MercoPress. South Atlantic News Agency

Ernst & Young accused of helping Lehman Brothers hide financial problems

New York Attorney General and governor-elect Andrew Cuomo

New York prosecutors sued Ernst & Young, accusing the accounting firm of helping to hide Lehman Brothers Holdings Inc's financial problems, the first major government legal action stemming from the Wall Street bank's 2008 downfall.

The civil fraud case seeks more than 150 million USD in fees that Ernst & Young received from 2001 to 2008 as Lehman's outside auditor, plus other unspecified damages.

It contends that one of the largest US auditing firms stood by for years while Lehman used accounting gimmickry to create a false impression about its financial health.

Ernst & Young is the only defendant in the case. New York did not file charges against the Lehman executives who ran the firm when it filed the largest bankruptcy in history in September 2008, helping spark the global financial crisis.

New York Attorney General Andrew Cuomo filed the lawsuit days before he leaves office and becomes governor of the state in January.

Ernst & Young has said that it believes its work as Lehman auditor “met all applicable professional standards” and that accounting issues were not to blame for the bankruptcy.

Cuomo said that for more than seven years leading up to Lehman's bankruptcy, Lehman engaged in fraudulent accounting transactions that were not properly disclosed and that the auditor explicitly approved.

The case focuses on an accounting technique known as Repo 105, which temporarily removed as much as 50 billion USD in assets from the balance sheet in 2008.

“This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed,” Cuomo said in a statement.

The case, filed in New York state Supreme Court, is one of the biggest legal cases involving an accounting firm since Arthur Andersen was criminally indicted in 2002 over the Enron scandal.

The Ernst & Young case is a civil lawsuit, while Andersen was charged criminally and later convicted of obstruction of justice for its role in Enron's collapse.

The U.S. Supreme Court reversed the Arthur Andersen conviction in 2005, but the firm was virtually out of business by then - and its reputation was shattered.