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December 21, 2010

Ernst & Young sued over Lehman

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 2008.

The lawsuit is the first legal action taken by the US government involving the Lehman Brothers’ collapse.

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