Report finds Lehman Brothers accounting gimmicks to delay collapse could open door for lawsuits

March 12, 2010

(ChattahBox) – A report released Thursday gives new insight into how Lehman Brothers fell into peril at the start of the financial crisis, and the details reveal “materially misleading” accounting gimmicks were among the factors. The collapse of the 158-year-old investment bank is widely credited with helping trigger the financial meltdown in Sept. of 2008 when it declared for bankruptcy.
The 2,200 page report written by Anton R. Valukas, chairman of the law firm Jenner & Block and a former federal prosecutor, as part of the bankruptcy proceedings, shows Lehman was insolvent for weeks before it went bankrupt. The report describes an accounting trick known as “Repo 105″ that the company used to hide some $50 billion in assets from its balance sheet for two quarters.  Accounting rules permitted Lehman to treat this transaction as sales instead of financings, “so that the assets could be removed from the balance sheet,” according to the report but it was not adequately challenged or questioned by its auditor Ernst & Young.  Lehman “repeatedly exceeded its own internal risk limits and controls” and a wide range of bad calls by its management led to the bank’s failure, the report says.  According to Valukas, the creative accounting could open up Lehman’s former chief executive Dick Fuld and chief financial officers Chris O’Meara, Erin Callan and Ian Lowitt to negligence or breach of fiduciary duty lawsuits as shareholders can use them to show they were deceived by the company. Furthermore, Valukas said there was also sufficient evidence to support a possible claim that Ernst & Young had been “negligent” and that Lehman’s liquidators could pursue claims against the firm for “professional malpractice”.

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