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Ernst & Young and New York AG Wrestle over Lehman Case

February 24, 2011

Ernst & Young has managed to transfer the lawsuit brought by former New York Attorney General (and now Governor) Andrew Cuomo over its audits of Lehman Brothers from state court to federal court, but the new attorney general wants to move the case back to his turf.

The Big Four accounting firm has argued that the case involves national auditing standards, and Attorney General Eric Schneiderman now faces a deadline of March 4 to respond to E&Y’s effort to get the case shifted to federal court, according to Reuters. The accounting firm contends that the New York Attorney General’s case involves questions of federal law that ought to be decided by a federal judge. The firm wants that judge to be U.S. District Judge Lewis Kaplan, who is already hearing another case involving E&Y’s audits of Lehman, and its approval of Lehman’s use of so-called “Repo 105” repurchase transactions.

Arguing the case before the same judge could make it easier for E&Y to present its side of the story and convince just one judge instead of two to see the matter from its perspective. The vagaries of auditing and accounting standards, and how much Repo 105 transactions fall inside or outside the norm, are not the sort of burning issue likely to keep most federal judges and juries awake in the courtroom.

However, by keeping the matter in state court, Schneiderman would be able to use the Martin Act, a venerable New York state law that gives state regulators enforcement authority over securities fraud. Cuomo built his lawsuit against Lehman using the Martin Act during his final days in the AG’s office in December before moving into the governor’s mansion.

Now his successor will have to decide whether he wants to fight to keep the case in state court. We should find out by the March 4 deadline if this is one case he will cede to the federal courts.

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