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Ernst & Young Faces Fraud Suit

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Bloomberg reported Monday that Ernst & Young LLP will be sued by New York Attorney General Andrew Cuomo for fraud. An unnamed source told Bloomberg Ernst & Young is being sued for its alleged role in Lehman Brothers' collapse.

The suit will focus on audits and quarterly reviews Ernst & Young prepared for Lehman Brothers, "which helped downplay the firm's liabilities," Bloomberg reports.

Bloomberg cites a report by Anton Valukas, a bankruptcy examiner, which found Lehman Brothers used Repo 105 trades to temporarily reduce its balance sheet by between $38.6 billion in the fourth quarter of 2007 and $50.4 billion in the second quarter of 2008.

In a footnote in his report, Valukas wrote that the "balance sheet manipulation was intentional, for deceptive appearances, had a material impact on Lehman’s net leverage ratio, and, because Lehman did not disclose the accounting treatment of these transactions, rendered Lehman’s Forms 10â€K and 10â€Q (financial statements and MD&A) deceptive and misleading."

In response to that report, released in March 2010, Ernst & Young argued that leverage ratios were not their responsibility, but management's, Bloomberg reports, and that "they are not part of the audited financial statements."

Valukas noted that even if the Repo 105 trades were technically compliant with U.S. accounting rules, Ernst & Young could still have been found negligent if it didn’t evaluate individual trades, didn't evaluate whether the trades "lacked a business purpose," and didn't conclude whether Lehman's use of the trades were "material," according to Bloomberg.

An electronic survey conducted Dec. 20 by Argyle Executive Forum of 498 of its members found over 48% of respondents think the Attorney General should move forward with fraud charges against the company. While just over 39% of respondents think the company had a "material role" in Lehman Brothers' collapse, 35.5% think the company wasn't involved and 25.3% said they weren't sure.


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