Ernst & Young will fight US court case as Cuomo seeks £97m Lehman fees

ERNST & Young pledged yesterday to "vigorously defend" the lawsuit launched against it by the US government over the collapse of American investment banking giant Lehman Brothers in 2008.

The accounting giant claimed in a statement that Lehman's bankruptcy happened amid a global financial crisis and was not caused by any accounting issues.

"Lehman's audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry," Ernst & Young said.

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A lawsuit filed in a New York state court last Tuesday by the office of Andrew Cuomo, the state's attorney general, alleges that E&Y helped the investment bank engage in a "massive accounting fraud" by using an accounting treatment known as Repo 105.

But E&Y said there was "no factual or legal basis" for a claim to be brought against an auditor where the accounting for the underlying transaction accorded with the Generally Accepted Accounting Principles (GAAP).

The firm said: "Lehman's bankruptcy occurred in the midst of a global financial crisis triggered by dramatic increases in mortgage defaults, associated losses in mortgage and real estate portfolios, and a severe tightening of liquidity.

"Lehman's bankruptcy was preceded and followed by other bankruptcies, distressed mergers, restructurings, and government bail-outs of all of the other major investment banks, as well as other major financial institutions. In short, Lehman's bankruptcy was not caused by any accounting issues."

It is the first major government legal action stemming from the bank's collapse, which triggered the worldwide financial sector crisis.

The lawsuit seeks more than $150 million (97m) in fees that E&Y received from 2001 to 2008 as the bank's outside auditor, which is less than 1 per cent of the accountancy group's annual revenues. Other unspecified damages are also being sought.

The US Securities and Exchange Commission, Wall Street's regulator, is already investigating former Lehman chief executive Richard Fuld and other former top executives at the bank.

Legal and accounting experts said they expected that Ernst & Young will try to settle the case rather than engage in a long court fight.

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"It tends to be lot less expensive for both parties to resolve it through settling and getting it behind them," said Bruce Pounder, an expert on accounting ethics and president of Leveraged Logic, a North Carolina-based firm that provides continuing education to accountants.

Pounder said he did not see the action undermining Ernst & Young's viability. The group is the third largest of the Big Four US accounting firms by revenues, behind Deloitte and PwC.

Cuomo filed the lawsuit days before he is to leave office and become governor of the state in January.