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(Bloomberg) - Ernst & Young LLP may be sued for fraud as early as today by New York Attorney General Andrew Cuomo for allegedly helping Lehman Brothers Holdings Inc. mislead investors, according to a person familiar with the matter.
Cuomo will be sworn in as governor on Jan. 1. The suit would relate to Ernst & Young’s audits of Lehman financial statements aimed at downplaying its liabilities, said the person, who wasn’t authorized to speak publicly about the case. The fraud suit would be brought under the state’s Martin Act, said the person, adding that a settlement is possible.
Richard Bamberger, a spokesman for Cuomo’s office, declined to comment. Charles Perkins, a spokesman for Ernst & Young, declined to comment. The Wall Street Journal said earlier today a lawsuit might be filed this week.
Lehman, once the fourth-largest investment bank, failed in September 2008 because of risky real estate bets and too much debt including Repo 105 trades, which it tried to hide from investors, according to bankruptcy examiner Anton Valukas’s report. Valukas, in the report, said Ernst & Young could be accused of “professional malpractice” for its role as auditor.
Repo 105 transactions are a form of short-term financing that Valukas said Lehman used to move as much as $50 billion off its balance sheet temporarily to show investors it wasn’t carrying too much debt.
The Repo 105 transactions were sale and repurchase agreements, so that Lehman was obligated to buy them back, swelling its leverage again.
Material Impact
“The balance sheet manipulation was intentional, for deceptive appearances, had a material impact on Lehman’s net leverage ratio” and caused financial reports to be misleading, Valukas wrote of the defunct New York-based company. Higher leverage undermines a firm’s capacity to absorb financial shock.
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