Ernst & Young faces Lehman litigation following examiner’s report

Ernst & Young has been named as a defendant in an amended class action in the Lehman Brothers securities fraud case, but Linklaters appears to have avoided the threat of litigation.

An amended complaint was filed earlier this week to include a number of allegations that relate to a report published by Lehman’s court-appointed examiner Anton Valukas in March (12 March 2010).

The allegations relate to Valukas’ comments that Ernst & Young “knew or should have known” that Lehman’s financial statements had been misleading.

The complainants allege that the auditor was aware of Lehman’s use of Repo 105 transaction, with which the firm is claimed to have fraudulently propped up its balance sheet by removing billion of dollars’ worth of assets.

There were suggestions in March that Linklaters could be dragged into the class action litigation after the Valukas report found Lehman had used an advice letter written by the magic circle firm to keep up to $50bn (£33.24) off its US balance sheet (15 March 2010).

There was no suggestion in the report that Linklaters had acted illegally and the firm has not been named in the amended complaint.

The lead plaintiffs in the class action are five pension funds based in the US and Europe. A number of other individuals and institutional investors are co-plaintiffs in the case.

They are being represented by several firms including co-lead counsel Barroway Topaz Kessler Meltzer & Check and Bernstein Litowitz Berger & Grossman.

Barroway Topaz partner David Kessler told The Lawyer: “We didn’t name Linklaters in the amended filing, but I can’t speak for other parties.”

He added that this would not preclude the plaintiffs from naming Linklaters as a defendant in the future.

Ernst & Young denies allegations of wrongdoing and has until 4 June to file a motion to dismiss the complaint. The firm is being represented by Latham & Watkins New York associate Kevin McDonough.

The former Lehman directors and officers named as defendants in the case are represented by Simpson Thacher & Bartlett partner Michael Chepiga.

The original shareholder suit was brought following Lehman’s bankruptcy filing in September 2008.