Man Nutzfahrzeuge AG, the German truck manufacturer, was induced to purchase its UK subsidiary ERF on the basis of fraudulent statements made by ERF’s former financial controller, the High Court has found.

Man brought the claim against ERF’s former owner Freightliner, then known as Western Star, on the basis that false accounting at ERF had misrepresented its trading position.

In a claim worth up to £350m, a judge ruled that Stephen Ellis had concealed huge problems in ERF’s accounts before its sale to Man.

Ellis, who had been financial controller from 1998 to the time of the sale, had falsified VAT returns, and made false entries into ERF’s accounts that flattered the company’s position, the judge found.

Lord Justice Moore-Bick said that Man had been ‘induced to purchase ERF by fraudulent statements made by Mr Ellis’.

The judge declined to make any assessment of the precise liability at this stage. Freightliner said that it would appeal.

‘The former financial controller of ERF admitted at the trial that he had been concealing trading losses and deliberately misleading Ernst & Young, as well as continuing to perpetrate the fraud for more than a year after the company was sold and E&Y had ceased to be its auditor,’ the judge said.

Ellis was dismissed once the fraud was discovered.

Separately, the judge rejected claims that ERF’s auditors E&Y should be held liable for the fraud.

Freightliner made claims against E&Y in the UK for a failure to meet duty of care on ERF’s 1998 and 1999 year-end accounts.

A decision to find E&Y liable would have risked extending the bounds of auditor liability unneccessarily, the judge said. that E&Y had ‘not stepped outside its
statutory function’.

E&Y’s deputy general counsel Lisa Cameron claimed that it was an attempt by Freightliner ‘to extend the recognised boundaries of an auditor’s duties, which was bound to fail’.