NEW YORK prosecutors accused Ernst & Young of helping Lehman Brothers engage in a “massive accounting fraud” by approving a move that temporarily reduced the brokerage firm’s debt.
The civil lawsuit alleges the auditing firm “substantially” helped Lehman mislead investors from 2001 until the brokerage firm’s 2008 bankruptcy filing by signing off on the accounting sleight of hand.
The lawsuit goes further than accusing Ernst & Young of misconduct. It alleges Lehman engaged in a “massive accounting fraud” by using the accounting treatment, known as Repo 105.
The office of Andrew Cuomo, New York attorney general, does not name any former Lehman officials, leaving open the question of whether additional charges will be filed against any former officials.
The lawsuit is the first legal action taken by the government involving Lehman Brothers’ collapse. The use of Repo 105 was first exposed by Anton Valukas, a bankruptcy examiner appointed to investigate the firm’s collapse.
Mr Valukas published an extensive report last March detailing the use of Repo 105 and alleging Ernst Young could be liable for malpractice. Lehman began using Repo 105 to take advantage of an accounting rule change that permitted 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, the lawsuit alleges.
Ernst & Young approved the treatment of Repo 105 as sales, which authorities allege were really short-term financings since the securities were quickly bought back by the bank. Repo 105 was used to move $36 billion off Lehman’s balance sheet in August 2007 and $50 billion at the second quarter of 2008. – (Copyright The Financial Times Limited 2010)
