A class-action lawsuit by former shareholders of Lehman Brothers has been amended to add the defunct investment bank’s auditing firm, Ernst & Young, as a defendant.

The amended complaint from a group of investors also describes the repurchase transactions detailed in the report of bankruptcy examiner Anton Valukas. The Lehman shareholder suit was originally filed following wipe-out losses stemming from the firm’s Sept. 15, 2008, bankruptcy filing, the largest in U.S. history. Investors allege that in the period leading to the bankruptcy, former Lehman officers, including ex-CEO Richard Fuld, made repeated misstatements about the firm’s financial health, including minimizing Lehman’s exposure to weakening residential and commercial real estate markets.

In the newly filed complaint, plaintiffs claim that Lehman used certain repurchase and resale transactions, known as “Repo 105” and “Repo 108” transactions, to temporarily remove tens of billions of dollars’ worth of assets from its balance sheet at the end of financial reporting periods, and that Lehman executed the repo agreements solely to fraudulently prop up its disclosure statements. 

The complaint takes note of Valukas’ testimony to the House Committee on Financial Services in April: “[T]he public did not know there were holes in the reported liquidity pool, nor did it know that Lehman’s risk controls were being ignored, or that reported leverage numbers were artificially deflated. Billions of Lehman shares traded on misinformation.”

The amended complaint further notes Valukas’s statement that Ernst & Young “knew or should have known” that parts of Lehman’s financial statements were false and misleading. “Ernst & Young had a professional obligation to communicate the issue to both senior management and the Audit Committee and to recommend corrections of the Forms 10-Q, and also to either issue modified review reports noting the materially inadequate disclosures, or to withhold its review reports altogether,” said Valukas.

The complaint notes that the Big Four auditor was made aware of Lehman’s improper use of Repo 105 transactions during its investigation of claims made by a whistleblower.

Ernst & Young disputes the claims in the amended lawsuit.

“We are confident in our ability to successfully defend ourselves against claims arising from our work with Lehman Brothers,” said a statement forwarded by Ernst & Young spokesman Charles Perkins. “Throughout our period as the auditor of Lehman, we firmly believe our work met all applicable professional standards, applying the rules that existed at the time. Lehman’s bankruptcy was the result of a series of unprecedented adverse events in the financial markets.  As the Bankruptcy Examiner has acknowledged, Lehman's bankruptcy was caused by a collapse in its liquidity, which in turn was caused by declining asset values and loss of market confidence in Lehman.  It was not caused by any accounting issues.”

The Lehman action was brought in the Southern District of New York before Judge Lewis Kaplan. In addition to Fuld, defendants include Lehman’s former CFO, members of its board of directors and various institutions that underwrote Lehman debt and equity offerings.

The securities law firm Barroway Topaz, Bernstein Litowitz and other firms jointly represent the lead plaintiffs: five pension funds based in the U.S., Europe and Guam that owned more than 140 million shares of Lehman equity. Nearly a dozen individual and institutional investors joined the co-lead plaintiffs in the suit.