Ernst & Young Faces Revived Securities Lawsuit

Newark, NJOfficials in New Jersey have revived their securities fraud lawsuit against Ernst & Young LLP, alleging the company helped Lehman Brothers commit stock fraud by hiding the financial firm's true financial situation. The securities fraud litigation involves allegations that Lehman Brothers presented itself as being more financially secure than it was.

According to The Wall Street Journal (10/11/11), New Jersey officials allege Ernst & Young, which was acting as Lehman's independent auditor, either knew or should have known that Lehman Brothers was making misstatements in its quarterly financial statements. Pension funds for more than 700,000 state workers put almost $400 million into Lehman Brothers, ultimately losing around $190 million when Lehman Brothers collapsed.

The lawsuit has been amended from a previous one, in which a judge threw out some of the claims against Ernst & Young. It is separate from a class-action lawsuit filed by other plaintiffs, who allege they, too, lost money when Lehman Brothers collapsed.

Ernst & Young defended its actions, saying it acted properly in auditing Lehman Brothers and arguing that the bank's collapse was due to the global financial crisis and not due to improper accounting. In a separate lawsuit, former Lehman officials settled with New Jersey for $8.25 million without admitting wrongdoing.

Meanwhile, Bank of America reportedly faces its own lawsuits from shareholders who allege they lost money when Bank of America acquired Merrill Lynch. The lawsuit alleges Bank of America executives did not disclose losses incurred by Merrill Lynch in an effort to ensure shareholders would vote in favor of the acquisition. According to Dealbook (dealbook.nytimes.com; 09/27/11), Bank of America disclosed both a $20 billion bailout by the federal government and a $15.31 billion loss by Merrill Lynch at the same time, after Merrill Lynch was acquired.

Following the disclosures, Bank of America stock fell more than 60 percent in two weeks. The lawsuit, which seeks approximately $50 billion, was filed on behalf of a variety of plaintiffs, which includes pension plans. According to the lawsuit, a senior official with Bank of America met with the banks general counsel to disclose some losses incurred by Merrill Lynch, but the full extent of the losses were not revealed, despite senior Bank of America officials allegedly knowing of those losses months before the acquisition.