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Ernst & Young sued, accused of covering up Lehman Brothers decline

December 21, 2010 |  9:11 am

New York Atty. Gen. Andrew Cuomo filed a lawsuit against the accounting firm Ernst & Young, accusing it of helping Lehman Bros. cover up its declining health in the years before its 2008 collapse.

The civil complaint filed in New York Supreme Court on Tuesday morning demands that Ernst & Young pay New York the $150 million in fees it earned from Lehman.

The collapse of Lehman in September 2008, when it was the fourth-largest investment bank in the U.S., was one of the defining moments of the financial crisis. Before Tuesday's lawsuit, though, regulators and prosecutors had not accused anyone of wrongdoing in the bank's collapse. 

Cuomo's suit focuses on a set of accounting maneuvers, begun in 2001, that allowed Lehman to shift securities to other banks for short periods in order to look healthier. The suit says that Ernst & Young, Lehman's lead accountants, knew the maneuvers were not being disclosed to investors but still approved Lehman's financial statements. 

The so-called Repo 105 transactions were done just before Lehman publicly reported its earnings and made it appear as though Lehman had more cash, according to the complaint. Lehman would immediately buy back the securities after reporting results.

"E&Y sat by silently while Lehman deceived the public," the complaint says.

Ernst & Young did not respond to a request for comment.

Cuomo will be leaving his post as attorney general at the end of the year and taking up office as New York's governor.

-- Nathaniel Popper