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
mislead investors.

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.