NEW YORK (Reuters)—Top former executives of Lehman Brothers Holdings Inc. lost their bid on Wednesday to throw out a securities fraud lawsuit seeking to hold them responsible for billions of dollars of investor losses tied to the Wall Street investment bank's 2008 collapse.

The decision, in a case brought three months before Lehman went bankrupt, will allow the lawsuit against former Chief Executive Richard Fuld and four top lieutenants to move forward. The investors were also allowed to press ahead with claims against former Lehman auditor Ernst & Young, as well as against former directors and underwriters.

The lawsuit, led by five retirement funds, seeks class action status on behalf of other funds, companies and individuals who bought some of the more than $31 billion of equity and debt that Lehman sold under a variety of offerings beginning in 2006.

"This is a complicated situation, but the real significance is that some of the most crucial claims of the plaintiffs survived a motion to dismiss," said James Cox, a professor at Duke University School of Law.

U.S. District Judge Lewis Kaplan in Manhattan dismissed some claims, but he said the investors sufficiently alleged that Lehman materially misled them about its accounting and its ability to manage risk ahead of the Sept. 15, 2008, bankruptcy.

"It is entirely plausible" that the "misleading picture" Lehman portrayed about its financial condition inflated its stock price and resulted in investor losses, Judge Kaplan wrote.

The decision comes amid other investigations into Lehman's collapse, although there have been no U.S. prosecutions against top officials over the bankruptcy. In December 2010, the New York attorney general sued Ernst & Young, saying the auditor stood by as Lehman painted a false picture of its health.

Ernst & Young said in an emailed statement that it was pleased that Kaplan's ruling dismissed most claims against it.

"We strongly believe that we will ultimately prevail on the remaining claim. As we have said consistently, we stand behind our work on the Lehman audit and our opinion that Lehman's financial statements were fairly stated in accordance with U.S. GAAP (generally accepted accounting principles), applying the rules that existed at the time," it said.

Lawyers for Mr. Fuld, the former directors, most of the underwriters and the investors did not immediately respond to requests for comments.

The office of New York Attorney General Eric Schneiderman was also not immediately available to comment. Lehman's bankruptcy estate is not named in the investors' lawsuit.

Examiner's findings validated

Lehman filed for bankruptcy with $639 billion of assets, and its collapse was a principal trigger of the 2008 global financial crisis. Barclays P.L.C. took over a large part of its investment banking business.

Exhaustive details of Lehman's pre-bankruptcy accounting practices were revealed in March 2010, in a report by court-appointed examiner Anton Valukas.

He found that Lehman's use of so-called Repo 105 transactions, in which assets were moved on and off the balance sheet, let Lehman to obscure its leverage and health. Part of the investor lawsuit involves those transactions.

"As far as I can tell, this is the first judgment that's come down that really validates in the legal framework and courtroom the findings of the examiner's report and seems to go a little further," said Lawrence McDonald, author of a book about Lehman, "A Colossal Failure of Common Sense."

Judge Kaplan also said the investors sufficiently alleged that Ernst & Young made a false statement in claiming ignorance of the impact of the transactions.

He wrote that the complaint "adequately alleged" that Lehman overstated its financial strength, understated its leverage, and understated its exposure to risky "Alt-A" mortgages and commercial real estate assets.

Steven Singer, a partner at Bernstein, Litowitz, Berger & Grossmann representing the plaintiffs, said the judge allowed the case to go forward against all parties in two key areas: Repo 105 transactions, and Lehman's risk management.

Among the claims Kaplan dismissed were allegations that the Repo 105 transactions materially affected Lehman's liquidity, or that Lehman made a material misstatement around their use.

The lead plaintiffs include two California pension funds: the Alameda County Employees' Retirement Association, and the Operating Engineers Local 3 Trust Fund; as well as public retirement funds in Guam, Northern Ireland and Edinburgh, Scotland.

The case is In re: Lehman Brothers Securities and ERISA Litigation, U.S. District Court, Southern District of New York, No. 09-md-02017.