A lawsuit accusing Ernst & Young LLP of facilitating a “major accounting fraud” by helping Lehman Brothers Holdings Inc. (LEHMQ) deceive the public about its financial condition was sent back to New York state court.
U.S. District Judge Lewis Kaplan in Manhattan today said the lawsuit, filed in state supreme court in December 2010 by then-New York Attorney General Andrew Cuomo and later moved to federal court, should be tried in state court. Cuomo’s successor, Eric Schneiderman, has continued to pursue the case.
Kaplan said he reviewed the matter even after the state dropped its objection to having the case tried in federal court and “now concludes that the removal was improper because the case does not come within federal jurisdiction.” The claims in the complaint are predominantly based on state and not federal law, he said.
“We are disappointed by the court’s ruling, and we are reviewing it,” Charlie Perkins, an Ernst & Young spokesman, said in an e-mail. “We will continue to vigorously defend ourselves in this matter.”
Cuomo alleged that Ernst & Young “assisted Lehman in a scheme that involved the repeated, surreptitious, and temporary removal of tens of billions of dollars of securities from Lehman’s balance sheets in order to create false impressions of Lehman’s liquidity” through the use of so-called Repo 105 transactions that helped concealed the debt.
For more than seven years before Lehman declared bankruptcy in 2008, the investment bank engaged in transactions approved by Ernst & Young whose purpose was to move debt off its balance sheet and make it appear less leveraged, Cuomo said in a statement.
Repo 105 transactions are a form of short-term financing that Lehman used to move as much as $50 billion off its balance sheet temporarily to show investors it wasn’t carrying too much debt, according to a bankruptcy examiner’s report. The report was used as a basis for many suits.
New York state is seeking disgorgement of at least $125 million in fees earned through the allegedly fraudulent Repo 105 transactions. Kaplan said he will continue to preside over 47 other complaints against Lehman that are still pending.
Lehman filed the biggest U.S. bankruptcy in history in September 2008 with $639 billion in assets. It is formally out of bankruptcy and continues to liquidate assets under a plan to pay the average creditor less than 18 cents on the dollar.
In June 2009, Ernst & Young paid $109 million to settle investor claims that it failed to find a $2.7 billion fraud at HealthSouth Corp. (HLS)
In December 2009, the firm and some of its partners paid $8.5 million to settle Securities and Exchange Commission allegations that they knew or should have known about fraudulent accounting by Bally Total Fitness Holding Corp. (BLLY)
Schneiderman became New York Attorney General in January 2011 after Cuomo was elected governor of New York.
The case is In re: Lehman Brothers Securities and ERISA Litigation, 09-MD-2017, U.S. District Court, Southern District of New York (Manhattan).
To contact the editor responsible for this story: Michael Hytha at email@example.com.