E&Y Cuts $99 Million Deal to Exit Lehman Investor Case
The auditing firm Ernst & Young has agreed to pay $99 million to resolve claims that it encouraged securities fraud by Lehman Brothers Holdings Inc., bringing an end to multidistrict litigation over the investment bank's securities offerings.
Attorneys for Lehman investors detailed the proposed settlement in an Oct. 9 letter to U.S. District Judge Lewis Kaplan in Manhattan, who is overseeing the Lehman MDL. Kaplan, who certified a class of investors suing E&Y in January, still needs to approve the deal.
Ernst & Young was the last remaining defendant in In re Lehman Brothers Equity/Debt Securities Litigation, a case dating back to the investment bank's collapse in September 2008. Plaintiffs lawyers at Bernstein Litowitz Berger & Grossmann and Kessler Topaz Meltzer & Check claimed that Lehman, with the assistance of its auditor, hid its financial woes through a now-infamous accounting practice known as "Repo 105" that allegedly allowed the bank to understate its leverage.
Bernstein Litowitz and Kessler Topaz were unable to sue Lehman Brothers itself because of its bankruptcy, the largest in U.S. history. So instead they alleged securities fraud on the part of Lehman's officers and directors, its underwriters, and Ernst & Young in its capacity as Lehman's auditor. Ernest & Young initially brought on Mayer & Brown for its defense, but switched to Latham & Watkins in 2009. The defense lineup for the directors & officers included Dechert's Andrew Levander and Allen & Overy's Patricia Hynes.
The Ernst & Young settlement comes on top of a $417 million deal that Bernstein Litowitz and Kessler Topaz struck in 2011 with Lehman's underwriters, including Bank of America Corp., Wells Fargo & Company, and Morgan Stanley. Around the same time, the plaintiffs firms reached a $90 million deal with Lehman's directors and officers, including former CEO Richard Fuld. (The $90 million settlement was financed with D&O insurance.)
Kaplan had instructed class counsel and Ernst & Young's lawyers at Latham & Watkins to be trial-ready by April 2014. Fact discovery had closed, and the parties were ramping up expert discovery. The fact discovery process was "complex and extraordinarily difficult," according to plaintiffs counsel Max Berger of Bernstein Litowitz.
"This is an outstanding result," Berger added. "It was a very difficult case, where the stakes were very high for Ernst & Young and also for the investors if we lost. Loss causation was a very significant obstacle. And it was a Section 10b5 case, so we were required to prove fraud."
Latham partner Miles Ruthberg, who led the defense for Ernst & Young, declined to comment.