The Work

December 21, 2010 3:31 PM

Latham, Kramer Levin Representing Ernst & Young in Suit Over Lehman Failure

Posted by Brian Baxter

UPDATE, 12/21/10, 5:45 p.m. A statement from Ernst & Young has been added to the sixth and seventh paragraphs below.

New York state attorney general Andrew Cuomo slapped Ernst & Young with a civil suit on Tuesday, accusing the Big Four accounting firm of perpetrating a massive fraud by misleading investors about the financial health of Lehman Brothers.

The case set forth by the attorney general's office accuses E&Y of signing off on Lehman's use of so-called "Repo 105" transactions that allowed the now-bankrupt investment bank to mask the true state of its shaky bottom line before its collapse in September 2008. (Click here for a copy of the 32-page complaint filed in state court in Manhattan on Tuesday and here for more on the suit from The Am Law Litigation Daily.)

Lehman's use of Repo 105 transactions was a prominent part of a 2,200-page examiner's report issued by Jenner & Block chairman Anton Valukas in March, which called the practice into question. The Am Law Daily reported at the time that no U.S. law firm would bless the use of Repo 105 by Lehman, save for Magic Circle firm Linklaters, which only did so under English law.

"We concluded in the report that the facts of our opinion would support a claim against E&Y, but the decision about whether to do so is strictly the decision of the government," Valukas says. "I was most heartened by the response of the SEC after all of this became public. They're now in the process of passing regulations, the purpose of which will be to limit this practice of 'window-dressing' and enforcing more candor and honesty in the disclosures."

Miles Ruthberg, a former global litigation chair at Latham & Watkins, confirmed, via an e-mail to The Am Law Daily, that he's representing E&Y in the suit along with Latham securities litigation and professional liability cochair Jamie Wine and Kramer Levin Naftalis & Frankel white-collar defense and SEC regulatory cochair Barry Berke. Latham, which has previously represented E&Y, has been handling securities litigation against the accounting firm stemming from Lehman's failure. Ruthberg declined to comment and Wine and Berke didn't respond to phone calls about the complaint filed by Cuomo's office.

Wilmer Cutler Pickering Hale and Dorr securities litigation and enforcement chair Harry Weiss, who has also handled high-stakes litigation for E&Y, referred a phone call to the company's deputy general counsel for professional practice Ronald Hauben. All subsequent calls were referred to E&Y spokesman Charlie Perkins, who said in a statement that the company would "vigorously defend against the civil claims alleged" by the attorney general's office.

"There is no factual or legal basis for a claim to be brought in this context against an auditor where the accounting for the underlying transaction is in accordance with Generally Accepted Accounting Principles," Perkins said in a statement. "Lehman's audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry."

E&Y's general counsel is Michael Solender, who joined the accounting firm last year after leading the in-house legal departments at Bear Stearns and Washington Mutual, and its deputy general counsel for litigation are David Weintraub and Stephen Young.

Overseeing the case against E&Y are Cuomo and Maria Vullo, a former Paul, Weiss, Rifkind, Wharton & Garrison litigation partner named an executive deputy AG for economic justice by Cuomo in February. Senior trial counsel David Ellenhorn and assistant attorneys general Armen Morian and Amir Weinberg conducted the investigation of E&Y under the supervision of Vullo and deputy attorney general Michael Berlin.

Cuomo, who will move into the governor's mansion next month, is being succeeded as New York's AG by former Kirkpatrick & Lockhart partner Eric Schneiderman. The two lawyers have vowed to work closely together.

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