Lehman Brothers and Ernst & Young

Lehman Brothers

General Information

  • Lehman Brothers Holdings Inc.
  • Investment bank; the smallest giant on Wall Street
  • Survived 158 years
  • 60 offices around the world
  • More than 28,000 staff

Brief Timeline

1993 – Richard Fuld became the CEO of Lehman

  • Grew from traditional investment bank to using borrowed money to play the market itself.

2000 – Borrowed significant amount of money to fund their investment in the housing markets.

2007 – The firm closed its subprime lender: BNC Mortgage

  • Repo 105 is used as a tool for Lehman to extend and delay their downfall.
  • $27 million reduction in goodwill

2008 – Reported loss of 3 billion dollars; sets $6 billion dollars stock sale

Sept. 15th, 2008 – Filed for Chapter 11 Bankruptcy Protection

  • Largest bankruptcy filing in US history, holding over $600 billion assets.

Effects to the Accounting Industry

  • The decisions made that led to the fall of Lehman were most miss calculation in investment choices
  • Since the issue is very recent, it is still under investigations.

Repo 105

It’s a repurchase agreement

–       Short term loan in exchange for collateral

–       Lehman: Categorized as sales instead of loan (Flashy Accounting!)

–       Used international law of Britain to define sales

–       Over 50 Billion in Repo 105 transactions

–       Repo 105 used to temporarily remove the securities inventory from the balance sheet

–       Repo money used to pay down liabilities

–       Decreased leverage misled investors into thinking the company was very healthy

Ernst and Young

General Information

–       Big 4 Accounting Firm

–       Involved in a few other scandals (Akai Holdings, Sons of Gwalia)

–       Responsible for: External Auditing and Investigating the internal fraud claim

Brief Timeline

  • 2003: HealthSouth Corp

– $109 million settlement of investor lawsuits

  • 2009: Bally’s Total Fitness Holding Corp.

– Fined 8.5 million for approving fraudulent statements

  • 2009: Akai Holdings ($200 million settlement)

– falsified court documents to avoid negligence charges

  • 2009: Sons of Gwalia

– $125 Million (AUS) negligent of gold and dollar hedging contracts

Ernst and Young Case

–       No substance to transaction except to remove unwanted assets

–       Repo 105 existed to manipulate financial information

–       Financial statements may be materially misleading even when they do not violate GAAP

–       Perfectly legal which makes it difficult to charge

–       Matthew Lee (long time employee) = Whistle Blower

–       Did not see or approved Repo 105

–       Ignored Matthew Lee’s Claim

–       Investigating the internal fraud claim = prohibited by Sarbanes-Oxley Act

Future Outlook

–       May experience reputation loss, but yet early to tell what will happen next

–       There is potential for:

–       Reforms of GAAPS and regulations

–       Shows the weakness of Sarbanes-Oxley

For more information, click on the following:

“The Credit of Crisis Visualized”

Brief documentary on “The Fall of Lehman”


The Official Valukas Report

Work Cited List

Works Cited

” A timeline of failure on Wall Street, from Lehman Brothers to Washington Mutual | Business | The Guardian .”  Latest news, comment and reviews from the Guardian | guardian.co.uk . N.p., n.d. Web. 3 Apr. 2011. <http://www.guardian.co.uk/business/2008/sep/27/wallstreet.useconomy3&gt;.

Buckstein, Jeff. “State targets E&Y in Repo 105 lawsuit.” The Bottom Line. N.p., n.d. Web. 3 Apr. 2011. <http://www.thebottomlinenews.ca/index.php?section=article&articleid=494&gt;.

Christodoulou, Mario. “Lehman smoking gun leaves E&Y facing questions.” Accountancy Age. N.p., n.d. Web. 3 Apr. 2011. <www.accountancyage.com/aa/news/1808180/lehman-smoking-gun-leaves-e-y-facing-questions >.

“Cuomo Sues Ernst & Young for Assisting Lehman Brothers in `Repo 105‚Ä≤ Fraud ¬´  Best make Moneys.” Best make Moneys. N.p., n.d. Web. 3 Apr. 2011. <http://best-make-moneys.com/cuomo-sues-ernst-young-for-assisting-lehman-brothers-in-repo-105-fraud.html&gt;.

“FACTBOX: Five facts about Lehman Brothers’ past and present  | Reuters    .” Business & Financial News, Breaking US & International News | Reuters.com. N.p., n.d. Web. 3 Apr. 2011. <http://www.reuters.com/article/2008/09/09/us-lehman-factbox-idUSN0930860520080909&gt;.

HENNING, PETER J.. “In Lehman Brothers’ Collapse, a Dwindling Chance of Charges – NYTimes.com.” Mergers, Acquisitions, Venture Capital, Hedge Funds – DealBook – NYTimes.com. N.p., n.d. Web. 3 Apr. 2011. <http://dealbook.nytimes.com/2011/03/15/in-lehmans-collapse-a-dwindling-chance-of-charges/?src=dlbksb&gt;.

“Lehman Brothers: In depth news, commentary and analysis from the Financial Times.” World business, finance, and political news from the Financial Times – FT.com. N.p., n.d. Web. 3 Apr. 2011. <http://www.ft.com/lehman&gt;.

MERCED, MICHAEL J. DE LA. “The Origins of Lehman’s ‘Repo 105’ – NYTimes.com.” Mergers, Acquisitions, Venture Capital, Hedge Funds – DealBook – NYTimes.com. N.p., n.d. Web. 3 Apr. 2011. <http://dealbook.nytimes.com/2010/03/12/the-british-origins-of-lehmans-accounting-gimmick/&gt;.