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

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.”