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NY loses ruling on fees paid to Ernst & Young by Lehman

By Karen Freifeld

NEW YORK (Reuters) - The New York attorney general has no authority to claim $150 million in fees that Ernst & Young earned from Lehman Brothers Holdings in the years leading up to Lehman's collapse in 2008, a judge ruled on Wednesday.

The state had sought the fees as part of a lawsuit against Ernst & Young over its auditing of Lehman Brothers. The lawsuit accuses the firm of assisting Lehman in accounting fraud.

New York State Supreme Court Justice Jeffrey Oing said the fees could not be recovered by the state because they were not paid by consumers or the state. "The allegations in this complaint fail to set forth sufficiently as to exactly what the public's injury is," Oing said.

James Freedland, a spokesman for New York Attorney General Eric Schneiderman, declined to comment on the ruling.

Amy Call Well, a spokeswoman for Ernst & Young, said the firm was pleased with the decision.

The lawsuit, filed in 2010, claimed that for more than seven years leading up to Lehman's 2008 bankruptcy, Ernst & Young made use of transactions known as "Repo 105s," which removed tens of billions of dollars from the bank's balance sheets, misleading investors and others about the bank's financial condition.

Ernst & Young has said it acted properly and that Lehman's accounting complied with national standards.

In court, David Ellenhorn, senior trial counsel to the state attorney general, argued the judge wasn't viewing the relief correctly. "Disgorgement is a remedy to prevent the wrongdoer from obtaining ill-gotten gains," he said.

But Oing disagreed. "The disgorgement remedy is not available," he said.

As part of the case, the New York attorney general can still pursue claims for investor damages and restitution against Ernst & Young, if it is successful in proving fraud by the auditor.

However, Ellenhorn said before the ruling that stripping away the state's ability to recover the fees could eventually hamper the case. If related investor lawsuits are successful, the state would not be able to recover the same damages, he told the judge.

Lehman filed for bankruptcy protection on September 15, 2008, in the midst of the financial crisis.

The case is People of the State of New York v. Ernst & Young, New York State Supreme Court, New York County, No. 451586/2010.

(Reporting by Karen Freifeld; Editing by Eddie Evans and Leslie Adler)

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