Cuomo sues E&Y over Lehman

[Scotteq]

http://dealbook.nytimes.com/2010/12/21/cuomo-sues-ernst-young-over-lehman/?hp

11:42 a.m. | Updated

The New York attorney general on Tuesday sued Ernst & Young, accusing the accounting firm of civil fraud for helping its client Lehman Brothers mislead investors about the investment bank’s financial health.

The lawsuit, coming more than two years after Lehman collapsed and the global economy buckled, is the first major legal action stemming from the collapse of the investment bank.

Ernst & Young, Lehman’s longtime outside auditor, certified the financial statements of Lehman from 2001 until the firm’s bankruptcy filing in September 2008. The lawsuit focuses on the Ernst & Young’s approval of a much-criticized accounting maneuver employed by Lehman that allowed it to remove debt from its balance sheet.

“E&Y substantially assisted Lehman Brothers Holdings Inc., now bankrupt, to engage in a massive accounting fraud, involving the surreptitious removal of tens of billions of dollars of securities from Lehman’s balance sheet in order to create a false impression of Lehman’s liquidy, thereby defrauding the investing public,” said the complaint.


****************** <SNIP> *****************

The lawsuit focuses on an accounting maneuver known inside Lehman as Repo 105. This tactic temporarily removed as much as $50 billion of assets from its balance sheet to give the appearance that the firm had reduced its debt levels. It often did this just before the end of a financial quarter, the lawsuit said.

Answering the question: "..What The F*ck Were The Accounting Firms Doing Before The Collapse..."


IMHO, this is a key to the whole mess. Why? These accounting firms {Ernst and Young in this case}, are responsible for auditing and certifying the Financial reports given by these Wall Street firms so that the Public, Investors, and Government Agencys (SEC, IRS etc) can be assured what's being said is reasonably accurate. Instead, they're alleged in this complaint to be helping cook the books...


{edit} - I Expect/Hope for many more similar lawsuits to be lodged.

 

[MovingTarget]

I wonder if any of those accounting goons will be taken to task for their shenanigans. Probably not.

10-15yrs down the line, we will have yet another crash caused by the same wall street culture. We need to clamp down on these guys.

 

[techs]

I wonder if any of those accounting goons will be taken to task for their shenanigans. Probably not.

10-15yrs down the line, we will have yet another crash caused by the same wall street culture. We need to clamp down on these guys.

Nuh, uh. The Republicans say they are going to repeal the new regulation designed to prevent this from happening again.
And by magic it won't ever happen again.

You believe in magic, don't you.

 

[MovingTarget]

Nuh, uh. The Republicans say they are going to repeal the new regulation designed to prevent this from happening again.
And by magic it won't ever happen again.

You believe in magic, don't you.

Well, the S&L crisis did happen when I was a kid, so I guess I do believe in magic. :awe:

 

[Jhhnn]

I wonder if any of those accounting goons will be taken to task for their shenanigans. Probably not.

10-15yrs down the line, we will have yet another crash caused by the same wall street culture. We need to clamp down on these guys.

Nah. With Repubs again in the ascendancy, they'll just turn the current feeble recovery into a big double-dip, a grand cornholio of epic proportions...

People think Dems are ineffective- just wait until they see how effective their Repub idols can be- at screwing over the vast majority of the population, that is...

 

[manimal]

The outcome I hope is that we start holding people accountable for white collar crime like this. Hiding fraud behind numbers and calling them innovative products and pushing money onto shadow markets to avoid oversight needs to be criminally prosecuted so it doesnt happen again...

Its like taking a drug overlord off the street and taking away his cars and boats and letting him go....how would that work out for law enforcement?

 

[hal2kilo]

http://dealbook.nytimes.com/2010/12/21/cuomo-sues-ernst-young-over-lehman/?hp






Answering the question: "..What The F*ck Were The Accounting Firms Doing Before The Collapse..."


IMHO, this is a key to the whole mess. Why? These accounting firms {Ernst and Young in this case}, are responsible for auditing and certifying the Financial reports given by these Wall Street firms so that the Public, Investors, and Government Agencys (SEC, IRS etc) can be assured what's being said is reasonably accurate. Instead, they're alleged in this complaint to be helping cook the books...


{edit} - I Expect/Hope for many more similar lawsuits to be lodged.

