Jointly asking the judge to dismiss the lawsuit were Fuld, former Lehman chief financial officers Christopher O’Meara, Erin Callan and Ian Lowitt, former President Joseph Gregory, present and past Lehman directors, and underwriters of the bank’s securities. According to the news report, the former Lehman executives denied in court papers that the investors had lost money on Lehman securities because of misstatements and omissions in offering documents.
They said Lehman’s accounting for Repo 105 transactions conformed to generally accepted accounting principles and was approved by auditor Ernst & Young. In addition, they claimed Repo 105 wasn’t used to create “a false impression” of Lehman’s balance sheet. Offering documents told investors “in blunt words” that the balance sheet would “fluctuate from time to time,” they said in the filing, according to Bloomberg. “Not only did Lehman disclose that during the interim periods it might have more assets, it revealed that it did, and the magnitude of the variance.”
The lawsuit, originally filed in June 2008 on behalf of retirement funds including the Alameda County Employees’ Retirement Association in Oakland, California, and the Government of Guam Retirement Fund, claimed that New York-based Lehman made false statements about liquidity, failed to take timely writedowns of its positions on mortgage-backed securities, and overstated their value. The lawsuit was amended in April to add Ernst & Young as a defendant and to add findings contained in a 2,200-page report published March 11 by Lehman bankruptcy examiner Anton Valukus (see Public Funds Sue Lehman and Auditor).
Repo 105 transactions are a form of short-term financing that Valukas said Lehman used to move as much as $50 billion off its balance sheet temporarily to show investors it wasn’t carrying too much debt.
Separately, Ernst & Young LLP also asked the judge to dismiss the lawsuit in a court filing, saying its work met all applicable professional standards, according to Bloomberg.
The lawsuit is In re Lehman Brothers Equity/Debt Securities Litigation, 08-cv-05523, U.S. District Court, Southern District of New York.