By Karen Freifeld
NEW YORK (Reuters) - Ernst & Young LLP [ERNY.UL] is near settling a high-profile lawsuit filed by New York state that accused the accounting firm of helping Lehman Brothers Holdings Inc [LEHMB.UL] deceive investors in the years leading up to its 2008 collapse, people familiar with the matter told Reuters.
Ernst & Young has agreed to pay $10 million to resolve the case, according to the sources.
The 2010 lawsuit claimed Ernst & Young's auditing facilitated a "massive accounting fraud" and sought $150 million in fees that the firm earned from Lehman between 2001 and 2008, plus investor damages and equitable relief.
A spokeswoman for Ernst & Young declined to comment, as did a spokesman for New York Attorney General Eric Schneiderman.
The lawsuit was filed by Schneiderman's predecessor, Andrew Cuomo, now the state's governor. According to the complaint, Ernst approved the "surreptitious" removal of tens of billions of dollars of debt from Lehman's balance sheet to make the investment bank appear less indebted at the close of financial quarters.
Lehman filed for bankruptcy on Sept. 15, 2008, helping to trigger the global financial crisis. Once the fourth-largest U.S. investment bank, Lehman held large quantities of risky subprime mortgage securities.
The complaint alleged that, for more than seven years before Lehman's bankruptcy, the bank made use of transactions known as "Repo 105s," short-term financing that temporarily moved as much as $50 billion from its balance sheet.
The lawsuit followed a report about the transactions by former federal prosecutor Anton R. Valukas, who served as a bankruptcy court examiner for Lehman.
Ernst & Young has not admitted wrongdoing in past settlements over the Lehman accounting.
In a class action settlement approved a year ago, Ernst & Young agreed to pay $99 million to former Lehman investors, precluding the state from collecting investor damages.
Ernst & Young last month agreed in principle to settle similar lawsuits filed by New Jersey and California municipalities over their losses from the Lehman collapse.
"Lehman's audited financial statements clearly portrayed Lehman as what it was - a highly leveraged entity operating in a risky and volatile industry; and Lehman's bankruptcy was not caused by any accounting issues," Ernst & Young said in a statement after the class action settlement.
A year ago, an arbitration panel found no basis for a Lehman malpractice claim against Ernst, ruling that any wrongdoing linked to the accounting maneuver was "overwhelmingly attributable to Lehman."
In 2012, the trial judge in the New York case ruled that the state had no authority to obtain the accounting fees because they were not paid by consumers or the state. But an appeals court reversed him last year, saying that a forced repayment could deter wrongdoing.
Lehman ended its three-year Chapter 11 in 2011 with a liquidation plan slated to repay creditors about $65 billion, or an average of about 21 cents on the dollar for allowed claims.
The case is People of the state of New York v. Ernst & Young, New York state Supreme Court, New York County, No. 451586/2010.