By Karen Freifeld
NEW YORK Feb 20 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
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
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
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.