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Ernst & Young Cleared by U.K. Regulator Over Lehman Work

June 22 (Bloomberg) -- Ernst & Young LLP won’t face sanctions in Britain over the way it dealt with Lehman Brothers Holdings Inc.’s off-balance sheet transactions in 2007, the country’s accounting regulator said.

The probe that started in June 2010 found no wrongdoing by the firm in its accounting for Lehman’s so-called Repo 105 and Repo 108 transactions, which helped the bank raise short-term funds before its collapse, the Financial Reporting Council said today on its website.

“No action should be taken against Ernst & Young LLP or any individuals in connection with their conduct in this matter,” Gareth Rees, a lawyer for the regulator’s Accountancy and Actuarial Discipline Board, said in the statement.

The probe began after revelations the repurchase deals helped Lehman downplay its leverage in late 2007 and 2008. A 2,200-page report on the bank’s collapse, filed in March 2010 by bankruptcy examiner Anton Valukas in New York, said Ernst & Young could be accused of “professional malpractice” for its role in auditing New York-based Lehman.

“Ernst & Young welcomes the decision by the AADB to close this matter with no further action to be taken, confirming our belief in the quality of our audit work,” Vicky Conybeer, a spokeswoman for the company, said in an e-mailed statement.

Inherently Improper

The deals took advantage of accounting rules that treated certain transactions as sales instead of financing and helped Lehman reduce its balance sheet and leverage ratios, the FRC said today. Valukas found that, while the transactions weren’t “inherently improper,” their primary use by Lehman was “balance sheet manipulation,” the watchdog said.

The probe covered Ernst & Young’s audits of Lehman’s London-based European unit for the year ended Nov. 30, 2007, the regulator said.

The regulator is still probing the accounting firm’s preparation of reports on the Lehman unit’s compliance with U.K. rules governing the protection of client money.

Lehman filed the biggest bankruptcy in U.S. history in September 2008 after mounting losses on mortgage-backed securities spooked investors and creditors. The investment bank’s failure helped trigger a freeze of global credit markets.

To contact the reporter on this story: Erik Larson in London at elarson4@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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