SEC, DOJ Once Again Play Catch-Up with a State AG

In the 11th hour of his term in office as New York attorney general, Andrew Cuomo sued accounting giant Ernst & Young for allegedly helping client Lehman Brothers mislead investors about the investment bank's financial health.  The lawsuit seeks disgorgement (over $150 million in fees collected between 2001 and 2008), restitution of investor damages, and equitable relief.  The lawsuit, which comes more than 2 years after Lehman collapsed, focuses on an accounting maneuver known inside Lehman as "Repo 105." 

This accounting maneuver temporarily removed as much as $50 billion of assets from its balance sheet to give the appearance that the firm had reduced its debt levels, according to a report by a court-appointed examiner that was released in March.  It often did this just before the end of a financial quarter, the report said.

"This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed.  Just as troubling, a global accounting firm, tasked with auditing Lehman’s financial statements, helped hide this crucial information from the investing public. ..."  -- Andrew Cuomo.

The 32-page complaint, filed in New York Supreme Court, follows the contours of the allegations made in the examiner’s report.  The attorney general’s investigation of Ernst & Young commenced began after the release of the report, said the person familiar with the inquiry.  The Justice Department and the SEC have each been investigating the circumstances of Lehman's collapse, although their investigations have resulted in no charges against any of the firm’s executives - including longtime CEO Richard Fuld Jr.

As Michael Missal, a government-enforcement lawyer at K&L Gates, put it:  "This appears to be another instance where the office is moving ahead of the SEC and any other federal regulator."   [NYT Dealbook, 12/21]