The US District Court in Manhattan has rejected former Lehman Brothers executives and
Ernst & Young’s (E&Y) attempt to dismiss an investor lawsuit claiming they were misled by the Repo 105 practice and the bank’s ability to manage risk ahead of its bankruptcy.
In a in a 106-page document US District Judge Lewis Kaplan said the plaintiffs [investors] allegations at this stage are sufficient in order to continue the proceedings.
Kaplan added the, “plaintiffs have sufficiently alleged that Lehman had a duty to disclose the Repo 105 transactions based on its statements regarding net leverage”. His decision regarding E&Y’s involvement dismissed most of the specific allegations brought forward by investors, however Kaplan said due to one particular incident the case against the auditors cannot be dismissed.
With regards to the plaintiff’s allegations about “red flags” and E&Y’s alleged violation to comply with US GAAP requirements Kaplan said it could be called “highly reckless”.
E&Y said in a statement to US media that they are pleased the judge has dismissed most of the claims and strongly believes the firm will ultimately prevail on the remaining claim.
“As we have said consistently, we stand behind our work on the Lehman audit and our opinion that Lehman’s financial statements were fairly stated in accordance with US GAAP, applying the rules that existed at the time,” the statement by the firm said.
This case began three months after the banks collapse in 2008 and is one of many against former Lehman executives and auditors.
In December 2010, the New York attorney general’s office began a suit against E&Y claiming it stood by as Lehman painted a false picture of financial health.