Lehman execs fudged books to hide the rot within

FAULT LINE REPO 105 GIMMICKS PLAYED A BIG ROLE IN WALL ST TITAN'S DEMISE

Lehman execs fudged books to hide the rot within: report

JPMorgan, Citi seen helping trigger collapse by taking out collateral from struggling bank, could face claims Richard Fuld 'grossly negligent'; Auditor Ernst & Young draws flak, may be liable for 'professional malpractice'

Emily Chasan NEW YORK 

    LEHMAN Brothers Holdings used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008, but there was not extensive wrongdoing, a court-appointed examiner has found. In a 2,200-page report made public on Thursday, examiner Anton Valukas, chairman of law firm Jenner & Block, reported the results of his more than year-long investigation into who could be blamed for the firm's collapse, which deepened the global financial crisis. 
    The examiner said that while some of Lehman's management's decisions "can be questioned in retrospect" and the firm's valuation procedures for its assets "may have been wanting," those responsible for the firm had used their business judgement and were largely not liable for the firm's collapse. 
    However, he said that Lehman, which is now liquidating for the benefit of creditors, could have claims against former Lehman chief executive Dick Fuld and chief financial officers Chris O'Meara, Erin Callan and Ian Lowitt for negligence or breach of fiduciary duty. 
    The examiner said there was also sufficient evidence to support a possible claim that the firm's auditor, Ernst & Young, had been 'negligent' and that Lehman could pursue claims against the firm for 'professional malpractice'. 
    He did not find that Lehman's directors had explicitly violated their fiduciary duty, but said that Wall Street paid a large role in causing an acute liquidity crisis at Lehman in its final days. 
    The examiner suggested Lehman may also be able to pursue claims against banks like JPMorgan and Citigroup for taking some $16 billion in collateral out of Lehman's coffers as it struggled to stay afloat. The long-awaited report contains explosive allegations about a gimmick, known as 'Repo 105', that was used for the sole purpose of manipulating Lehman's books, contributing to the firm's demise. 
    The examiner concluded that the gimmick, which dated back to 2001 and was used without telling investors or regulators, gave the appearance that Lehman was reducing its overall leverage levels in 2008 when in reality it was not. Lehman used the gimmick to temporarily remove $50 billion of assets from its balance sheet in 2008, according to the report. 
    An attorney for Lehman's former CEO said in a statement on Thursday that Fuld "did not know what those transactions were." 
    "He didn't structure them or negotiate them, nor was he aware of their accounting treatment," attorney Patricia Hynes said, noting that the firm's outside auditor and legal counsel had not raised any concerns about the transactions with him. The examiner also said a claim could be based on Ernst & Young's failure to abide by professional standards relating to communications with Lehman's audit committee. Claims could also be based on shortcomings in Ernst & Young's probe into a whistleblower claim and reviews of Lehman's public filings. 
    Ernst & Young said: "Our last audit of the company was for the fiscal 
year ending November 30, 2007. Our opinion indicated that Lehman's financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view." Questions about Lehman's accounting had been raised in the months before its bankruptcy, notably by hedge fund manager David Einhorn, who thought the bank was not taking proper write-downs. 
    The examiner's report could provide ammunition for future lawsuits that would let Lehman recover more funds for creditors. 
    Lehman's lead bankruptcy attorney, Harvey Miller, said in court that the unsealing of the report came at an 'opportune time' as the company is in the process of coming up with a reorganisation plan that will detail how the bank will complete its bankruptcy. The report, which details the harrowing days of September 2008 before Lehman filed the largest US bankruptcy in history, was compiled from thousands of documents and emails and interviews with such key players in government and Wall Street as treasury secretary Hank Paulson, Federal Reserve chairman Ben Bernanke, JPMorgan CEO Jamie Dimon, British authorities and Lehman executives. The bankruptcy judge overseeing the case, James Peck, said the report "reads like a best-seller." 
    The examiner said Lehman could be found to have been insolvent as far back as September 2, 2008, even though it did not file for bankruptcy until September 15. 
    "Lehman's small margin of equity relative to assets meant it did not need much loss in asset value to render it insolvent," the examiner wrote, adding that Lehman had an unreasonably small amount of capital to be operating its business beginning in the third quarter of 2008. During that period, Lehman entered into new and more onerous collateral agreements with rival Wall Street banks — agreements that the examiner suggested could be challenged because Lehman was technically insolvent. 
    Indeed, the report details the increasingly aggressive collateral calls that JP Morgan made in the days before Lehman's September 15, 2008, bankruptcy filing. 
    On September 11, for example, JP Morgan executives met and decided that the collateral Lehman had posted "was not worth nearly what Lehman claimed it was worth," the report says. The next day, JP Morgan asked for an additional $5 billion in collateral. About that time, JP Morgan discovered that one of the securities posted by Lehman, an asset-backed security known as Fenway, was "worth practically nothing as collateral". In the report, the examiner raised questions about whether JPMorgan had acted 'in good faith' but also detailed an interview in which Dimon said he told Fuld in every conversation "that he did not want to harm Lehman." The examiner found Lehman could have potential claims against JPMorgan, which is still holding about $6.9 billion of Lehman's collateral, and Citi in connection with collateral demands. — Reuters

JUDGEMENT DAY: In this file photo, protestors hold signs behind Richard Fuld, former chairman and CEO of Lehman Brothers