I'm amazed that there has not been a procession of perp walks for this whole financial crisis which had more to do with out and out fraud rather than government policy IMHO. Maybe this will be the start of some justice.

 

[Phokus]

A reminder that the Big 4 accounting firms used to be known as the Big 5 when Arthur Anderson was around, until they got whacked for Enron. It absolutely blows me away that accounting firms are still doing this shit after Anderson got it's ass handed to them. Then again, conflict of interest in the free market rears it's ugly head again.

 

[Phokus]

Also:

There once was a business owner who was interviewing people for a division manager position. He decided to select the individual that could answer the question "how much is 2+2?"

The engineer pulled out his slide rule and shuffled it back and forth, and finally announced, "It lies between 3.98 and 4.02".
The mathematician said, "In two hours I can demonstrate it equals 4 with the following short proof."
The physicist declared, "It's in the magnitude of 1x101."
The logician paused for a long while and then said, "This problem is solvable."
The social worker said, "I don't know the answer, but I a glad that we discussed this important question.
The attorney stated, "In the case of Svenson vs. the State, 2+2 was declared to be 4."
The trader asked, "Are you buying or selling?"
The accountant looked at the business owner, then got out of his chair, went to see if anyone was listening at the door and pulled the drapes. Then he returned to the business owner, leaned across the desk and said in a low voice, "What would you like it to be?"

 

[hal2kilo]

A reminder that the Big 4 accounting firms used to be known as the Big 5 when Arthur Anderson was around, until they got whacked for Enron. It absolutely blows me away that accounting firms are still doing this shit after Anderson got it's ass handed to them. Then again, conflict of interest in the free market rears it's ugly head again.

Aparently magic works slow in the free markets.

 

[manimal]

A reminder that the Big 4 accounting firms used to be known as the Big 5 when Arthur Anderson was around, until they got whacked for Enron. It absolutely blows me away that accounting firms are still doing this shit after Anderson got it's ass handed to them. Then again, conflict of interest in the free market rears it's ugly head again.

Accenture is still there. Sadly a few fall guys fell but the entity lived on in parts.

 

[CycloWizard]

Nuh, uh. The Republicans say they are going to repeal the new regulation designed to prevent this from happening again.
And by magic it won't ever happen again.

You believe in magic, don't you.

Was this legal under the regulations existing at the time? I believe it was not. So why do we need more regulations that will simply not be enforced? Fraud is fraud, and writing more regulations simply creates more loopholes by which fraud magically becomes legal. No one is enforcing the law of the land because the guy whose job it is to do exactly that is more worried about being the legislator in chief than doing his real job. If you carry out a drive-by shooting in St. Louis, you're more likely to get busted for the speeding ticket leaving the scene than for the shooting itself. Do we need more laws regulating drive-by shootings, or do we need to enforce the existing ones? It's pathetic that the first legal action in this case is in civil court.

 

[Phokus]

Accenture is still there. Sadly a few fall guys fell but the entity lived on in parts.

Accenture split off from Anderson a long ass time before Enron. I remember they were doing some recruiting on my campus back in '97. I don't think they're an accounting group either, they do other types of consulting.

 

[thegimp03]

Accenture doesn't do accounting, they do IT and business consulting. Most of the former Andersen employees either switched to other accounting firms or went to private industry. I worked with quite a few ex-Andersen employees at the Big 4 accounting firm I use to work for (not E&Y).

As for E&Y, it'll be interesting to see what comes of this. I highly doubt they'll get anything more than a slap on the wrist and a fine of $500m-$1B because anything a lot more than $1B would probably put the firm at risk of collapse. Furthermore, the DOJ/SEC/PCAOB wouldn't want a structure which has less than 4 major accounting firms because that would adversely affect competition amongst the firms.

 

[Fern]

This is not a poltical thing, not a Dems v. Repubs or Conservative v. Liberal.

E&Y either followed the appropriate accounting rules or they didn't. Now if it required judgement, did they use 'good faith' in excercising that judgement? There is a lot more of latter these days. Accounting rules (FAB's etc) have proliferated over the past few decades, this means more options for how something is to be treated, and more judgement therefore required.

Everybody screams about AA, but in Enron's case, as best as I can tell, they followed the rules properly. As sometimes happens, rules have 'holes' in them that are revealed as attorneys etc devise new structures and as businesses move into new markets/areas, particularly overseas. They got fvcked for no good reason. it wasn't their fault the rule in question was imperfect and allowed the Enron situation to develop.

