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British firm Ernst & Young accused of 'professional malpractice' over $700billion collapse of Lehman Brothers

Daily Mail | Mar. 12, 2010

One of Britain’s biggest companies could face legal action over the $700 billion collapse of Lehman Brothers, a scathing report revealed today.

Accountancy giant Ernst & Young failed to challenge the book-keeping 'gimmicks' the American investment bank was using to stay afloat, according to report author Anton Velukas. 

He concludes that the British firm been 'negligent' and that Lehman could pursue claims against the firm for 'professional malpractice'.
 

It is also revealed that one of the UK's leading law firms gave Lehman the green light to use the accountancy gimmick - known as 'Repo 105' - in the first place.

Linklaters provided an opinion letter which allowed the US investment bank to exploit the accountancy loophole and 'lose' $50 billion from its balance sheet.

New York lawyers had previously refused to approve the procedure.

In 2008, just before Lehman filed for bankruptcy with $700billion (£461billion) in assets, the report reveals it transferred $50.38billion (£33.2billion) in a Repo 105, effectively improving its balance sheet. 

There is no suggestion that Linklaters acted either illegally or unethically.

Mr Valukas, who was appointed as examiner by the judge handling Lehman’s bankruptcy, said: ‘Unable to find a United States law firm that would provide it with an opinion letter permitting the true sale accounting treatment under United States law, Lehman conducted its Repo105 programme under the aegis of an opinion letter the Linklaters law firm in London.’

Claims could also be based on shortcomings in Ernst & Young's probe into a whistleblower alert and reviews of Lehman's public filings.

Ernst & Young said in a statement: 'Our last audit of the company was for the fiscal year ending November 30, 2007.
 

'Our opinion indicated that Lehman's financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.'

Questions about Lehman's accounting had been raised in the months before its bankruptcy, notably by hedge fund manager David Einhorn, who thought the bank was not taking proper write-downs.

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