"New York Set to Allege Ernst & Young Stood By as Lehman Cooked Its Books
New York prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the Big Four accounting firm stood by while the investment bank misled investors about its financial health...
...The suit stems from transactions Lehman allegedly carried out to make its risk appear lower than it actually was.
...the accounting firm earned approximately $100 million [from Lehman] in fees for its auditing work from 2001 through 2008...
The suit, led by Mr. Cuomo, New York's governor-elect, could come as early as this week. It is part of a broader investigation into whether some banks misled investors by removing debt from their balance sheets before they reported their financial results to mask their true levels of risk-taking...
...The transactions in question, known as "window dressing," involve repurchase agreements, or repos, a form of short-term borrowing that allows banks to take bigger trading risks. Some banks have systematically lowered their repo debt at the ends of fiscal quarters, making it appear they were less risk-burdened than they actually were most of the time.
Lehman Brothers dubbed transactions of this type "Repo 105."
The maneuver came to light in March, when the bankruptcy examiner investigating the firm's collapse more than two years ago found that it moved some $50 billion in assets off its balance sheet. Lehman labeled those transactions as securities sales instead of loans, which led investors to believe the firm was financially healthier than it really was.
The bankruptcy examiner's report and the attorney general's investigation found that Lehman Brothers carried out the Repo 105 transactions on a quarterly basis in 2007 and 2008 without telling investors. Mr. Cuomo's investigation found that Repo 105 transactions started as far back as 2001...
The attorney general's investigation, which began after the bankruptcy examiner's report, found that Ernst & Young specifically approved of Lehman's use of Repo 105 transactions and provided the investment bank with a complete audit opinion from 2001 through 2007...
Mr. Cuomo's office has also been investigating suspected window-dressing transactions at other banks...
An analysis earlier this year by The Wall Street Journal found that other banks were reducing their level of debt at quarter-end.
...The Lehman bankruptcy examiner's report also stated that there may be evidence to support negligence and malpractice claims against Ernst & Young regarding Lehman's audits and its lack of response to a whistle-blower at Lehman who raised red flags about the repo trades.
...Though accounting firms were at the center of the last major corporate scandals nearly a decade ago, they haven't been tied to any of the key causes of the recent crisis."
Liz Rappaport
WSJ
No comments:
Post a Comment