Bloomberg News

New York Seeks to Pursue Ernst & Young Lehman Fee Suit

February 24, 2012

(Updates with filing in third paragraph.)

Feb. 18 (Bloomberg) -- Ernst & Young LLP, bankrupt Lehman Brothers Holdings Inc.’s former auditor, should “disgorge” $125 million in fees earned in an alleged fraud involving so- called Repo 105 transactions that concealed tens of billions of dollars in debt, the New York attorney general said.

Attorney General Eric Schneiderman asked a judge today to let him pursue the suit after the auditing firm tried to get it dismissed. The state is limited by law from recovering the fees for itself or for Lehman’s former shareholders, Ernst & Young said.

“E&Y is wrong on every count,” Schneiderman said in a court filing in U.S. District Court in Manhattan. “It is well- settled that the state can, and frequently does, obtain disgorgement of ill-gotten gains under public enforcement statutes.”

Repo 105 transactions are a form of short-term financing that Lehman used to move as much as $50 billion off its balance sheet temporarily to show investors it wasn’t carrying too much debt, according to a bankruptcy examiner’s report. The report was used as a basis for many suits, including one that Ernst & Young is fighting by investors including the Alameda County Employees’ Retirement Association, which alleges the firm made misleading statements about Lehman’s finances before its 2008 bankruptcy.

Standards, Rules

Charlie Perkins, an Ernst & Young spokesman, didn’t immediately respond to a call and e-mail after regular business hours seeking comment on the attorney general’s filing. The auditing firm has said its work for Lehman met all applicable professional standards and applied rules that existed at the time.

Schneiderman said New York wasn’t suing on behalf of Lehman’s shareholders and could distribute money obtained from the suit “in any manner that serves justice, including to the state.”

Lehman filed the biggest U.S. bankruptcy in history in September 2008 with $639 billion in assets. It has said it will spend the next few years completing a liquidation to pay unsecured creditors less than 18 cents on the dollar.

The case is People of the State of New York v. Ernst & Young LLP, 11-cv-00384, U.S. District Court, Southern District of New York (Manhattan).

--Editors: Mike Millard, David Rovella.

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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