In an unusual move, Southern District Judge Lewis Kaplan (See Profile) has sent back to state court the New York attorney general’s suit against Ernst & Young over its role as auditor for Lehman Brothers. Judge Kaplan, who is handling 47 consolidated cases related to Lehman’s collapse, said in a March 22 decision that this case presented a quandary that “has perplexed both the Supreme Court and scholars for at least a century”—the so-called embedded federal question. The problem arises when a complaint is based solely on state law, but implicates a federal question. Here, however, “The State may obtain all the relief it seeks without prevailing on its contention that E&Y violated [Public Companies Auditing Oversight Board] auditing standards with respect to Lehman’s quarterly financials,” the judge wrote in In re Lehman Brothers Securities and ERISA Litigation, 09 MD 2017.
Not only would E&Y prefer to be in federal court, but Judge Kaplan’s decision came 14 months after E&Y had removed the case to federal court, four months after Attorney General Eric Schneiderman conceded that the federal court had jurisdiction, and just six days after E&Y had filed its reply memorandum to its motion to dismiss. Now, both sides will be starting all over in state court.
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