2cash, which Lehman then used to pay down liabilities, with the binding understanding thatLehman would repurchase the same securities from the banks within a short time, often just afew days, in return for improved balance sheet “metrics.” E&Y not only approved butconsistently supported Lehman’s Repo 105 policy, and advised Lehman that it could takeadvantage of a technical accounting rule, known as FAS 140, to treat these Repo 105transactions, which in reality were short-term financings, as “sales,” enabling Lehman to removethe securities from inventory on its financial statements until they were repurchased. As E&Yalso knew, at no time did Lehman disclose, either in its financial statements or otherwise, that itwas transferring tens of billions of dollars in fixed income securities to foreign banks, on atemporary basis, often at the very end of Lehman’s fiscal quarters, with the obligation to quicklyrepurchase the securities.2.
These Repo 105 transactions had no independent business purpose and weredesigned solely to enable Lehman to manage the company’s financial balance sheet “metrics.”In fact, a number of senior financial executives at Lehman warned management that thetransactions were improper. Nevertheless, Lehman used the transactions aggressively, andissued financial statements, audited, reviewed, and approved by E&Y, that concealed thetransactions and created a highly misleading picture of Lehman’s true leverage. Not only werethe transactions concealed, but Lehman’s financial statements affirmatively, and falsely, statedthat the only securities subject to repurchase (“repo”) agreements were “collateralizedagreements and financings” (
, loans), even though, as E&Y well knew, Lehman was treatingthe transfer of tens of billions of dollars of securities in Repo 105 transactions as “sales,” not“loans.” Rather than expose this fraud as auditors must, E&Y expressly “approved” this practice