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Accounting Malpractice Lawsuit Launched against Giant E&Y Firm

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New York, NYA major Accounting Malpractice lawsuit has been filed in the State of New York, and is the first major action to emerge from the failure of the once-Herculean Lehman Brothers bank. While all eyes are on the action and how it all plays out, the lawsuit also comes at a critical time for New York with the ascension of outgoing New York Attorney General Andrew Cuomo to the Governor's mansion.

As most will recall, the demise of Lehman Brothers was not only massive, the failure took a lot of people with it. With the launch of the accounting malpractice lawsuit by Cuomo mere days before his tenure as Attorney General comes to a close; the incoming governor is signaling there is allegedly more to the story than meets the eye.

Part of the story, according to the December 21 issue of the Wall Street Journal and the Associated Press, is the role allegedly played by noted accounting firm Ernst & Young (E&Y)—the target of the lawsuit. The accusation is that Ernst & Young aided Lehman Brothers in the hiding of billions in debt as the banking giant edged toward the brink.

According to the lawsuit, Lehman Brothers undertook temporary overseas sales of securities, and then used the proceeds to pay off debts just ahead of key reports to investors (made every quarter). The practice, known as "Repo 105" according to the report, involved sales of securities that lasted, in some cases, only a few days.

The lawsuit alleges that Ernst & Young was not only involved in the alleged scheme, but did so willingly and with full understanding of the potential for deception. The practice of temporary overseas sales allowed Lehman Brothers, according to the report, to retain the inventory required by its customers, while at the same time concealing debt from skittish Lehman Brothers investors who might have otherwise sold off their shares and bolted toward the door.

The lawsuit claims that between 2001 and 2008, Ernst & Young was paid more than $150 million for auditing and accounting services on behalf of Lehman Brothers.

Ernst & Young denied the charges and said in a statement it would defend itself vigorously in court.

The accounting malpractice lawsuit went on to claim that Lehman Brothers reported the transactions as actual sales. However, given that Lehman Brothers was obligated to buy back the securities after a brief period of time, the transactions were alleged to be, in effect, loans rather than final sales. The accusation is that upwards of $50 billion in Lehman Brothers assets were shuffled around in this way.

The lawsuit is seeking unspecified restitution and damages, and it also asks that Ernst & Young return more than $150 million in Lehman Brothers fees earned since 2001 to the State of New York.

"There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles," a statement issued by Ernst & Young said. "Lehman's audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry."

However, the accounting malpractice lawsuit claims that the defendant betrayed the public's trust. "At a time when it was critical for investors to make informed decisions as to whether to keep or buy Lehman stock, E&Y assisted Lehman in defrauding the public," the lawsuit claims. "Lehman had no legitimate business reason to enter into such transactions, and could have obtained sufficient financing through less costly means."


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