State of New York sues Ernst & Young for civil fraud

Tuesday, December 21st, 2010 By

Ernst & Young building in New York's Time Square.

Ernst & Young is being accused of helping cook Lehman Brothers' books. (Photo Credit: CC BY-SA/Angie Linder/Flickr)

The questionable practices of U.S. investment and accounting houses continue to be exposed, thanks to the vigilance of officials like New York Attorney General Andrew Cuomo. According to the Wall Street Journal, Cuomo has filed a lawsuit against Ernst & Young for alleged civil fraud. Ernst & Young is being accused of helping Lehman Brothers Holdings Inc. to hide its ailing balance sheet from investors for seven years, before the bank collapsed in Sept. 2008.

New York sues Ernst & Young for fooling investors

Not only did Ernst & Young allegedly help Lehman Brothers hide the truth from investors who were legally entitled to know, but the accounting firm allegedly advised Lehman to take on “Repo 105” debt. Repo 105 is an accounting move where short-term loans are classified on the books as sales, and the cash obtained through the “sale” is used to pay down debt. Thus, a company can conceivably appear as though it is reducing its leverage by paying down its liabilities – just long enough for it to look good on a published balance sheet. After the glittering report is released, the company then borrows money and repurchases its original assets, which would be uninspiring to investors if they ever found out.

All of this made Lehman Brothers Holdings Inc. appear to be a much less risky investment than it was in reality.

‘A massive accounting fraud’

Andrew Cuomo bluntly stated that Ernst & Young “substantially assisted” Lehman Brothers in committing “massive accounting fraud,” claims on which Ernst & Young have declined to comment so far.

According to accounting records, Ernst & Young collected $150 million in fees from Lehman from 2001 to 2008. During that time, Lehman shifted an estimated $50 billion in assets off its balance sheet and moved them to foreign banks when it was time to report financials. Days later, Lehman bought them back, completing their Repo 105 accounting fraud.

Kevin Reilly, an Ernst & Young partner, testified to Attorney General Cuomo that this policy was “acceptable.”

Sources:

Wall Street Journal

Wikipedia

FOX Business Network coverage of Ernst & Young scandal

http://www.youtube.com/watch?v=MPBotxpqE5E

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