REPO 105 | NY cannot seek fees paid to Ernst & Young for assisting Lehman Bros. accounting fraud

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REPO 105 | NY cannot seek fees paid to Ernst & Young for assisting Lehman Bros. accounting fraud

REPO 105 | NY cannot seek fees paid to Ernst & Young for assisting Lehman Bros. accounting fraud

Bloomberg-

The New York attorney general has no authority to claim $150 million in fees that Ernst & Young earned from Lehman Brothers Holdings in the years leading up to Lehman’s collapse in 2008, a judge ruled on Wednesday.

The state had sought the fees as part of a lawsuit against Ernst & Young over its auditing of Lehman Brothers. The lawsuit accuses the firm of assisting Lehman in accounting fraud.

New York State Supreme Court Justice Jeffrey Oing said the fees could not be recovered by the state because they were not paid by consumers or the state. “The allegations in this complaint fail to set forth sufficiently as to exactly what the public’s injury is,” Oing said.

James Freedland, a spokesman for New York Attorney General Eric Schneiderman, declined to comment on the ruling.

[BLOOMBERG]

Back from 3/2010 HuffPo wrote about this same issue Lehman Bankrutpcy: ‘Repo 105,’ Firm’s ‘Accounting Gimmick,’ Was Like ‘A Drug,’ Emails Show

An executive referred to by Lehman execs as the firm’s “balance sheet” czar — who later went on to become the firm’s COO — likely had knowledge of the firm’s highly creative accounting maneuvers, notes The New York Times. Here’s the NYT:

“I am very aware … it is another drug we [are] on,” Herbert McDade wrote in an April 2008 e-mail cited by the examiner’s report. At other times, he is described as calling for a limit to the number of Repo 105 transactions.

At the center of the controversy is a technique called “Repo 105,” under which Lehman was able to move $50 billion off of its balance sheet in the second quarter of 2008 alone, MarketWatch reports. Here’s more from Market Watch:

[Repo 105 is] essentially a type of secured loan and is booked that way in the accounts — leading to an increase in both assets and liabilities.

Lehman’s trick was to use a clause in the accounting rules to classify the deal as a sale, even though it was still obliged to repurchase the assets at a later date. That meant the assets disappeared from the balance sheet, and it could use the cash it received to temporarily pay down other liabilities…. [Repo 105] was crucial for maintaining the group’s credit rating as rating agencies and investors began to focus more on leverage and demanded lower risk.

In a series of e-mail messages cited by the examiner, one Lehman executive writes of Repo 105: “It’s basically window-dressing.” Another responds: “I see … so it’s legally do-able but doesn’t look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS [balance sheet] to Rates Europe?” The first executive replies: “Yes, No and yes. :)

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