Ernst & Young Subject to Fraud Lawsuit

The Wall Street Journal is reporting that New York prosecutors will file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers. Apparently the Attorney General's office thinks the Big Four accounting firm looked the other way while the investment giant misled investors about its financial health.

The first of many questions comes to mind: Why hasn't the AG's office filed criminal charges? A civil case usually means that there isn't enough evidence to make criminal charges or the prosecutors don't think that a jury will respond the same way a civil jury might.

The Journal reports that State Attorney General and NY Governor-elect Andrew Cuomo is said to be close to filing the case. The suit stems from transactions Lehman allegedly carried out to make its risk appear lower than it actually was.

Another question: How can a firm come clean if their risk exposure is actually through the roof? Should they go to the SEC or the NY Times and say, "Wow, we are so over-leveraged and you really don't want to see the mortgage-backed securities we are selling. Yikes!"

Is there a procedure for a bank that finds itself close to the edge to seek help before they drive off the cliff?

The Journal does give one clue as to why E&Y might - allegedly, of course - look the other way or at least do very little: Lehman Brothers paid an estimated $100 million in fees for its auditing work from 2001 through 2008 to Ernst & Young.

The suit will be led by the outgoing Cuomo before he takes the oath of office in Albany and could come as early as this week. Once the charges are filed, the Journal says that this would mark the first time a major accounting firm was targeted for its role in the financial crisis

Is Moody's next?