EY’s £2.7bn legal fight over NMC Health audits
A mammoth legal fight against Big Four giant EY over its auditing of a former London-listed health giant that collapsed after allegations of fraud starts today.
Private hospital operator NMC Health Plc collapsed in April 2020 after being placed into administration, and in the same month, it was delisted from the London Stock Exchange.
Headquartered in the United Arab Emirates, the group was part of the FTSE 100 and at its peak in August 2018, it had a market value of £8.6bn.
NMC Group’s largest creditor, Abu Dhabi Commercial Bank, applied to the English High Court to place NMC into administration in April 2020, which was approved by ICC Judge Prentis.
NMC understated its debts
After the group went into administration, investigations revealed that NMC Health and the NMC Group were the victims of long-running fraud.
It was accused of misleading the market about its debt, operating with dual accounting records, and failing to declare related party transactions.
According to the Financial Conduct Authority (FCA), it, along with the administrators at Alvarez & Marsal, “secured material which made clear that the picture [NMC Health Plc] presented to the market was inaccurate”.
The FCA’s investigation revealed that NMC Health Plc understated its debts by as much as $4bn (£3bn).
Allegations against EY
The auditing giant was the group’s auditor from 31 December 2012 to 31 December 2018, until NMC was placed into administration on 9 April 2020.
The firm is under investigation by the audit regulator, Financial Reporting Council (FRC), for its role in NMC’s audits.
According to the particulars of claim (POC) for the administrators of NMC, the group’s financial statements were deliberately manipulated to inflate performance and its financial position to boost its share price.
The claimant POC alleges that the false financial statements of NMC and the NMC Group, supported by an audit opinion from a ‘Big Four’ audit firm (i.e EY), were an essential part of the fraud and enabled it to be perpetuated.
EY has been accused of providing an unqualified audit opinion on the NMC financial statement and the NMC Group’s consolidated financial statements for each audit year outlined in the case.
The claim alleged that had EY not breached its duties, including supervising work carried out by EY Middle East, the fraud at the healthcare group would have become apparent.
The administrators are suing EY for NMC’s liability with respect to £2.5bn.
EY UK’s statement in 2022 on the NMC matter said they are “not responsible” for any alleged failures by their Middle East arm. They claim that if found liable, any damages should be “extinguished” or “substantially reduced” due to NMC’s own contributory negligence.
The Big Four firm also said at the time that they would defend the claim vigorously.
£2.7bn legal battle
The administrators instructed US law firm Quinn Emanuel & Sullivan, with lead partners Richard East, Aidan O’Rourke and Nikolas Bruce-Smith.
According to the recent administrator’s report, Alvarez & Marsal has received over £12.8m in litigation funding to pay the costs of its claim against EY.
The legal action was filed with the High Court in April 2022, two years after the group went bust.
EY enlisted law firm RPC, with lead partner Rupert Boswall leading the firm’s defence. City PM understands that the firm has instructed four senior barristers to represent it for this dispute.
The case started on Monday, 12 May, but this week was reading week for Dame Clare Moulder. The main trial is set to begin today (Monday 19 May) at Court 19 in the Rolls Building.
The case will run for 15 weeks, with witnesses including EY audit partners before pausing for the Summer break when the courts close, and will pick up again to conclude in October.
When approached for comment, a media spokesperson for EY told City PM: “This was a complex, pervasive and collusive fraud, and responsibility for it lies squarely with its perpetrators, including NMC’s owners, directors and the treasury and finance team.”
“This case is without merit and the full extent of this unprecedented fraud – of which EY was one of the targets – will be exposed during the course of the trial,” the spokesperson added.