Ernst & Young LLP has been sued by the New York state attorney for its role in the alleged accounting fraud involving the surreptitious removal of tens of billions of dollars of fixed income securities from the Lehman Brothers balance sheet to deceive investors about the bank’s liquidity.
New York attorney general Andrew Cuomo’s lawsuit against the Big Four accountant claims that in the years leading up to Lehman’s 2008 bankruptcy Ernst & Young “substantially assisted” transactions that moved so-called toxic assets offshore to help the bank reduce the liquidity ratios used by regulators and investors.
“This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed,” said Cuomo. “Just as troubling, a global accounting firm, tasked with auditing Lehman’s financial statements, helped hide this crucial information from the investing public. Our lawsuit seeks to recover the fees collected by Ernst & Young while it was supposed to be using accountable, honest measures to protect the public.”
The lawsuit alleges the auditing firm substantially helped Lehman engage in a “massive accounting fraud” and mislead investors from 2001 until 2008 by consistently supporting Lehman’s “Repo 105” policy.
The Repo 105 transactions were highlighted as accounting gimmicks in March this year by US federal court investigator Anton Valukis.
The complaint claims the use of Repo 105 had no independent business purpose and were designed solely to enable Lehman to manage the company’s financial balance sheet “metrics.”
The lawsuit alleges Lehman started using the accounting sleight of hand to take advantage of a rule change that allowed certain repurchase agreements to be treated as sales if the bank had a “true sale” letter from a law firm saying it gave up control of the assets.