Auditors to Pay $99 Million in Lehman Securities Case
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 Southern District Judge Lewis Kaplan in Manhattan, who is overseeing the Lehman MDL. Kaplan, who certified a class of investors suing Ernst & Young in January, still needs to approve the deal.
The auditing firm was the last remaining defendant in In re Lehman Brothers Equity/Debt Securities Litigation, 08 Civ. 5523, 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 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 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. The plaintiffs firms reached deals of $417 millions with the underwriters and $90 million with Lehman's directors and officers, including former CEO Richard Fuld.
"This is an outstanding result," plaintiffs counsel Max Berger of Bernstein Litowitz said of the latest settlement. "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 & Watkins partner Miles Ruthberg, who led the defense for Ernst & Young, declined to comment.