Wednesday, 22 December 2010

Ernst and Young targeted in the first Lehman court case

Lehman is a name we would all like to forget. When it failed in September 2008, it nearly destroyed the global financial system. Looking back, doesn't it seem strange how quickly one of the giants of Wall Street came crashing down?

New York prosecutors have been asking that same question. They seem to have arrived at a tentative answer - Lehman's reported balance sheet was a sham. Since balance sheets should be audited correctly, prosecutors have pointed the finger at Lehman's auditors - Ernst & Young.

New York attorney general Andrew Cuomo has filed a lawsuit against the accounting firm. The civil fraud case claims that Ernst & Young did nothing except book handsome fees while Lehman used accounting gimmickry to mask its rotten balance sheet.

The lawsuit says Lehman was "a massive accounting fraud". This is strong language which begs the question why haven't any former top executives at the investment bank also been indicted.

The core of the case is centered on the infamous Repo 105 transaction. Lehman used this concocted "sale and repurchase" agreement to move $50 billion off its balance sheet. This allowed Lehman to temporarily to show investors it wasn’t carrying too much debt.

The lawsuit is looking to pull more than $150 million in fees from Ernst & Young, which were received from 2001 to 2008 as Lehman's outside auditor.


Anonymous said...

Lehman made banking interesting.

Anonymous said...

Hi, i just want to say hello to the community

Elby the Beserk said...

Alice - welcome back.

This, from Juliet Gardiner's wonderful "The Thirties - An Intimate History" (a companion to the equal wonderful post-war histories of David Kynaston & Peter Hennessey - if you have time on your hands, order these all one by one from your library and indulge yourself. There are worse fates than to be redundant and a book worm).

1933 - Times writer Philip Guedella defines an American banker as one who "makes a dubious fortune by lending other people's money on insufficient security in the interval that he can spare from selling useless bonds".

Plus ca change eh?

Alice Cook said...

Thank you Elby for the kind words.

True, nothing seems to change.


Anonymous said...

You can find some of the detail behind the claim against E&Y here

I think they are in trouble!