BTW: Accounting rules are apolitical and have nothing to do Congress etc. I suppose the SEC may have some input, but someone better versed in auditing and GAAP will have to comment. (I'm just a tax guy and long removed form auditing and GAAP)

Edit: Just saw this:

"Lehman did not disclose its use ... of Repo 105 to the Government, to the rating agencies, to its investors, or to its own Board," the report said. One senior official inside the company warned that the use of Repo 105 would present "reputational risk" to the company if the public found out.

They didn't disclose this info to their own board? Wow! That seems to indicate rogue elements within Lehman. If they hid it from their own board, they may well have hid it from E&Y. We'll have to wait and see.


Fern

 

[Phokus]

This is not a poltical thing, not a Dems v. Repubs or Conservative v. Liberal.

E&Y either followed the appropriate accounting rules or they didn't. Now if it required judgement, did they use 'good faith' in excercising that judgement? There is a lot more of latter these days. Accounting rules (FAB's etc) have proliferated over the past few decades, this means more options for how something is to be treated, and more judgement therefore required.

Everybody screams about AA, but in Enron's case, as best as I can tell, they followed the rules properly. As sometimes happens, rules have 'holes' in them that are revealed as attorneys etc devise new structures and as businesses move into new markets/areas, particularly overseas. They got fvcked for no good reason. it wasn't their fault the rule in question was imperfect and allowed the Enron situation to develop.

BTW: Accounting rules are apolitical and have nothing to do Congress etc. I suppose the SEC may have some input, but someone better versed in auditing and GAAP will have to comment. (I'm just a tax guy and long removed form auditing and GAAP)

Edit: Just saw this:



They didn't disclose this info to their own board? Wow! That seems to indicate rogue elements within Lehman. If they hid it from their own board, they may well have hid it from E&Y. We'll have to wait and see.


Fern

Uh, no, E&Y knew about it, there was a whistleblower who alerted them to it. The LEAD AUDITOR and E&Y Partner said she didn't know what Repo 105 was as a defense, which is funny because Ernst and Young gave a presentation to all partners about it:

http://www.zerohedge.com/article/an...ainst-ernst-young-lehman-repo-105-involvement+

Back to E&Y - where things get really bleak for Ernst & Young is the following disclosure of a whistleblower arising from Lehman's soon to be ashes, and E&Y's treatment of his brand new information.

On May 16, 2008, Matthew Lee, then?Senior Vice President in the Finance Division responsible for Lehman&#8217;s Global Balance Sheet and Legal Entity Accounting, sent a letter to certain members of Lehman&#8217;s senior management identifying possible violations of Lehman&#8217;s Ethics Code related to accounting/balance sheet issues.Lehman involved Ernst & Young in its investigation of the concerns raised in Lee&#8217;s May 16, 2008 letter.
Subsequently, less than a month later, on June 12, 2008, Ernst & Young &#8211; Schlich and Hillary Hansen &#8211; interviewed Lee. Hansen&#8217;s notes of the interview reveal that Lee made certain statements to Ernst & Young about Lehman&#8217;s Repo 105 practice, including, most notably, the volume of Repo 105 activity that Lehman engaged in at quarter?end (May 31, 2008). Hansen&#8217;s notes specifically recount Lee&#8217;s allegation that Lehman moved $50 billion of inventory off its balance sheet at quarter?end through Repo 105 transactions and that these assets returned to the balance sheet approximately a week later.

During the Examiner&#8217;s interview of Hansen, Hansen recalled that while Ernst & Young questioned Lee about his May 16, 2008 letter, Lee &#8220;rattled off&#8221; a list of additional issues and concerns he held, one of which was Lehman&#8217;s use of Repo 105 transactions. Ernst & Young had no further conversations with Lee about Repo 105 transactions. Prior to her interview of Lee in June 2008, Hansen had heard the term Repo 105 &#8220;thrown around&#8221; but she did not know its meaning; according to Hansen, Schlich described Repo 105 transactions to her shortly after they met with Lee.

It is good to know that a head auditor on a top 5 investment bank was unfamiliar with its business practices, and the implications of SFAS 140, even though the firm, as presented above, was edumacating its partners about such things.

