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

(Photo:fr.wikipedia.org)

This recession has put the proverbial shackles on the aspirations of people both rich and poor. The availability of credit is still moving at the pace of a slow crawl, while consumer spending is still searching for a way to pick itself up off the floor. But of course, it won’t truly be able to do that until the question of job security becomes less a hot button and more background scenery. Until money and credit begin flow as they did 10 years ago, the stock market will continue to show only modest gains at best. People are looking for help, whether it is the temporary assistance of cash advance loans or the more permanent change in which wages actually begin to keep pace with inflation.

Most of know just how the recession has taken a bit out of our finances. But did you know just how much even those who would have been “untouchable” have been hurt by the downturn? A recently New York Times articles takes a look at John McAfee, founder of the software company that produces McAfee Antivirus. His $100 million fortune has dwindled by an astounding 96 percent. Sure, that still means that he’s worth about $4 million and won’t need a cash advance, but what a drop!

“Horrific news”

Yes, Gawker jests when they call this “horrific news,” brought to us by “those tireless chroniclers of the plight of the rich, the New York Times,” but this cautionary tale does give us some idea of just how far America’s economic dealings have run aground. The number of super-rich in the United States may just be at its ebb tide. Yes, there are those who have already recovered to their pre-recession salaries, but there are many more that have not.

John McAfee is certainly not one of those who have recovered. He founded his company in the late 1980, and then sold his stock a couple of years after the antivirus giant had its initial public offering on Wall Street. He made $100 million in the deal, and he went on to invest much of it in real estate and bonds through the Lehman Brothers brokerage. At the time, it seemed like a great way to keep his fortune safe. Everyone in his income tax bracket was doing it.

Then the bubble burst

And John McAfee’s real estate holdings dropped in value like crazy. A 10,000-square-foot home in Colorado with a view of Pike’s Peak cost him $25 million to buy and build. In 2007, it sold for only $5.7 million. Then Lehman Brothers went belly up and his bonds were suddenly worth pennies on the dollar. Other stock investments cost him millions more in lost revenue.

Wait, there’s more. John McAfee has sold his 10-passenger Cessna and now flies like the rest of us. I wonder if he used the JetBlue unlimited pass when he went to visit his Hawaii oceanfront estate for the last time. That estate is gone too. It sold at auction for $1.5 million (much less than he paid for it), and there were only a handful of bidders. Apparently the former antivirus software mogul is going to high-tail it to Belize, where tax laws are more favorable to sinking millionaires like him.

What’s in store for John McAfee?

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Let’s be realistic. I’m sure he’s going to land on his feet in Belize just fine. However, he’ll have to make do with much less than before. We who get cash advance loans when we need a cash advance will surely weep for him, particularly after ANOTHER estate (this one in New Mexico) goes up for a no-floor auction. In other words, no matter how low the top bid is, John McAfee has agreed to accept.

(Photo: glyphjockey.com)

I bring all of this to your attention not because John McAfee deserves a pity party. I’m sure he was aware that he was taking some risks with his money, and he certainly isn’t hurting with $4 million left over and likely a nice home in Belize. What I’m saying is that we can no longer allow the game players who manipulated the levers and knobs of the U.S. economy to carelessly speculate with our money. They walk away with something left over, but what of the less sophisticated investors? Like Tommy Wilhelm in Saul Bellow’s “Seize the Day,” they’re left with nothing. Financially, it’s a perpetual funeral.

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