The Lehman perp walk

For those baffled by all the talk of repos, accounting rules and hidden leverage, a quick round-up of those against whom the court-appointed Anton Valukas, “examiner” of Lehman Brothers, found that legal claims would have “sufficient credible evidence to support a finding by a trier of fact” – what he calls “colorable claims”. You can read the full 2,200 page report here.

At Lehman, thanks to the discovery of “repo 105″, used to hid borrowing and make levels of leverage look lower:

  • Dick Fuld, chief executive – who seems to be channelling Jeffrey Skilling of Enron
  • Christopher O’Meara, former chief financial officer
  • Erin Callan, former chief financial officer and until recently at Credit Suisse
  • Ian Lowitt, chief financial officer

All “in connection with their failure to disclose the use of the practice”.

Secured lenders:

  • JPMorgan Chase
  • Citigroup

Both “in connection with modifications of guaranty agreements and demands for collateral in the final days of Lehman’s existence”.

The accountants:

  • Ernst & Young

For “its failure to meet professional standards in connection with that lack of disclosure”. specifically it “did not meet professional standards, both in investigating [whistleblower Matthew] Lee’s allegations and in connection with its audit and review of Lehman’s financial statements”.

The buyer:

  • Barclays

Because “a limited amount of assets of LBHI [Lehman Brothers Holding Inc] Affiliates other than LBI [Lehman Brothers Inc] were improperly transferred to Barclays”. He expressed no view on the LBI assets, which are subject to an ongoing lawsuit.

The existence of “colorable claims” does not mean that there is no credible defence to them – the examiner is not trying to pre-empt a court finding. But he did present each of those named with the evidence, and listened to their representations. He was unconvinced (footnote 90):

While the Examiner was directed to credible facts and arguments that might form the basis for successful defenses, the Examiner concluded in all cases that these possible defenses do not change his now final conclusion that there is sufficient credible evidence from which a trier of fact could find a breach of duty after weighing the credible evidence on both sides of the issue.

Also deserving an honourable mention, although with no suggestion that it did anything wrong, let alone actionable, is the role played by Linklaters, the London law firm. According to the examiner’s report (page 740):

Lehman first introduced its Repo 105 program in approximately 2001. Unable  to find a United States law firm that would provide it with an opinion letter permitting  the true sale accounting treatment under United States law, Lehman conducted its Repo 105 program under the aegis of an opinion letter the Linklaters law firm in London wrote for LBIE, Lehman’s European broker‐dealer in London, under English law. Accordingly, if United States‐based Lehman entities such as LBI and LBSF wished to engage in a Repo 105 transaction, they transferred their securities inventory to LBIE in order for LBIE to conduct the transaction on their behalf.

Yet another failure of British regulation in regard to Lehman, by the look of things. Recall that Lehman’s London arm was used to offer greater leverage to hedge funds and other borrowers than the US allowed, while when the bank failed the US brokerage was able to keep trading to net off positions and save protected customer accounts, while the UK business simply closed, causing chaos even for customers who thought their accounts were segregated.

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Christopher Cook is an FT editorial writer. Before joining the FT in 2008 as a Peter Martin Fellow, he worked for three years for the Conservative party.

Lorien Kite is deputy comment editor, a post he took up in 2009 after four years as a commissioning editor on the analysis page. He joined the FT in 2000.

Ian Holdsworth became assistant features editor in 2009 and was previously chief production journalist for the features pages.


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