UPDATE 1-Court revives NY claims to Ernst & Young fees from Lehman audits

Thu Feb 20, 2014 4:16pm EST

By Karen Freifeld

NEW YORK Feb 20 (Reuters) - A New York state appeals court on Thursday revived the New York attorney general's claims for $150 million in fees that Ernst & Young earned from Lehman Brothers Holdings in the years leading up to the bank's 2008 collapse.

The state wants to recoup the fees as part of a lawsuit against Ernst & Young over its auditing of Lehman Brothers. The 2010 lawsuit accuses the firm of assisting Lehman in accounting fraud.

The appeals court found that a lower court erred when it ruled that New York could not seek the fees because they were not paid by consumers or the state.

In a unanimous opinion, the appeals court said that, when a claim is based on fraudulent activity, disgorgement of gains is available as a remedy.

"Disgorgement aims to deter wrongdoing by preventing the wrongdoer from retaining ill-gotten gains from fraudulent conduct," the five-judge panel wrote.

Amy Call Well, a spokeswoman for Ernst & Young, said in a statement that the firm was disappointed by the ruling and would seek further review by the New York Court of Appeals, the state's highest court.

"There is no basis for the attorney general's claim," the statement said. "In its role as auditors, EY met all applicable professional standards."

Melissa Grace, a spokeswoman for New York Attorney General Eric Schneiderman, said the office was pleased that the court recognized "the attorney general is authorized to recover illegal gains from fraudulent conduct, separate and apart from any payment of damages to injured parties."

If it had been upheld, the lower court decision would have limited the attorney general's ability to recover monies from parties who may have participated in a securities fraud but didn't get funds directly from investors, according to legal experts at Clearly Gottlieb Stein & Hamilton.

The reversal gives new life to the attorney general's lawsuit, which could otherwise be hampered if private cases are settled first.

The appeals panel considered that possibility in its decision. Allowing the attorney general the remedy is "crucial," the appeals panel wrote, particularly if related investor lawsuits are settled, precluding the state from seeking the same restitution and damages.

The attorney general has alleged that, for more than seven years leading up to Lehman's 2008 bankruptcy, Ernst & Young made use of transactions known as "Repo 105s," which removed tens of billions of dollars from the bank's balance sheets, misleading investors and others about the bank's financial condition.

Lehman filed for bankruptcy on Sept. 15, 2008, in the midst of the financial crisis.

The case is People of the state of New York v. Ernst & Young, New York state Supreme Court, New York County, No. 451586/2010.

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