Ernst & Young sued in New York for alleged Lehmans fraud

NEW YORK prosecutors have sued accountant Ernst & Young for its involvement in Lehman Brothers’ collapse in 2008.

In the first major government legal action stemming from Lehman Brothers Holdings Inc's downfall, the suit accuses the accounting firm of helping to hide financial problems at the Wall Street bank.

The civil fraud case seeks more than $150m (£97m) in fees that Ernst & Young received from 2001 to 2008 as Lehman's outside auditor, plus other unspecified damages.

It alleges that Ernst & Young stood by for years while Lehman misled investors about its financial health, specifically through the use of a controversial accounting technique called Repo 105.

Andrew Cuomo, the New York state attorney general, has filed the lawsuit days before he leaves office to become governor of the state in January.

"This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed," Cuomo said in a statement.

Cuomo's successor, Democratic New York state senator Eric Schneiderman, will take over the case.

Ernst & Young has not commented on the case, and in the past has said it believes its work as Lehman auditor "met all applicable professional standards" and that accounting issues were not to blame for the bankruptcy.

Ernst & Young is also being investigated by the UK’s Financial Reporting Council and the Accountancy and Actuarial Discipline Board over the allegations, originally published in an report of Lehman’s collapse by bankruptcy lawyer Anton Valukas.

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.

The Ernst & Young case is a civil lawsuit, while Andersen was charged criminally and later convicted of obstruction of justice for its role in Enron's collapse.

The US Supreme Court reversed the Arthur Andersen conviction in 2005, but the firm was virtually out of business by then -- and its reputation was shattered.

Andersen's demise reduced the number of big accounting firms that audit most large companies globally to just four, including Ernst & Young.

Since then, prosecutors have been wary of charging entire firms with fraud because of worries that another audit firm could collapse, endangering the financial system.