Thu, Dec 23, 2010 - Page 10 News List

State sues Ernst & Young over Lehman

Reuters, NEW YORK

The sign for accounting firm Ernst & Young is reflected in the firm’s windows on Tuesday in New York.

PHOTO: EPA

Accounting firm Ernst & Young was sued by New York prosecutors over allegations it helped to hide Lehman Brothers’ financial problems, in the first major government legal action stemming from the Wall Street company’s 2008 downfall.

The civil fraud case contends that Ernst & Young stood by while Lehman used accounting gimmickry to mask its shaky finances. The lawsuit says Lehman ran “a massive accounting fraud,” but it did not name as defendants any former top executives at the investment bank whose September 2008 collapse helped spark the global financial crisis.

The lawsuit seeks more than US$150 million in fees that Ernst & Young received from 2001 to 2008 as Lehman’s outside auditor — less than 1 percent of its global annual revenue — plus other unspecified damages.

The lawsuit was filed by New York Attorney General Andrew Cuomo. People close to Cuomo said one factor in bringing the case was that he knows that the US Securities and Exchange Commission is already investigating former Lehman chief Richard Fuld and other former top Lehman executives.

Cuomo “wants to go after the one party he knows isn’t being sued,” said John Coffee, a professor of corporate law at Columbia University.

In a statement on Tuesday, Ernst & Young said it intended to “vigorously defend” the lawsuit.

Lehman’s bankruptcy occurred in the midst of a global financial crisis and was not caused by any accounting issues, the company said.

“Lehman’s audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry,” the accounting firm said.

Ernst is the third-largest by revenue of the “Big Four” US accounting firms, behind Deloitte and PwC, but ahead of KPMG.

Cuomo filed the lawsuit days before he is to leave office and become governor of the state next month. A spokesman for incoming attorney general Eric Schneiderman declined to comment.

The case, filed in New York state Supreme Court, is one of the biggest legal cases involving an accounting firm since Arthur Andersen was criminally indicted in 2002 over the Enron scandal.

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