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New York AG sues Ernst & Young in Lehman probe

New York AG sues Ernst & Young in Lehman probe

New York's attorney general is suing accounting giant Ernst & Young, accusing it of helping defunct investment bank Lehman Brothers hide billions of dollars in debt from investors even as it teetered on the brink of financial collapse.
The civil lawsuit, filed by Attorney General Andrew Cuomo on Tuesday, days before he's due to be sworn in as the state's governor, marks the first government legal action stemming from the collapse of Lehman Brothers, one of the first milestones of Wall Street's 2008 meltdown.
It targets a practice known as "Repo 105," in which _ the lawsuit says _ Lehman Brothers made temporary overseas sales of securities, often lasting only days, and then used the money to pay off debts ahead of key quarterly reports to investors.
The system allowed the company to hold on to the inventory required by its customers while concealing debts from nervous investors, who otherwise might have sold off their shares.
The lawsuit claims that, as auditor, Ernst & Young signed off on the practice with full understanding that it was being used to deceive investors. From the launch of "Repo 105" in 2001 until the Lehman Brothers bankruptcy in 2008, Ernst & Young was paid more than $150 million for its auditing and accounting work for Lehman Brothers.
Ernst & Young said in a statement that it would defend itself in court and called the lawsuit "a significant expansion of the Martin Act" used to prosecute the case.
"There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles," the statement said. "Lehman's audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry."