In what may be his last major action before moving from the New York attorney general's office to the governor's mansion, Andrew Cuomo sued Ernst & Young for allegedly helping Lehman Brothers mislead investors.
The lawsuit, coming more than two years after Lehman collapsed and the global economy buckled, is the first major legal action stemming from the collapse of the investment bank.
Ernst & Young, Lehman’s longtime outside auditor, certified the financial statements of Lehman from 2001 until the firm’s bankruptcy filing in September 2008. The lawsuit focuses on the Ernst & Young’s approval of a much-criticized accounting maneuver employed by Lehman that allowed it to remove debt from its balance sheet.
The suit, viewable here, accuses Ernst & Young of approving an accounting practice that allowed Lehman to remove billions in assets from its books to make it look like it had reduced its debt.
Apparently Ernst & Young knew it would never get an American court to sign off on it, so it got an English court to allow Lehman to move securities to British banks. While these transactions should have been characterized as short-term financing, the English opinion allowed Lehman to characterize it as a sale of assets. At least one Ernst & Young accountant wondered if this practice, called "Repo 105," was a good idea.
The suit charges that Lehman ramped up the use of the practice even when Lehman was, as we know now, teetering on the brink of collapse. Between 2007 and Lehman's 2008 bankruptcy, Lehman moved $50 billion in assets to British banks.
Cuomo wants Ernst & Young to cough up $150 million in fees it earned on the Lehman account from 2001 to 2008, plus other damages. Given the circumstances, the only question in my mind is how fast Ernst & Young will settle.