 

[Fern]

Uh, no, E&Y knew about it, there was a whistleblower who alerted them to it. The LEAD AUDITOR and E&Y Partner said she didn't know what Repo 105 was as a defense, which is funny because Ernst and Young gave a presentation to all partners about it:

Wow. Sounds like they're fvcked. You'd think after Enron they'd be a helluva lot more careful.

AFAIK, in the accounting world, ignorance of an accounting rule is NO defense. You're supposed to know that stuff. In fact, if she claims that she didn't know the rules for that client/industry, it's an actionable offense that she even took the assignment in the 1st place.

Fern

 

[Jhhnn]

Everybody screams about AA, but in Enron's case, as best as I can tell, they followed the rules properly.

Hogwash. They were convicted of obstruction of justice for shredding an enormous volume of Enron audit paperwork. That conviction was later set aside by the SCOTUS, and the govt declined to pursue a new trial because the firm was defunct.

What would be the purpose of frantically shredding documents ahead of a subpoena, anyway? Neatness?

 

[Darwin333]

Nuh, uh. The Republicans say they are going to repeal the new regulation designed to prevent this from happening again.
And by magic it won't ever happen again.

You believe in magic, don't you.

Exactly which part of what new reform/regulation will prevent this from happening again?

Or do you believe in magic as well?

 

[manimal]

Accenture split off from Anderson a long ass time before Enron. I remember they were doing some recruiting on my campus back in '97. I don't think they're an accounting group either, they do other types of consulting.

Anderson became accenture January 1st 2001 officially. The Enron scandal broke in August or Sept of that year. I do not know when the investigations started but Anderson would have been subpoenaed or at least have some knowledge of the investigation before the news became public knowledge.

Hmm this was an interesting read. Funny what google scrapes up. Love the DO NOT COPY on all the pages lol

http://docs.google.com/viewer?a=v&q...&sig=AHIEtbTiLaOF3PGzUT-Z9udc-h2LEpRYDw&pli=1

 

[Phokus]

Anderson became accenture January 1st 2001 officially. The Enron scandal broke in August or Sept of that year. I do not know when the investigations started but Anderson would have been subpoenaed or at least have some knowledge of the investigation before the news became public knowledge.

Hmm this was an interesting read. Funny what google scrapes up. Love the DO NOT COPY on all the pages lol

http://docs.google.com/viewer?a=v&q...&sig=AHIEtbTiLaOF3PGzUT-Z9udc-h2LEpRYDw&pli=1

I guess i got my dates wrong, but Accenture did split from Arthur Anderson before that... they were known as Anderson Consulting, i believe, but then changed their name later.

edit: As documented in your link

 

[manimal]

I guess i got my dates wrong, but Accenture did split from Arthur Anderson before that... they were known as Anderson Consulting, i believe, but then changed their name later.

edit: As documented in your link

Ya my memory is fading as the years pass. The link was fairly saucy with details that were not common knowledge at the time. The part about both divisions consulting and the conflict that ensues was interesting. I have forwarded the link to a friend of mine that was a vp at accenture to see if I am wholly wrong.
Sorry for the derail

 

[Craig234]

I'm amazed that there has not been a procession of perp walks for this whole financial crisis which had more to do with out and out fraud rather than government policy IMHO. Maybe this will be the start of some justice.

I read that the much smaller Savings and Loan crisis had over 700 arrests. I'm almost susprised the New York state government isn't bought off more than to do this.

My impression is that these large accounting firms are unfortunately sleazy as a rule. Part of that is just the competitive issue, if they don't do it the other guys will take the deal.

All they need to do is get a lack of enforcement from the government, and that's why we see such anti-government ideology promoted, to get such guys elected by the ignorant.

It's why we see such other issues hyped pushing for votes - Terry Schiavo, mosque near the trade center, whatever will get votes - to hide the agenda here.

 

[lothar]

Exactly which part of what new reform/regulation will prevent this from happening again?

Or do you believe in magic as well?

Don't expect an answer to that question.

 

[nonlnear]

Hogwash. They were convicted of obstruction of justice for shredding an enormous volume of Enron audit paperwork. That conviction was later set aside by the SCOTUS, and the govt declined to pursue a new trial because the firm was defunct.

What would be the purpose of frantically shredding documents ahead of a subpoena, anyway? Neatness?

I believe it's called risk management.