The Subprime Crisis: Where Were the Auditors?

On his way out the door of the New York Attorney General’s office, the new Governor Cuomo took a parting and rather overdue shot at the cozy relationship between Wall Street investment banks and their lapdogs, supposedly independent and highly ethical auditors.

Cuomo’s final act as NYAG last month was suing Ernst & Young for fraud for allowing Lehman Brothers to cook its books using “Repo 105.” That accounting practice, which may have been used by other Wall Street firms during the subprime binge, allowed Lehman to take billions of  its toxic assets off its balance sheet for a few days at the end of the crucial 2nd and 3rd quarters of 2008, months before it filed for bankruptcy.

By moving toxic assets first off and then back on its books, Lehman was effectively dressing up its balance sheet in a deceptive manner. The lawsuit essentially alleges that Ernst & Young was aware of the practice, starting when it became Lehman Bros.’ auditor in 2001 until the firm’s death in 2008.

Lehman Bros.’ actions, and Ernst & Young turning a blind eye to them, stink to high heaven. Investors suffered devastating losses from the accounting chicanery. But one, huge question remains unanswered: As the financial and subprime crisis unfolded, where were the auditors who were the “gatekeepers” charged with protecting shareholders?

Just a few years ago after our last financial crisis, lawmakers in Washington took action to deter and prevent accounting shenanigans such as “Repo 105.” After the 2000 to 2003 corporate scandals, such as Enron, WorldCom, and all the rest, Congress passed Sarbanes Oxley and created the PCAOB to improve auditors’ accountability to the public to prevent fraud.

And you would think that after Arthur Andersen was destroyed by its cozy relationship with Enron that the remaining Big 5 accounting firms would learn a lesson.

But guess what: they didn’t.

Auditors were once again at the center of the financial meltdown and some are being sued for fraud.

PWC was the auditor for AIG, which wrote the disastrous CDS which forced a government bailout, as well as Goldman Sachs, which set up CDOs designed to fail and bet against its own customers.

Deloitte & Touche oversaw the demise of Bear Stearns and Fannie Mae.

It’s been a horrible decade for the auditors. The subprime crisis saw history repeat itself. Let’s hope New York’s lawsuit against Ernst & Young is the first step in severing the unholy relationship between the auditors and their banker masters.

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About Jacob H. Zamansky 58 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

Visit: Zamansky & Associates

1 Comment on The Subprime Crisis: Where Were the Auditors?

  1. Implementation of standardized accounting principles that stress honesty and transparency are needed. If companies are going to be publicly traded, it’s criminal to keep information from both potential sellers and buyers. I agree with you, and hope that those that acted in their own interest at the cost of others are brought to justice.

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