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 $150 million in fees that Ernst & Young received from 2001 to 2008 as Lehman’s outside auditor, less than 1% 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 already is 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.
Legal and accounting experts said earlier they expect that Ernst & Young will try to settle the case rather than engage in a long court fight.
“It tends to be lot less expensive for both parties to resolve it through settling and getting it behind them,” said Bruce Pounder, an expert on accounting ethics and president of Leveraged Logic, an Asheville, North Carolina, firm that provides continuing education to accountants.
He said he does not see significant fallout for Ernst & Young in terms of its viability as an audit firm.
Ernst is the third-largest by revenue of the “Big Four” US accounting firms, behind Deloitte and PwC.
Cuomo filed the lawsuit days before he is to leave office and become governor of the state in January.
A spokesman for incoming attorney general Eric Schneiderman declined to comment.
Cuomo said in the civil complaint that for more than seven years leading up to Lehman’s bankruptcy, the investment bank engaged in fraudulent accounting transactions that Ernst & Young explicitly approved.
The case focuses on an accounting technique known as Repo 105, which temporarily removed as much as $50 billion in assets from the balance sheet in 2008.