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Examiner finds Lehman execs lied to investors, board

lehmanbros_optBY JOE TYRRELL
NEWJERSEYNEWSROOM.COM

As their bad business decisions were pushing it toward collapse, top executives of failed investment bank Lehman Brothers Holdings Inc. repeatedly lied to investors and withheld information from their own board, according to a bankruptcy examiner.

Lehman's auditor, accounting giant Ernst & Young, was aware of the executives' manipulation of balance sheets, but chose to shield them from an internal inquiry, according to the report from court-appointed examiner Anton R. Valukas of the law firm Jenner & Block.

The corporate executives "who oversaw and certified misleading financial statements – Lehman's CEO Richard S. Fuld Jr., and its CFOs Christopher O'Meara, Erin Callan and Ian T. Lowitt," have left themselves open to legal claims, Valukas said.

He also found that "colorable" – that is, actionable – "claims exist that Ernst & Young did not meet professional standards."

Following the Wall Street herd, Lehman plunged heavily into risky investments in recent years. As the housing bubble burst and the economy slumped in 2007-8, Lehman executives searched for a way to improve their bottom line. But they were stuck with overpriced assets whose market value was dropping.

So just before the end of the second quarter of 2008, Lehman management privately removed $50 billion in illiquid assets from the books, according to Valukas. The temporary move made it appear that instead of being further overextended in heavily leveraged, non-performing deals, the company was getting stronger.

Temporary sales and repurchases of assets, repossessions, are not unusual, Valukas said. But citing internal e-mails, he found Lehman's used the maneuver "for no articulated business purpose except 'to reduce the balance sheet at the quarter-end.' "

Lehman still reported an unprecedented $2.8 billion loss for the second quarter of 2008. Management "sought to cushion the bad news by trumpeting that it had significantly reduced its net leverage ratio to less than 12.5 percent, that it had reduced the next assets on its balance sheet by $60 billion, and that it had a strong and robust liquidity pool," Valukas wrote.

But even employees described "Repo 105," their name for the temporary removal of $50 billion of the $60 billion, as "an accounting gimmick" and the "lazy way" to improve the balance sheet without actually selling underperforming assets, the examiner said.

"Lehman did not disclose its use – or the magnitude of its use – of Repo 105 to the government, to the rating agencies, to its investors, or even to its Board of Directors," Valukas wrote. "Ernst & Young were aware but did not question Lehman's use and nondisclosure."

Even the post-bankruptcy sale of Lehman Brothers assets to UK-based Barclays Capital Inc. raised red flags for the examiner. But some were handled properly, he concluded a "limited amount... were improperly transferred to Barclays."

But the examiner did absolve Fuld and his team for their poor business judgment. He even found that although they withheld details of the $50 billion move from the board, they adequately informed the corporate directors about their high-risk strategy.

The examiner noted that not everyone at Lehman was caught up in the rush to high-risk, low-reward investings. Fuld removed some executives because of their opposition to management's growing accumulation of risky and illiquid investments," Valukas said.



 

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