Updated: Cuomo Sues Ernst & Young

More than two years after the collapse of Lehman Brothers, the Wall Street Journal reports that New York Attorney General Andrew Cuomo yesterday filed a lawsuit against Ernst & Young (E&Y) for civil fraud.

In his complaint Cuomo alleges E&Y assisted the now bankrupt Lehman “to engage in massive accounting fraud, involving the surreptitious removal of tens of billions of dollars.”

Cuomo charges E&Y with knowingly creating what he calls “a false impression of Lehman’s liquidity, thereby defrauding the investing public” for seven years and contributing to the financial crisis of 2008.

The suit claims E&Y approved and “consistently supported” Lehman’s use of Repo 105 transactions, an off-balance sheet device that, the Journal said, made the firm look more stable to investors than it actually was.

According to Cuomo’s complaint, E&Y brought in $150 million in fees from Lehman between 2001 and 2008.

In response to the suit, E&Y issued this statement on Tuesday night:

We intend to vigorously defend against the civil claims alleged by the New York Attorney General.

There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the US Generally Accepted Accounting Principles (US GAAP).

Lehman’s bankruptcy occurred in the midst of a global financial crisis triggered by dramatic increases in mortgage defaults, associated losses in mortgage and real estate portfolios, and a severe tightening of liquidity. Lehman’s bankruptcy was preceded and followed by other bankruptcies, distressed mergers, restructurings, and government bailouts of all of the other major investment banks, as well as other major financial institutions. In short, Lehman’s bankruptcy was not caused by any accounting issues.

What we have here is a significant expansion of the Martin Act. Although the Martin Act is almost 90 years old, we believe this is the first time that an Attorney General is attempting to use this law to assert claims against an accounting firm, rather than the company that took the alleged actions.

We look forward to presenting the facts in a court of law.