NEW YORK prosecutors started a civil lawsuit against accountancy firm Ernst & Young yesterday over the company’s audits of Lehman Brothers ahead of the bank’s collapse.
It is the first government-led legal action to be brought against those involved in Lehman’s bankruptcy in September 2008, which sparked the global credit crisis.
New York attorney general Andrew Cuomo is seeking the return of more than $150m (£97m) in fees that Ernst & Young made auditing Lehman between 2001 and 2008, as well as other damages.
Ernst & Young encouraged Lehman to engage in “massive accounting fraud”, according to the lawsuit.
It alleges billions of dollars worth of Repo 105 transactions, using an accounting technique to temporarily remove liabilities from a balance sheet, without telling investors, were used according to the 32-page filing at the New York Supreme Court.
Lehman justified the deals with written opinions from Linklaters, despite the law firm’s advice in 2001 to place limits on the use of Repo 105, said the filing.
“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.
“Just as troubling, a global accounting firm, tasked with auditing Lehman’s financial statements, helped hide this crucial information from the investing public.”
Ernst & Young did not comment last night, but the firm is expected to fight the case.
Lehman’s bankrupcty examiner Anton Valukas said earlier in the year criminal charges could still emerge.