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Lehman Suit Returns to Its Roots in State Court

MANHATTAN (CN) - Allegations that Ernst & Young reaped $150 million from massive securities fraud to disguise the collapse of Lehman Brothers should play out in state court, a federal judge ruled.

On Dec. 22, 2010, then-New York State Attorney General Andrew Cuomo filed a lawsuit in Manhattan county court to hold Lehman's former auditors accountable under the Martin Act, a 1921 New York law that broadens prosecutorial power to fight financial fraud.

"The state here contends that [Ernst & Young] assisted Lehman in a scheme that involved the repeated, surreptitious, and temporary removal of tens of billions of dollars of securities from Lehman's balance sheets in order to create false impressions of Lehman's liquidity, thereby defrauding the investing public," according to the court's summary of the case.

Ernst & Young allegedly sought to vault liability under that statute by remanding the case to federal court, over the prosecutors' objections.

Once in the U.S. District Court for the Southern District of New York, prosecutors briefly tried to send the case back to state court, before abandoning that motion at oral arguments.

Nevertheless, U.S. District Judge Lewis Kaplan decided Thursday to send the case back "from whence it come," without prompting by either of the parties.

"The court has not reached this result lightly," Kaplan wrote. "The Judicial Panel on Multidistrict Litigation some time ago determined that all federal securities and ERISA cases, wherever commenced, that relate to the Lehman collapse and attendant circumstances, and that raise common questions of fact, would be transferred here for pretrial proceedings in order to secure the benefits of a unified approach. There are 47 such cases, this one aside, pending before the undersigned for that purpose.

"This case would benefit from being a part of that process, as the discovery that will be sought, the factual issues and at least some legal questions that will be raised here will overlap quite substantially with the other 47 cases," the 17-page ruling states. "The remand of this action to the state courts thus entails a risk that the efficiencies that otherwise would have been gained will be lost and the burdens of the litigation on parties and witnesses increased. But this court nonetheless has come to the view that remand of this action is the only course open to it in the present posture of the case."

Kaplan says the case against Ernst & Young cannot stand without the Martin Act.

"The complaint contains four causes of action against E&Y, three under New York State's Martin Act and one under New York Executive Law § 63(12)," Kaplan wrote. "Three of those causes of action plainly assert no claims arising under federal law."

After several more pages of analysis, Kaplan concluded that "none of the claims in the complaint arises under the laws of the United States."

The case will be remanded to the New York County Supreme Court.

Neither party returned requests for comment.

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