US Attorney General Andrew Cuomo has filed a Martin Act lawsuit against Ernst & Young (E&Y), in which it is charged with helping Lehman Brothers Holding engage in an accounting fraud involving the surreptitious removal of tens of billions of dollars of fixed income securities from Lehman's balance sheet. The lawsuit - filed in the New York Supreme Court - claims that this was in order to deceive the public about Lehman's true liquidity condition.

The lawsuit further claims that for more than seven years leading up to Lehman's bankruptcy filing in September 2008, Lehman had engaged in 'Repo 105' transactions, explicitly approved by E&Y. The transactions' purpose was to temporarily park highly liquid, fixed income securities with European banks for the sole purpose of reducing Lehman's financial statement leverage, according to the lawsuit.

Further, the complaint alleges that in 2007 and early 2008, when Lehman was facing demands to reduce its leverage, it rapidly accelerated its use of repo transactions - removing up to US$50bn from its balance sheet on a quarterly basis. The complaint also alleges that E&Y failed to object when Lehman misled analysts on its quarterly earnings calls regarding its leverage ratios, and that E&Y did not inform Lehman's audit committee about a highly-placed whistleblower's concerns about Lehman's use of repo transactions.

The Attorney General seeks the return of the entirety of fees E&Y collected for work performed for Lehman between 2001 and 2008 -­ exceeding US$150m - plus investor damages and equitable relief.