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Ernst & Young settles NY lawsuit for $10m over Lehman auditing

[NEW YORK] Ernst & Young will pay US$10 million to settle a New York lawsuit accusing the accounting firm of helping Lehman Brothers Holdings Inc deceive investors in the years leading up to its 2008 collapse, the New York attorney general said on Wednesday.

The 2010 lawsuit claimed Ernst & Young's auditing facilitated a "massive accounting fraud" and sought US$150 million in fees that the firm earned from Lehman between 2001 and 2008, plus investor damages and equitable relief.

While the US$10 million was much smaller than what the attorney general's office had sought, Ernst & Young agreed to pay US$99 million in damages to investors in a class action settlement approved a year ago.

The case was the only action by a law enforcement authority in connection with Lehman's 2008 collapse, New York Attorney General Eric Schneiderman said in a statement. "If auditors' reports...provide cover for their clients by helping to hide material information, that harms the investing public, our economy and our country," Schneiderman said.

Nearly all the US$10 million will go to investors in Lehman securities, the office said.

The case was the last significant lawsuit against Ernst & Young over Lehman, according to a spokeswoman for the accounting firm. "After many years of costly litigation, we are pleased to put this matter behind us, with no findings of wrongdoing by EY or any of its professionals," the firm said in a statement.

According to the complaint, Ernst approved the"surreptitious" removal of tens of billions of dollars of debt from Lehman's balance sheet to make the investment bank appear less indebted at the close of financial quarters.

Lehman filed for bankruptcy on Sept 15, 2008, helping to trigger the global financial crisis. Once the fourth-largest US investment bank, Lehman held large quantities of risky subprime mortgage securities.

The complaint alleged that, for more than seven years before Lehman's bankruptcy, the bank made use of transactions known as "Repo 105s," short-term financing that temporarily moved as much as US$50 billion from its balance sheet.

The lawsuit followed a report about the transactions by former federal prosecutor Anton R. Valukas, who served as a bankruptcy court examiner for Lehman.

The attorney general's office took more than a dozen depositions in the case and elicited information that also helped the earlier class action, the office said.

Ernst & Young last month agreed in principle to settle lawsuits filed by New Jersey and California municipalities over their losses from the Lehman collapse.

A year ago, an arbitration panel found no basis for a Lehman malpractice claim against Ernst, ruling that any wrongdoing linked to the accounting maneuver was "overwhelmingly attributable to Lehman." "Lehman's audited financial statements clearly portrayed Lehman as what it was - a highly leveraged entity operating in a risky and volatile industry; and Lehman's bankruptcy was not caused by any accounting issues," Ernst & Young said in a statement after the class action settlement.

In 2012, the trial judge in the New York case ruled that the state had no authority to obtain the accounting fees because they were not paid by consumers or the state. But an appeals court reversed him last year, saying that a forced repayment could deter wrongdoing, an important decision for future cases.

The attorney general's case also was the first against the auditor of a public company under New York's Martin Act, the powerful securities fraud statute Schneiderman used last year to sue Barclays Plc over high-speed trading in its "dark pool"trading platform.

Lehman ended its three-year Chapter 11 in 2011 with a liquidation plan slated to repay creditors about US$65 billion, or an average of about 21 cents on the dollar for allowed claims.

The case is People of the state of New York v. Ernst & Young, New York state Supreme Court, New York County, No. 451586/2010.