of the 1986 and 1987 transactions had been fully analyzed by ACC's and Lincoln's independent auditors as part of the audits for those years which were certified without qualification. The 1988 transactions also had been reviewed by the auditors, although the events of early 1989 resulted in the audit being incapable of completion. Astonishingly, Leventhal admits in the early pages of the report that (i) the report was based on procedures that do not constitute an audit in accordance with generally accepted cuditing standards, -111) and (ii) the information on which its analysis was based included incomplete files and, as applicable accounting standards require for this type of report, did not include interviews with the parties to the transactions, or professionals who had previously reviewed or evaluated the transactions. 122/ Leventhal also admitted, in a derogatory fashion, that the transactions had been carefully constructed so as to comply... with the requirements of the controlling guidance contained in SPAS No. 66 (Accounting for Real Estate Šales]," but then engaged in a highly subjective discussion of the economic substance of these transactions to conclude that these 1217 122/ Whether viewed as an "Attestation Engagement" or "an The Leventhal report admits its inadequacy, stating that, in That transactions involved "accounting gimmickry" and displayed an "egregious example of the misapplication of generally accepted accounting principles," a conclusion with which the major accounting firms who had previously examined most of these transactions in connection with the issuance of unqualified opinions on ACC's financial statements surely do not agree. 123/ Indeed, upon the release of this report, a spokesman for Arthur Young stated the firm continues to stand behind its audit opinions for the periods 1986 and 1987.-1247 In testimony before the House Banking Committee on November 14, 1989, William L. Gladstone, a partner of Ernst & Young (formerly a partner of Arthur Young) stated Arthur Young's position firmly. "We believe our audits of Lincoln's 1986 and 1987 financial statements were responsibly and professionally done, and were performed in accordance with generally accepted auditing standards. . . [T]he matters and accounting principles involved were particularly complex, technical and judgmental, and... the Kenneth Leventhal application of these principles in some instances is Just flatly wrong" (emphasis added). He severely criticized the Leventhal Report, stating: 1237 124/ An institution of [Lincoln's] size conducts It appears that even Leventhal would not have agreed only two Harris, R.J., "Report Criticizes Accounting Practices of 129 sweeping, and we believe unsupported, Gladstone's colleague, Nancy A. Matusiak, also a partner of Ernst & Young pointed out in her testimony the same day that Leventhal "has made some serious mistakes, including one in which the document on which Leventhal focused in reaching its conclusions had "nothing to do with the gain recognition on this transaction." While allegations have been made that ACC's hiring of a partner of Arthur Young somehow taints the professionalism with which these audits were performed, Gladstone pointed out that "there were probably 50 or 60 people involved (in the audits] including numbers of other partners・・・ ", and, ACC recalls, the audit involved not the usual test sampling of random transactions, but an extended review of every transaction. Notwithstanding the obvious frailties of the Leventhal Report, and the strongly contrary position of the major accounting firm that performed a complete and thorough analysis of transactions criticized in that report, this report nonetheless appears to have formed the basis for the PHLBB's reversal of $135,269,000 of previously reported pre-tax income. C. The Receivership On August 2, 1989, the FHLBB met to appoint a receiver for Lincoln. Like the earlier meeting at which the conservator had been appointed, this August 2 meeting was a secret, ex parte affair from which ACC and Lincoln were deliberately excluded. The FHLBB's staff at the meeting asserted that Lincoln was insolvent as of March 31, 1989 as a result of the massive adjustments that the conservator and others had made to Lincoln's financial reports after the conservator had been appointed. Because ACC and Lincoln were excluded from the meeting, they were unable to question or challenge any of these adjustments. Nor did the FHLBB members question the adjustments, even though the staff failed to explain the basis for any of them. Instead, the FHLBB simply assumed without more, that the conservator's adjustments were appropriate. The FHLBB took several actions on August 2 in addition to appointing the receiver. The FHLBB replaced the conservator with the receiver, thereby terminating the conservatorship. The FHLBB also formed a new federally chartered thrift, Lincoln Savings and Loan Association, F.A. ("New Lincoln"), and authorized all of Lincoln's assets and most of its