Matt Taibbi is all over this, and while the suit is civil and not criminal, and so a loss would not put the accounting firm in the same position as Arthur Anderson, which was shut down as a result of a criminal conviction stemming from the collapse of Enron. (Since reversed, but they are still dead)

Basically, it comes down to a way that Lehman used an arcane financial instrument called a “Repo 105″ to conceal its debt, and his example is spot on”

These Repo 105 transactions are just loans that Ernst and Young and Lehman Brothers conspired to book as revenue from sales. If I go to you and I ask you to lend me a hundred bucks to pay for Knicks tickets, that’s a loan, and you and I and the SEC and every investor on Wall Street all know I’m in debt to you, that I owe you a hundred bucks.

Here’s how Lehman Brothers paid for their Knicks tickets: a week before the game, they went to you and offered to you “sell” you their worthless puke-stained lava lamp for a hundred bucks, with the understanding that two days after the Knicks game, it would come back and “buy” the lamp back for the same $100 (plus a small commission for your trouble). And when Lehman pocketed that $100 from the initial transaction, they decided to call that not borrowing but a true sale, i.e. they booked that hundred bucks as revenue from an honest sale of a worthless piece-of-sh%$ lava lamp.

In 2007 and 2008 Lehman would do this before the end of every quarter. They would “sell” billions of dollars of assets, typically bonds, to various companies, and use that money to pay down debt before the quarter’s end, so that they didn’t look so flat-ass broke to investors. Then, a week or so after the end of the quarter, they would go out and borrow more money, and then “buy” the assets back. The reasons they did this were myriad, but in most cases the assets they were “selling” were depressed in value at the time and could not have been sold at anything like face value had they really gone out on the market and tried. So instead of really “selling” these items on their balance sheet, they worked together with other companies to jury-rig these “repurchase” agreements that looked like sales but were actually loans.

(%$ mine)

There are two possibilities here for Ernst & Young:  Either they were negligent, and hence they owe damages, or they complicit, in which case they are criminally liable, and could suffer the same fate as Anderson .

My hope is that the accounting firm will turn on former Lehman executives, most notably Dick Fuld, to get out from under, and we may see our first big banker criminal case as a result.

My fear is that this will be another 8 figure fine with no criminal prosecutions.