On June 15, 2023, Judge Eldon Fallon of the Eastern District of Louisiana granted Ernst & Young LLP’s (“EY”) motion to disqualify FDICs counsel from a malpractice suit brought by the FDIC, in its receivership capacity (“FDIC-R”), seeking to recover $125 million in connection with 2014 and 2015 audits for First NBC Bank. EY argued that outside counsel representing FDIC-R and FDIC in-house counsel, could not fairly continue after having gained improper access to confidential and privileged information. Specifically, those lawyers had obtained—and reviewed—materials originating from the PCAOB’s separate, statutorily confidential investigation into the audits. The court found that such access could unfairly prejudice EY.

This ruling follows a Fifth Circuit October 2020 ruling that the Federal Reserve—not the FDIC-R—was the “appropriate Federal functional regulator” of First NBC and that it was thus improper for the PCAOB to have disclosed privileged information and confidential documents (including an auditor’s investigative testimony transcript) to FDIC-R. We previously reported on the Fifth Circuit opinion in our October 30, 2020 Auditor Liability Bulletin. In response to this disqualification motion, FDIC-R had argued that while it was not authorized to view the PCAOB production, the same underlying facts would have been subject to “inevitable disclosure” since FDIC-R had obtained the underlying facts through EY’s own productions to FDIC-R. FDIC-R further argued that it could have obtained such documents from the Federal Reserve. The court disagreed because FDIC-R’s hypothetical counterfactual chain of events did not occur and “the actual path” by which FDIC-R received the documents had been deemed impermissible by the Fifth Circuit.

The case is FDIC v. Ernst & Young LLP (E.D. La. June 15, 2023). FDIC is represented by Stanley Reuter Thornton & Alford LLC and ArentFox Schiff LLP. EY is represented by Barrasso Usdin Kupperman Freeman & Sarver LLC and Williams & Connolly LLP. A copy of the decision is attached.