A lawsuit has been filed by New York state
prosecutors accusing Ernst & Young (E&Y) of helping Lehman
Brothers engage in a “massive accounting fraud” by helping to
The civil lawsuit alleges that the Big Four
firm “substantially” helped Lehman mislead investors from 2001
until the bank’s collapse in 2008 by approving a move that
temporarily reduced Lehman’s debt, giving the impression the bank
was in a stronger financial position than it was.
In response to the lawsuit, E&Y said it
would “vigorously defend” against the civil claims by stating that
there “is no factual or legal basis for a claim to be brought
against the auditor in this context”.
In its statement the firm added “Lehman’s
audited financial statements clearly portrayed Lehman as a highly
leveraged entity operating in a risky and volatile industry.”
The lawsuit also accuses E&Y of misconduct
involving the use of Repo 105, first exposed by US district court
earlier this year where Ernst & Young was a defendant in
another Lehman lawsuit. Ernst & Young allegedly approved the
treatment of Repo 105 as sales, which authorities allege were
really short-term financings.
At the time investigator Valukas alleged in a
2,000 page report that Lehman Brothers used the Repo 105 accounting
trick to allow the bank to temporarily move $36bn off its balance
sheet in August 2007 and $50billion in the second quarter of
The lawsuit is the first legal action taken by
the US government involving the Lehman Brothers’ collapse.