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March 22, 2012

E&Y’s Lehman Brothers suit heads back to the state court

A lawsuit that alleges Ernst & Young (E&Y) helped hide the financial troubles of Lehman Brothers prior to its collapse has been sent back to a New York state court after a federal judge ruled it does not fall under federal jurisdiction.

New York prosecutors had cited violations of a 90-year-old state law known as the Martin Act, which gives regulators broad enforcement authority over securities fraud, Reuters reports.

One of the most significant government-led lawsuits to come out of the Lehman Brothers collapse, the case was launched in a state court but E&Y succeeded to move it to the US District Court, Southern District of New York.

In the original suit, New York’s attorney general accused the Big Four firm of conspiring with Lehman to hide tens of billions of dollars from its balance sheet by using an accounting trick known as Repo 105.

The prosecution is seeking $150m in fees that E&Y collected as auditor of Lehman Brothers from 2001 until Lehman’s bankruptcy in 2008.

Federal court judge Lewis Kaplan ruled the prosecution had sufficiently alleged Lehman Brothers had a duty to disclose Repo 105 transactions, but most of the allegations levelled against E&Y were dismissed. Kaplan said E&Y must still answer allegations about ‘red flags’ and an alleged violation to comply with certain US GAAP requirements.

The hearing will now move back to the state court, which could protract proceedings.

“We are disappointed by the court’s ruling, and we are reviewing it,” Ernst & Young stated. “We will continue to vigorously defend ourselves in the matter.”

 

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