liabilities to be transferred to New Lincoln (liabilities not transferred to New Lincoln were to be transferred to the Resolution Trust Corporation, the successor agency to FSLIC). Finally, the FHLBB appointed a conservator for New Lincoln on the ground that it, too, was insolvent. The purpose of these actions was to destroy ACC's ownership interest in Lincoln and to prepare Lincoln's assets for sale unencumbered by that interest or the scrutiny of the Bankruptcy Court. On August 18, 1989, Lincoln amended its complaint in the action to remove the conservator to add a challenge to the FHLBB's appointment of the receiver. Lincoln's amended complaint asserts that the conservator's massive adjustments were not warranted and that Lincoln was not insolvent either on March 31 or August 2, 1989, as alleged by the FHLBB. Lincoln also alleged that if it was in fact insolvent on August 2, it was made so by the actions of the conservator and other federal officials and that the FHLBB therefore could not fairly appoint a receiver based on such insolvency. The issue of whether Lincoln was insolvent on March 31 and August 2 is currently before the District Court in Washington, D.C. The FHLBB has moved for summary judgment on this issue based upon the adjustments to Lincoln's financial records that are included in the "Administrative Record." Lincoln has opposed the Board's motion on the ground that it cannot respond to these adjustments until it has had the opportunity to discover the bases for them. As discussed above, oral argument on the FHLBB's motion for ummary judgment was held on November 8 and 9, 1989. At that time, the District Court refused to grant summary judgment and scheduled a series of hearings at which testimony will be presented concerning certain of the factual allegations in the administrative records. XVIII. Regulators. Efforts to Obstruct a Reorganization of ACC Both prior to and since the appointment of a receiver for Lincoln and the liquidation of all of its assets, many actions taken by the regulators seem more to be directed to aborting ACC ́s prospects for reorganization, with the consequential loss to its creditors, including approximately 23,000 bondholders, than to the 131 proper exercise of their regulatory authority and obligations to the public. Less For example, at its first formal meeting of creditors on the morning of June 6, 1989, ACC announced its intention to propose a plan of reorganization which would repay all creditors in full with interest. The centerpiece of the plan of reorganization as described that morning was the purchase, from AMCOR Funding, a also in a Chapter 11 reorganization, of its assets including the AFLIC, CFLIC and GOIL assets. The initial response of creditors and the press was quite favorable and parties appeared to be interested in working with ACC to help effectuate this plan. than an hour after ACC's creditors' meeting concluded, however, the FDIC conducted a brief meeting of two of the three members of the Board of Directors of AMCOR Funding. Without particular discussion, the decision to sell APLIC and CFLIC was purportedly made at that "meeting." The FDIC caused a press release to be issued two days later stating that AFLIC was to be sold, subject to approval of the Bankruptcy Court, an application for which it expected to file the following week. When, ten days later, at the first meeting of creditors for AMCOR Funding, creditors asked why the application for approval of that sale still had not been filed, representatives of the FDIC testified that the sale was still subject to negotiation and that no application for sale would be filed for at least several weeks. They refused to provide further detail concerning the sale, asserting that the negotiations were confidential and the considerations regarding the sale were subject to "deliberative process privilege. later, the FDIC announced that the "negotiations' had terminated and that no sale would take place. It appears that no sale agreement ever existed, notwithstanding public announcements..to the contrary, and the conclusion is inescapable that the sale was announced prematurely to undercut the positive effect of ACC's announcement of prospects for reorganization at its first meeting of creditors. Months The FDIC has also refused to provide information essential to the day-to-day operations of ACC which have caused it great expense, potential liability, and the distraction of management from the reorganization process. For example, ACC files consolidated tax returns with all of its subsidiaries, including Lincoln and its subsidiaries and notwithstanding the seizure of Lincoln's assets by the regulators, ACC was still considered to be the common parent for the consolidated group under the applicable provisions of the Internal Revenue Code. As parent, ACC was "sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax liability for the consolidated return year. 1257 Under that regulation, no 1257 Treas. Reg. Section 1.1502-77(a). R000303 |