Ernst & Young’s Leftover Lehman Liability

By Francine • Dec 13th, 2012 • Category: Pure Content, The Case Against The Auditors

There was some news this week about the New York Attorney General’s lawsuit against Ernst & Young for its role in the Lehman Brothers failure. One less thing for them to worry about…

Ernst & Young chalked up one small victory in New York State Supreme Court this week over claims by the New York Attorney General that the firm committed fraud leading to the failure of Lehman Brothers in 2008. Justice Jeffrey Oing said the New York Attorney General cannot claim $150 million in fees that Ernst & Young earned from Lehman Brothers Holdings from 2001-2008, when the firm filed bankruptcy.

Attorney David Ellenhorn of the NYAG claimed the fees represented “disgorgement” of “ill gotten gains” since the Attorney General says Ernst & Young repeatedly committed “fraudulent acts” as auditor of Lehman Brothers all those years. When Ellenhorn tried to explain this to the judge, Oing told Ellenhorn he had the wrong remedy.

Not good when you have to explain too much to the judge.

There’s more at Forbes, including what’s left of the remedies the New York Attorney General is looking for. There’s also a reminder that Ernst & Young is last defendant standing – other than investment bank UBS – in the private class action lawsuit.

Unobstructed, solo target is not the best place for an audit firm to be when its clients fail – last one left to settle rather than first. That’s the case with the PwC and Colonial Bank class action, too. Typically, the auditors get out first via a small, or no, settlement and help the plaintiffs make a better case against executives. Can PwC do that now that the MF Global bankruptcy trustee has sent the class action lawyers after the firm?

It’s not good to be the next up to be sued, after company executives are convicted of fraud and the trustee in bankruptcy has whetted its appetite with them. That’s the position PwC is in with the FDIC suit against them for Colonial Bank.

Will the FDIC make Ernst & Young its next auditor to be sued, for IndyMac, now that the regulator  has successfully sued the bank’s executives?

It’s also not good to be the only one likely to be successfully sued, as Ernst & Young was with Sino-Forest. That just cost Ernst & Young C$117 million, the largest settlement against an auditor in Canadian history. Ernst & Young is still subject to sanctions by the Ontario Securities Commission which alleges that the auditing firm had failed to live up to proper standards reviewing Sino-Forest’s books.

Is it just me or are the auditor defense lawyers losing their touch?

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5 Responses »

  1. We need to nail the liability of CPA firms for their patently defective audit opinions. In addition to lawsuits, we need each state board of accountancy to provide sufficient investigators to go after the big firms. Right now, California with 85,000 CPA licensees has fewer than 5 investigators; and it is no better in the other states. No wonder the public is losing so far. Good legislators will fix this problem. Funding for investigators generally comes out of CPA dues to the board of accountancy and recoveries from offending firms– no cost to taxpayers.

  2. There is no way that the defendant’s lawyers are losing their touch. EY won against the NY Attorney General. If the money was going to NY State, maybe the judge has a point. Why should NYS collect anything on this failure? NYS was a major beneficiary of the fraud at Lehman. It is my estimate that NYS and NYC collected more than a billion dollars on salaries and bonuses paid while Lehman was insolvent.

    If you look at the economics of this thing, the plaintiff’s lawyers will always settle. Dp they take their share of $150 million or so settlement or do they try to fighjt on, whatever the cost?

    The NY AG has some explaining to do. If he believes that EY committed fraud, why weren’t EY partners charged with a crime? Why hasn’t he tried to take away the partner’s license to practice public accounting?

  3. I agree criminal charges should have been forthcoming. What about statestreet.com…Ihave been unable to determine who the auditors were.

  4. @John

    That’s a good question. I’ll look into it. I tweeted on that case. It’s hilarious.

  5. [...] reports of the quarterly reviews but not auditors of the commercial banks. It’s the reason Ernst & Young is still on the hook in private litigation for their work related to a [...]

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