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New York sues Ernst & Young for fraud

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Accounting firm Ernst & Young was sued by New York state prosecutors Tuesday, accused of helping to hide financial risks at Lehman Brothers Holdings Inc. before the Wall Street firm's 2008 collapse.

The civil fraud case seeks $150 million US in fees that the accounting firm collected, New York Attorney General Andrew Cuomo said in a statement.

The lawsuit also seeks investor damages and other relief in what is one of the biggest government cases involving an accounting firm since Arthur Andersen was criminally indicted in 2002 over the Enron scandal.

Ernst & Young was Lehman's outside auditor from 2001 until the investment bank filed for bankruptcy in September 2008.

Ernst & Young was not immediately available for comment on Cuomo's lawsuit, which was filed in New York State Supreme Court.

Cuomo said that for more than seven years leading up to Lehman's bankruptcy, Lehman engaged in fraudulent accounting transactions that were explicitly approved by the auditor. Cuomo said he is seeking the return of more than $150 million in fees that Ernst & Young collected for its Lehman work.

"This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed," Cuomo's statement said. "Just as troubling, a global accounting firm, tasked with auditing Lehman's financial statements, helped hide this crucial information from the investing public."

The firm has said previously that it believes its work as Lehman auditor "met all applicable professional standards" and that accounting issues were not to blame for the bankruptcy.

The audit firm has been under scrutiny since a court-appointed Lehman bankruptcy examiner released a scathing report in March on the investment bank's accounting methods. The report concluded that Ernst & Young was "professionally negligent" in its oversight.

The examiner said Ernst & Young failed to challenge accounting gimmicks that gave the appearance that Lehman was reducing its overall leverage levels in 2008, when in reality it was not.

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