US set to sue E&Y for Lehman audit

NEW YORK prosecutors are said to be preparing to file a lawsuit against accountant Ernst & Young for its involvement in Lehman Brothers’ collapse in 2008.

The civil case will reportedly charge Ernst & Young with helping Lehman Brothers to mislead investors during its time as the bank’s auditor, specifically homing in on the use of a controversial accounting technique called Repo 105.

The lawsuit may seek fines and damages from the Big Four accountant if it can prove it failed to spot evidence that Lehmans’ accounts mislead investors, the report in the Wall Street Journal said.

The lawsuit would be filed by Andrew Cuomo, the New York state attorney general, but would be pursued by his successor, Democratic New York state senator Eric Schneiderman, as Cuomo is due to step down at the end of December to become governor of New York state.

A suit of this kind would be unusual, legal experts said yesterday, as it has been rare for prosecutors to charge audit firms directly since auditor Arthur Andersen collapsed after being sued for its role in the Enron scandal.

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.

Valukas said Lehman used Repo 105 without telling investors or regulators to temporarily remove up to $50bn (£32.2bn) of risky assets and liabilities from its balance sheet in 2008.

Ernst & Young and the SEC declined to comment yesterday.