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Investigation Begins Into E&Y's Role In Connection With Lehman's Repo 105 Scam

Tyler Durden's picture


Fox Business reports that the investigation around Lehman is intensifying. Surely the SEC, now generically equated with objects that float around in sewers in formal conversation, has realized it has to do something, anything, to find at least one scapegoat for the financial collapse. Which is why we read with little surprise Gasparino's report that "thee SEC has ramped up its inquiry into Lehman’s fall, particularly after court-appointed bankruptcy examiner Anton Valukas issued a lengthy report stating that Lehman’s top executives were “grossly negligent” in possibly hiding the risky nature of the firm’s finances during its final day." What we find much more interesting is that "yet another investigative agency, the Public Accounting Oversight Board
-- created under the 1992 Sarbanes-Oxley law to investigate and
discipline public accounting firms -- has launched an inquiry into the
role of Lehman’s auditor, Ernst & Young,
following the examiner’s
report, which accused the big accounting firm of “professional
malpractice,” for its work in approving accounting techniques Lehman
used during its dying days in the summer of 2008." In the absence of any Wall Street villains, which it is now all too clear have endless diplomatic immunity from prosecution by the corrupt regulators, will the auditor, together with Dick Fuld, be made into the sacrificial lambs? Or will we continue the farce that anything even remotely related to capital markets integrity and reporting is real and valid? Judging by the nearly 60 days of no S&P downticks, the market has answered that question for us.

More from Gasparino:

It was the use of one of those accounting techniques, known as Repo 105, which appears to be at the top of the list of investigators, people with knowledge of the inquiry say. The use of the accounting technique, which is designed to temporarily lower the amount of “leverage,” or borrowing a firm uses to stay afloat thus lowering its risk levels, isn’t necessarily illegal. In fact, Lehman sought and received a favorable opinion from Ernst & Young to use the technique in 2008.

But what might fall afoul of the securities laws, according to people close to the inquiry, is if Lehman turned to the gimmick in a concerted effort to hide its risk level. One person with knowledge of the inquiry say investigators are looking at “the pattern” of Repo 105 usage, and if that pattern represents intent to deceive investors about the true nature of the firm’s finances.

Several large investors such as the state of New Jersey pension fund as well as money management powerhouse BlackRock (BLK: 206.93, 1.13, 0.55%), run by CEO Larry Fink, a friend of Fuld, as well as former AIG (AIG: 40.16, -0.73, -1.79%) chief Hank Greenberg (through his company CV Starr) all bought Lehman shares in the summer of 2008. After the purchase, Greenberg later told Dow Jones Newswires that "nobody can forecast what is to come, but I think on balance it is a very well-run organization…I think they raised enough capital” to survive.

In addition to the firm’s use or possible misuse of Repo 105, investigators are examining whether top officials properly marked to market the declining value of investments, such as the Archstone-Smith Trust, a massive real estate venture of apartment complexes that the firm bought at the top of the market in 2007, and whether the firm properly booked losses stemming from an alleged stock fraud scheme involving Japanese trading house Marubeni, these people say.

Another area of interest, according to people who have been interviewed by investigators, focuses on Lehman’s trading with various hedge funds it controlled or owned pieces of, and its use of off-balance sheet companies or so-called “qualified special purpose vehicles” that traded with Lehman during its final months as a firm.

One may question whether Louise Story's discovery of additional Lehman accounting gimmicks will be included in the "regulatory" probe. We are confident that the SEC will get right on it, just as the SEC will analyze why Ambac, which JPM notes has no value, is now the most actively traded stock in the market.


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Tue, 04/13/2010 - 15:45 | Link to Comment bugs_
bugs_'s picture

Ernst & Anderson "so cooked"  .... LOL!

Tue, 04/13/2010 - 15:48 | Link to Comment casino capitalism
casino capitalism's picture

Unfortunately, the financial system has moved beyond where it was when Enron and Arthur Anderson blew up.  Now, the criminals have a stranglehold on the system and there is absolutely no way any of them will be held accountable.  Legalized fraud and theft, starting on wall street, is the dominant force now.

Tue, 04/13/2010 - 16:00 | Link to Comment Camtender
Camtender's picture

"1992 Sarbanes-Oxley law", it was passed in 2002.

Does it really matter? The SOX law does not work, only made the Big 4 tons of money for a few years.  I sure hope E&Y purchased a "Prepaid Legal" policy with all that SOX dough they got........

Tue, 04/13/2010 - 16:18 | Link to Comment AccreditedEYE
AccreditedEYE's picture

I agree. This cr@p continues and continues and continues. Idiot political types pass some 5 million page legislation that they try to justify their existence with, the public swallows it whole and the cycle repeats. I wanna get off this ride... :(

Tue, 04/13/2010 - 16:12 | Link to Comment VegasBD
VegasBD's picture

Im over today. Who's up for Happy Hour in Hermosa Beach?

Tue, 04/13/2010 - 16:32 | Link to Comment carbonmutant
carbonmutant's picture

Apparently the White house has instructed Mary to look into this... for purely defensive reasons.

Tue, 04/13/2010 - 16:38 | Link to Comment Mako
Mako's picture

Wouldn't you be doing an investigation on all the active companies doing this exact same thing?  


I love this stuff, you couldn't make up entertainment better then this.

Tue, 04/13/2010 - 17:00 | Link to Comment Hulk
Hulk's picture

Thats too much work. We take em one at a time and string out the investigations until retirement time...Watch porn in between...

Tue, 04/13/2010 - 17:11 | Link to Comment Gold...Bitches
Gold...Bitches's picture

Its about f'in time.

I just emailed this morning Sen Schumer regarding his oh so very tough stand he is taking with introducing legislation to ban fees on carry on luggage.  I asked him if after taking so brave a stand if he could please turn his attention to doing something, anything about the banks.  Damn, the guy is in a state on the other side of the country, but jesus man, this is getting ridiculous.  I dont really expect any reply.

Tue, 04/13/2010 - 18:55 | Link to Comment lucky 81
lucky 81's picture

my favorite quote by lenny bruce,'you're only as honest as you can afford to be'. great.

Wed, 04/14/2010 - 06:15 | Link to Comment anony
anony's picture

Bruce was wrong; his was a monumental understatement, totally off the mark. 

They have exceeded affordable honesty by a light year. 

Wed, 04/14/2010 - 08:59 | Link to Comment jeff montanye
jeff montanye's picture

which would seem to me to mean they have no excuse.  the richest should be the most honest.  not what i have observed.  it's spotty, like a good throwing arm.

Tue, 04/13/2010 - 19:20 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

'Tis institutionalized fraudulent conveyance it tis.

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