The charges brought by Cuomo are civil, and they do not target any Lehman executives, but there is some good news as you'll read below.
(Reuters) - Accounting firm Ernst & Young was sued by New York prosecutors over allegations it helped to hide Lehman Brothers' financial problems, in the first major government legal action stemming from the Wall Street company's 2008 downfall.
The civil fraud case contends that Ernst & Young stood by while Lehman used accounting gimmickry to mask its shaky finances. The lawsuit says Lehman ran "a massive accounting fraud," but it did not name as defendants any former top executives at the investment bank whose September 2008 collapse helped spark the global financial crisis.
The lawsuit seeks more than $150 million in fees that Ernst & Young received from 2001 to 2008 as Lehman's outside auditor -- less than 1 percent of its global annual revenue -- plus other unspecified damages.
The lawsuit was filed by New York Attorney General Andrew Cuomo. People close to Cuomo said one factor in bringing the case was that he knows that the U.S. Securities and Exchange Commission already is investigating former Lehman chief Richard Fuld and other former top Lehman executives.
Cuomo "wants to go after the one party he knows isn't being sued," said John Coffee, a professor of corporate law at Columbia University.
In a statement on Tuesday, Ernst & Young said it intended to "vigorously defend" the lawsuit.
Lehman's bankruptcy occurred in the midst of a global financial crisis and was not caused by any accounting issues, the company said.
"Lehman's audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry," the accounting firm said.
Legal and accounting experts said earlier they expect that Ernst & Young will try to settle the case rather than engage in a long court fight.
He said he does not see significant fallout for Ernst & Young in terms of its viability as an audit firm.
Ernst is the third-largest by revenue of the "Big Four" U.S. accounting firms, behind Deloitte and PwC.
Cuomo filed the lawsuit days before he is to leave office and become governor of the state in January. A spokesman for incoming attorney general Eric Schneiderman declined to comment.
Cuomo said in the civil complaint that for more than seven years leading up to Lehman's bankruptcy, the investment bank engaged in fraudulent accounting transactions that Ernst & Young explicitly approved. The case focuses on an accounting technique known as Repo 105, which temporarily removed as much as $50 billion in assets from the balance sheet in 2008.
"This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed," Cuomo said in a statement.
From the WSJ
Until this week when civil-fraud charges were brought against Ernst & Young LLP for its role in the collapse of Lehman Brothers Holdings Inc., auditors had largely side-stepped blame for the financial crisis.
Yet auditors had to pass judgment on some of the practices that caused the big losses that led to government bailouts. The case against Ernst highlights the roles accounting firms played and raises questions about whether reforms enacted after the last financial crisis went far enough.
Auditors weren't involved in a lot of the primary causes of the crisis: bad lending and investing decisions; a lack of understanding of risk; and flaws in the credit-rating system. Auditing isn't meant to stop companies from making dumb business moves—just to make sure those moves are properly disclosed.