Ernst & Young will be sued for fraud as early as Monday by New York Attorney General Andrew Cuomo for allegedly helping Lehman Brothers Holdings mislead investors, according to a person familiar with the matter.
The suit would relate to Ernst & Young’s audits and quarterly reviews of Lehman financial statements aimed at downplaying its liabilities, said the person, who wasn’t authorized to speak publicly about the case. The firm would be sued under the state’s securities fraud statute, the Martin Act, the person said.
Lehman, once the fourth-largest investment bank, failed in September 2008 because of risky real estate bets and too much debt, which it tried to hide from investors, according to bankruptcy examiner Anton Valukas’ report. Mr. Valukas, in the report, said Ernst & Young could be accused of “professional malpractice” for its role as auditor.
The Valukas report was surely “the spark that ignited” Mr. Cuomo’s interest, Harvey Miller, Lehman’s lead bankruptcy lawyer, said in an interview. “I don’t know what the new attorney general will do when he takes over,” he said.
Mr. Cuomo will be sworn in as governor on Jan. 1. His successor will be New York Democratic state Sen. Eric T. Schneiderman.
Richard Bamberger, a spokesman for Mr. Cuomo’s office, declined to comment, as did Charles Perkins, a spokesman for Ernst & Young.
Responding to the Valukas report in March, Ernst & Young said leverage ratios reported in Lehman’s management discussion and analysis “were the responsibility of management, not the auditor. They are not part of the audited financial statements.”
The accounting firm has been named in at least one class-action lawsuit accusing former Lehman Chairman Richard Fuld and other executives of misleading investors. One suit, based on Mr. Valukas’ 2,200-page report, was filed April 23 in U.S. District Court in New York on behalf of retirement funds including the $5 billion Alameda County Employees’ Retirement Association, Oakland, Calif.