Ernst & Young May Escape Charges as Lehman Probe Stalls

U.S. Securities and Exchange Commission officials may lose a court battle against Lehman Brothers Holdings Inc. accused of accounting fraud involving the surreptitious removal of tens of billions of dollars of fixed income securities from Lehman’s balance sheet in order to deceive the public about Lehman’s true liquidity condition, reports the Wall Street Journal.


In a sign that the investigation has stalled, the SEC hasn't issued a Wells notice to Lehman's longtime auditor, Ernst & Young. According to the Journal, Wells notices are a formal signal that the SEC's enforcement staff has decided it might file civil charges against the recipient. In a statement, Ernst & Young said the firm stands "behind our work on the Lehman audit and our opinion that Lehman's financial statements were fairly stated in accordance with the U.S. accounting standards that existed at the time." The firm had concluded that the accounting in the Repo 105 transactions was acceptable.


According to the Journal, if SEC officials decide not to take enforcement action against former Lehman executives, they likely would escape criminal prosecution, too. "[The Justice Department] tends to follow the SEC's lead in these complex financial cases, so reluctance to pursue civil charges generally means the federal agencies won't take a criminal case," Elizabeth Nowicki, a former SEC lawyer who is an associate professor at Tulane University School of Law in New Orleans. told the Journal.


In December 2010, Attorney General Andrew M. Cuomo filed a Martin Act lawsuit against Ernst & Young LLP. The Attorney General’s lawsuit claims that for more than seven years leading up to Lehman’s bankruptcy filing in September 2008, Lehman had engaged in so-called “Repo 105” transactions, explicitly approved by E&Y. The transactions purpose was to temporarily park highly liquid, fixed-income securities with European banks for the sole purpose of reducing Lehman’s financial statement leverage, an important financial metric for investors, stock analysts, lenders, and others interested in Lehman.





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