Financial Regulatory Forum

By Julie DiMauro and Stuart Gittleman

NEW YORK, June 18 (Thomson Reuters Accelus) - The insider-trading conviction of Rajat Gupta, a former McKinsey group chairman and a-list board member, had federal prosecutors and securities regulators glowing. But companies face stiff challenges protecting their boards from breaches confidentiality by directors and the reputational and other damages that ensue, consultants and lawyers said.

The conviction also draws a contrast with the relative lack of high-level prosecutions stemming from the 2008 financial crisis, which analysts said was rooted in practices harder to establish a case on.  (more…)

By Erik Krusch (Westlaw Business)

Legal opinions underpin the Lehman-related lawsuit against Ernst &Young (E&Y) by New York Attorney General Andrew Cuomo, and both lawyers and auditors can’t help but take note. The AG alleges that Lehman’s then-auditor E&Y provided substantial assistance to Lehman in its perpetrating a massive financial fraud. In particular, Cuomo has charged the accounting giant with three counts of securities fraud under the Martin Act and a charge of persistent fraud and illegality brought under the Executive Law § 63(12) of New York.

The AG’s case centers on Lehman’s use of the now notorious Repo 105 to lower its leverage levels. Lehman accounted for Repo 105, which amounts to selling securities for 105% of their value to counterparties with the agreement to repurchase the securities later, as sales rather than loans. It is standard practice to account for securities repos as loans. Repo 105 allowed Lehman to shift assets (and more to the point, “net leverage”) from the curious eyes of the ratings agencies, investing public and regulators. Ernst & Young signed off on this accounting from 2001 until Lehman’s demise in 2008. For additional information on Repo 105 please see the previous Westlaw Business Currents article The Tale of the Grim Repo: Lehman’s Link to True Sales.

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