The agreement, which must still get court approval, signals the end of a massive class action against Lehman's former directors, as well as several other financial institutions, according to a letter filed Wednesday in federal court in Manhattan. Lehman is accused of using the infamous "Repo 105" accounting practice to misleadingly understate its leverage to make itself appear more financially solvent.

The investors who brought the lawsuit asked the court to suspend the case while the sides draft a settlement agreement.

"The settling parties are currently drafting a detailed stipulation of settlement and anticipate" asking the court for permission to notify class members of the deal in about 30 days, the investors said in the letter.

Ernst & Young said it denied all liability, settling the case "to put this matter behind us."

"Lehman's audited financial statements clearly portrayed Lehman as what it was - a highly leveraged entity operating in a risky and volatile industry; and Lehman's bankruptcy was not caused by any accounting issues," Ernst & Young said in a statement.

Ernst & Young is the last defendant still involved in the case. Bank of America Corp (>> Bank of America Corp), Morgan Stanley (>> Morgan Stanley) and more than 30 other underwriters of Lehman debt reached a $417 million settlement in December 2011, while Lehman's former officers, including ex-Chief Executive Richard Fuld, settled for $90 million.

The case goes back to 2008, when Lehman's historic collapse served as a key catalyst to the global financial crisis.

Investors filed the lawsuit that year, accusing Lehman directors of painting a misleading picture of Lehman's health in financial statements and securities offerings. Ernst & Young and the underwriters contributed to the fraud by failing to investigate and ensure the truthfulness of the statements, the investors alleged.

Lehman ended its three-year Chapter 11 in 2011 with a liquidation plan slated to repay creditors about $65 billion, or an average of about 21 cents on the dollar for allowed claims.

The case is In re Lehman Brothers Equity/Debt Securities Litigation, U.S. District Court, Southern District of New York, No. 08-cv-05523.

Lehman's bankruptcy is In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555.

(Editing by Bob Burgdorfer and Lisa Shumaker)

By Nick Brown

Stocks treated in this article : Bank of America Corp, Morgan Stanley