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Deleana K.: Repo 105 - What happened to Materiality and Substance over form?

In December 2010, New York Attorney General (AG) Andrew Cuomo recently brought civil charges against Lehman Brothers’ external auditors Ernst & Young (E&Y) for complicity in fraudulently misleading investors. The AG alleges that Lehman’s then-auditor E&Y assisted Lehman in perpetrating financial fraud. In particular, Cuomo has charged the accounting giant with three counts of securities fraud under the Martin Act and a charge of persistent fraud and illegality brought under the Executive Law § 63(12) of New York. The AG claims that E&Y by signing off on the controversial Repo 105 transactions worth $US 50 billion on Lehman’s balance sheets just before it went bankrupt, aided the bank to mislead investors. Repo 105 (Repo is short for repurchase agreements) involved what amounted to a short-term loan, exchanging collateral for cash up front, and then unwinding the trade as soon as overnight. It involved selling securities for 105% of their value to counterparties... read more

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