Ernst & Young Accused Of Hiding Lehman’s Financial Troubles

Accounting giant Ernst & Young has been accused by New York Attorney General Andrew Cuomo of deceiving the public about the state of Lehman Brothers’ finances before the investment firm collapsed in 2008 and cost investors billions of dollars.

In a lawsuit filed Dec. 21, Cuomo alleges that Ernst & Young helped Lehman Brothers cover up its deteriorating financial health up until the investment bank filed for bankruptcy protection in September 2008.

Cuomo’s complaint focuses on a set of short-term transactions that reportedly started in 2001 and which Ernst & Young allegedly approved. The transactions, known as Repo 105 transactions, allowed Lehman to transfer billions of dollars off of its balance sheet, thereby improving the appearance of its financial health and downplaying the risks it was actually taking.

Ernst & Young “sat by silently while Lehman deceived the public,” the complaint reads.

The case against Ernst & Young is civil, not criminal, and could conclude with a monetary settlement. The complaint asks the court to order Ernst & Young to pay the state of New York more than $150 million in fees that the accounting firm collected from Lehman Brothers.

In Lehman’s case, the use of Repo 105 allowed the firm to give fixed-income securities to other banks in exchange for cash, with the understanding that it would buy back the securities at the end of the quarter. Lehman would then use the cash it received to temporarily pay down some of its debts.

This, in turn, let Lehman report less debt in its financial reports, while giving investors the appearance of financial stability.

The scale of Lehman’s use of Repo 105 was significant. According to Cuomo’s complaint, Lehman exchanged $50 billion of securities for cash in May 2008 alone.

As reported Dec. 22 by the LA Times, U.S. law firms refused to sign off on the accounting maneuver. However, Lehman found a European law firm that would, and as a result, all the Repo 105 deals were done by Lehman’s European operation.

Internal Lehman documents called the technique “window dressing” and an “accounting gimmick,” and the bank’s chief operating officer wrote in an e-mail, “it is another drug we’re on.”

Ernst & Young says it intends to fight the lawsuit.