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NY State Is Serious About the Battle with EY Over Lehman Audit Fees

Not so fast, Ernst & Young. You may be able to rebrand and spout off a bunch of feel good hooey about integrity or whatever silly phrase you're using these days but you're gonna need a bigger rug under which to sweep Lehman, guys:

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.

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

Jeez, has it really been over five years? Why yes, yes it has.

You will recall Francine McKenna wrote about the original decision in late 2012:

Ernst & Young chalked up one small victory in New York State Supreme Court this week over claims by the New York Attorney General that the firm committed fraud leading to the failure of Lehman Brothers in 2008. Justice Jeffrey Oing said the New York Attorney General cannot claim $150 million in fees that Ernst & Young earned from Lehman Brothers Holdings from 2001-2008, when the firm filed bankruptcy.

Attorney David Ellenhorn of the NYAG claimed the fees represented “disgorgement” of “ill gotten gains” since the Attorney General says Ernst & Young repeatedly committed “fraudulent acts” as auditor of Lehman Brothers all those years. When Ellenhorn tried to explain this to the judge, Oing told Ellenhorn he had the wrong remedy.

Not good when you have to explain too much to the judge.

Back to present day and the topic of disgorgement. The appeals court is going with the fraudulent activity angle, which makes disgorgement a possible outcome even if no one ever gets charged for said fraudulent activity. "Disgorgement aims to deter wrongdoing by preventing the wrongdoer from retaining ill-gotten gains from fraudulent conduct," wrote the appeals court panel.

Riiiiight. Hit 'em where it hurts, in the wallet. That'll teach 'em.