If Round One is "New York Attorney General vs. Ernst & Young,"  then Round Two is likely to be "New York Attorney General vs. Former Executives of Lehman Brothers." 

New York Attorney General Andrew Cuomo accused Ernst & Young of helping Lehman Brothers disguise its financial conditions from more than 7 years, and that the accounting firm was "aware that the public was being misled."  Of course, that case is conditioned largely on proving that Lehman's financial statements were, in fact, fraudulently prepared with the intent of materially misstating the company's leverage. 

Which is why, CNBC Senior Editor John Carney expects the Ernst & Young civil case to be a road map for an eventual criminal case - against former executives of Lehman Brothers. 

Three of the 4 causes of action against E&Y are made under the Martin Act, the powerful anti-fraud statute passed in 1921 that gives the NY Attorney General an edge over national regulators, such as the SEC when it comes to securities fraud cases.  The law was used aggressively by Eliot Spitzer.

Under the Martin Act.   Perhaps most importantly, the Martin Act gives the Attorney General broad discretion in whether to file civil or criminal fraud charges. A civil suit was filed against Ernst & Young which, according to Mr. Carney, may bode poorly for former Lehman Brothers executives. If Ernst & Young is guilty of fraud for merely helping Lehman executives mislead the public, the Lehman Brothers executives are likely to find themselves faced with criminal charges.

Criminal charges under the Martin Act do not require the AG to prove an intent to defraud.  All that's required is an intent to commit an act that constitutes fraud.  "Fraud" is broadly construed under the act, to include misrepresentations and omissions.  "The words ‘fraud’ and ‘fraudulent practice’, as used in the act, are given a wide meaning to include all deceitful practices contrary to the plain rules of common honesty,” one New York court has explained.

Conclusion:  It’s only a matter of time before the NY AG's office gets around to prosecuting the underlying fraud they claim happened at Lehman.  Based on the AG’s complaint, Erin Callan and Ian Lowitt would seem to be especially imperiled.  Both executives are quoted at length in the complaint to establish that the public was being misled about Lehman’s attempts to reduce its leverage.  Ernst & Young’s auditors are accused of being aware the public was being misled, and of failing to disclose the truth just because they heard these statements.  Of course there will be actions filed against the executives who actually made the statements.   [CNBC's NetNet, 12/22]