Lehman collapse: The story so far

The "credit crunch" of 2008 expanded to engulf leading US investment banks Lehman Brothers and Bear Sterns and plunged the worldwide economy into recession. As with the collapse of Enron, the backlash will have profound effects on accountancy - particularly the Big Four firms involved in auditing the failed banks. This timetable of events charts how the saga has unfolded.

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30 Jan 2013The Financial Reporting Council (FRC) abandons the case against Ernst & Young over its role as auditor of Lehman Brothers. Gareth Rees QC, FRC’s executive counsel, decides that “no action should be taken against EY or any individuals in connection with their conduct in the case.”

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21 Dec - Ernst & Young charged with accounting fraud by New York attorney general Andrew Cuomo. The firm was complicit in the "surreptitious removal of tens of billions of dollars of securities from Lehman’s balance sheet in order to create a false impression of Lehman’s liquidity, thereby defrauding the investing public," the prosecutor alleged. E&Y answered that there was no factual or legal basis for the suit.

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9 April - In a letter to clients, Ernst & Young set out its defence against the allegations raised in court examiner Anton Valukis's report that the firm had been negligent in its audit of Lehman Brothers. The central tenet of E&Y's argument was that the financial statements presented by the bank were in accordance with US GAAP and accurately portrayed Lehman Brothers as a ‘leveraged entity operating in a risky and volatile industry’.

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16 Mar 2010 - The Financial Reporting Council has issued a statement which reads: "Following the publication of the recent report on Lehman Brothers, the FRC is ascertaining the facts on how the “Repo” transactions were accounted for and audited in the UK in order to determine any implications. To that end, we have asked Ernst & Young to provide further information in relation to what happened in the UK".

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Mar 2010 - Lawyers for Lehman’s chief executive Dick Fuld say he had nothing to do with the ‘repo 105’ transactions used to hide the bank’s losses.

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Mar 2010 – After a 2,000-page examination of the accounting gimmicks used to whisk some $50bn in toxic assets off the Lehman balance sheet at reporting time, US court examiner Anton Valukis concludes that stakeholders in Lehman's remains could seek compensation from the auditor “as a result of Ernst & Young's malpractice”.

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Feb 2010 - The financial advice wing of RSM Tenon fined £700,000 by the Financial Services Authority (FSA) for failings in its advice and sales processes relating to Lehman investment products.

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Nov 2008 – Lehman’s admistration is “ten times bigger and more complicated” than Enron, says Tony Lomas, PwC’s lead administrator. Since September, PwC recovered $5bn out of a potential $550bn worth of outstanding obligations and identified a further $22.3bn of client assets. The administration fees are running at a reported £4m a week.

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Nov 2008 – Barclays Capital agreed to pay $1.35bn for the assets of failed investment bank Lehmans, once they had been stipped clean of some of the more toxic elements. Unfortunately, a docket submitted by Barclays' representatives Cleary Gottlieb Steen & Hamilton LLP to the bankruptcy court in advance of the 22 September sale date included 179 contracts that should have omitted. All because a legal clerk didn’t notice them when he converted an asset spreadsheet to PDF.

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Sep 2008 – As Lehman files for bankruptcy, AccountingWEB.co.uk asks, Will the Big Four survive the credit crunch? “Ernst & Young will almost inevitably see itself in court over the demise of its audit client Lehman Brothers,” reports Rob Lewis, while KPMG is vulnerable for its work on the Fannie Mae accounts and PwC is likely to feel some heat from the AIG audit. PwC wins the job as administrator for Lehman Brothers, where it will need to find out what happened to a reported trillion dollars’ worth of assets.

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Mar 2008 – Rumbles of trouble as US sub-prime housing market leaves investment banks with toxic assets they can’t get rid of. Lehman Brothers writes down $1.8bn on its holdings and Goldman Sachs $2bn. After recording an $11bn quarterly loss, AIG chief executive Martin Sullivan blamed recently introduced fair value accounting rules for causing the “paper” losses.

Comments

FRC drops Lehman case against Ernst & Young    1 thanks

dsefton | | Permalink

Perhaps the author of the post is fearful of being attacked by Ernst & Young, but I do think he might comment on exactly why the case has been dropped. Maybe E&Y had a valid defence, or the prosecution wasn't framed correctly. Surely some comment might be given on the reasons for dropping the case.