Attorney General Cuomo Sues Ernst & Young For Assisting Lehman Brothers In Financial Fraud

NEW YORK, N.Y. (December 21, 2010) - Attorney General Andrew M. Cuomotoday 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'strue 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 hadengaged 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.

"This practice was a house-of-cards business model designed to hidebillions in liabilities in the years before Lehman collapsed,'saidAttorney General Cuomo. "Just as troubling, a global accounting firm,tasked with auditing Lehman's financial statements, helped hide thiscrucial information from the investing public. Our lawsuit seeks torecover the fees collected by Ernst & Young while it was supposed to beusing accountable, honest measures to protect the public."

Specifically, Repo 105 transactions involved transfers by Lehman offixed income securities to European counterparties in return for cash -often at the end of a financial quarter - with the binding understandingthat Lehman would shortly repurchase the equivalent securities fromthese counterparties only a few days later for more money. Lehman thenused the cash to pay down liabilities and improve its leverage andbalance sheet metrics, while failing to disclose to the investing publicthe obligation to repurchase the securities at a higher price. Lehmandid so, with E&Y's explicit approval, by characterizing thesefinancing transactions as "sales." Indeed, the sole purpose ofcharacterizing these transactions as "sales" was to reduceLehman's leverage on its financial statements and public filings,thereby deceiving the investing public.

The complaint, filed in New York Supreme Court, alleges that E&Y wasfully aware of Lehman's fraudulent Repo 105 transactions, specificallyapproved of Lehman's use of them, and gave Lehman an unqualified auditopinion every year from 2001 to 2007, despite knowing that theyconcealed the Repo 105 transactions. Further, the lawsuit alleges thatin 2007 and early 2008, when Lehman was facing demands to reduce itsleverage, Lehman rapidly accelerated its use of Repo 105 transactions,removing up to $50 billion from its balance sheet on a quarterly basiswithout disclosing the use of the Repo 105 transactions.

The complaint also alleges that E&Y failed to object when Lehman misledanalysts on its quarterly earnings calls regarding its leverage ratios,and that E&Y did not inform Lehman's Audit Committee about ahighly-placed whistleblower's concerns about Lehman's use of Repo105 transactions.

The Attorney General seeks the return of the entirety of fees E&Ycollected for work performed for Lehman between 2001 and 2008, exceeding$150 million, plus investor damages and equitable relief.

A copy of the lawsuit can be found at www.ag.ny.gov/media_center/2010/dec/ErnstYoungComplaint.pdf.

The investigation was conducted by Senior Trial Counsel David N.Ellenhorn and Assistant Attorney General Armen Morian under thesupervision of Executive Deputy Attorney General Maria T. Vullo andDeputy Attorney General Michael Berlin.


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