Authorities Take On Lehman Auditor

lehman 5 Authorities Take On Lehman Auditor Ernst & Young smelled what Lehman Brothers was cooking — the books! but authorities now believe the company charged with auditing the collapsed financial firm was also complicit in the company’s accounting shenanigans, according to a report from the Wall Street Journal.

In what may be his final act before he heads up to Albany to become governor, Attorney General Andrew Cuomo is taking a shot at Ernst & Young, part of a wider look into possible misleading practices by major financial institutions in the runup to the financial crisis. The Attorney General is also examining Bank of America.

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Lehman’s sinister-sounding “Repo 105″ practice is at issue in the AG’s civil suit. Says The Journal:

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, said the person familiar with the probe.

Although there’s a chance Ernst & Young could settle, Wall Street observers are taking note of the suit for a couple reasons. First of all, although misleading balance-sheet acrobatics was a major reason why so many big banks reached inflated valuations in the runup to the crisis, there hasn’t been much will to take on the firms that signed off on accounting statements. Says Colin Barr of Fortune:

The New York suit is worth watching because it’s the first major official case against an auditor in a crisis that was characterized by unreliable financial reports at major financial institutions. Countrywide, Bear Stearns, Lehman, AIG (AIG) — all of them were the very picture of robust good health till suddenly they weren’t. Coincidence?

John Carney at CNBC, meanwhile, says that the filing of civil as opposed to criminal charges against Ernst & Young reduces the likelihood that a criminal case is forthcoming. Whatever happens from here, Mr. Cuomo has gotten Wall Street’s attention.

mtaylor [at] observer.com | @mbrookstaylor