Cuomo Sues Ernst & Young Over Lehman Collapse

New York's attorney general filed a civil lawsuit Tuesday accusing the accounting firm Ernst & Young of helping the defunct investment bank Lehman Brothers deceive investors about its financial health.

Attorney General Andrew Cuomo said that in the seven years leading up to the bank's collapse, Ernst & Young signed off on an accounting practice that allowed Lehman to keep billions of dollars in debt off its financial statements.

In the suit, lawyers for the state argued that in essence, Ernst & Young auditors had allowed the bank "to engage in a massive accounting fraud, involving the surreptitious removal of tens of billions of dollars of securities from Lehman's balance sheet in order to create a false impression of Lehman's liquidity, thereby defrauding the investing public."

An Ernst & Young spokesman did not immediately return a call for comment Tuesday. The company declined to comment Monday when news of the impending lawsuit first surfaced.

The suit takes aim at Lehman's practice of temporarily moving liquid, fixed-income securities to European banks in exchange for cash that it used to pay off liabilities.

According to the suit, those transfers, called "Repo 105" transactions, were booked as sales of assets, but were actually loans because Lehman's deals with the banks required them to repurchase those securities right away, usually within a few days.

"Rather than expose this fraud as auditors must, Ernst & Young expressly 'approved' this practice in 2001," Cuomo's lawsuit said.

As much as $50 billion in Lehman assets were shuffled in the transactions, the lawsuit said.

The suit seeks to force Ernst & Young to return the $150 million in fees it charged Lehman for its audits.