Wednesday, December 22, 2010

NY Attorney General Cuomo's Ernst & Young Fraud Complaint

From New York Attorney General Cuomo's press release, Attorney General Cuomo Sues Ernst & Young For Assisting Lehman Brothers In Financial Fraud :
NEW YORK, N.Y. (December 21, 2010) - Attorney General Andrew M. Cuomo today filed a Martin Act lawsuit against Ernst & Young LLP (“E&Y”), charging the accounting firm with helping Lehman Brothers Holding, Inc. (“Lehman”) engage in an accounting fraud involving the surreptitious removal of tens of billions of dollars of fixed income securities from Lehman’s balance sheet in order to deceive the public about Lehman’s true liquidity condition.

The Attorney General’s lawsuit claims that for more than seven years leading up to Lehman’s bankruptcy filing in September 2008, Lehman had engaged in so-called “Repo 105” transactions, explicitly approved by E&Y. The transactions purpose was to temporarily park highly liquid, fixed-income securities with European banks for the sole purpose of reducing Lehman’s financial statement leverage, an important financial metric for investors, stock analysts, lenders, and others interested in Lehman.
Read the complete press release here

The Ernst & Young fraud complaint is available on the NY AG site , on Scribd and embedded below.

When the SEC charged Arthur Andersen with criminal fraud, Arthur Andersen lost many of its clients and ceased to exist as a public accounting firm. The Ernst & Young fraud charges are civil and not criminal, from the New York Attorney General and not from the SEC, but are these distinctions without a difference?

Many a corporate counsel is in discussion with boards of directors of public companies audited by Ernst & Young about what, if any liability, a firm or its board may incur by continuing to use a public accounting firm charged by a governmental body with fraud. Hopefully, the accounting firm will survive, but only time will tell.

Ernst Young Fraud Complaint by Milton Recht

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