Ernst & Young LLP has agreed to settle a pair of lawsuits filed by the state of New Jersey and a handful of California cities and counties over losses they suffered when Lehman Brothers Holdings Inc. collapsed, the Wall Street Journal reported on Saturday. Lawyers for New Jersey and the California municipalities each said they have reached “an agreement in principle” to settle their legal disputes with the accounting firm, according to documents filed in U.S. District Court in New York. New Jersey, seven California cities and counties, plus one California-based insurer had accused Ernst & Young of helping Lehman hide its true financial condition while the bank’s executives were pitching them to invest in “safe” Lehman stock and securities. Pension funds, municipalities and individuals from places as far as Scotland, Ireland and Guam, sued Lehman a few months before its September 2008 collapse after their investments in some $30 billion in Lehman debt and equity went sour. The suits claimed Lehman’s use of so-called Repo 105 deals — repurchase transactions that allowed Lehman to temporarily lower its leverage — falsely allowed the bank to present itself as financially stronger than it really was. The lawsuits also took aim at Ernst & Young for saying Lehman was in compliance with accounting rules even though the auditor was aware of the bank’s use of Repo 105 transactions to buff up its balance sheet.
