NJ Slaps Lehman Execs with Suit over Millions in Pension Losses

March 18, 2009 (PLANSPONSOR.com) - State of New Jersey officials have charged in a lawsuit that lies by executives and directors of Lehman Brothers about the now-defunct Wall Street company's financial condition led to the loss of more than $100 million in state pension investments.

In the state court suit filed in Mercer County Superior Court, New Jersey alleges the executives and directors hid Lehman’s potential loss exposure affecting its real estate and mortgage-related investment positions. The suit alleges negligent misrepresentation, breach of fiduciary duty, fraud, aiding and abetting, and violations of  New Jersey and federal securities laws,  .

The state had purchased $2 million in preferred stock in an April 1, 2008 offering, and nearly $120 million of common stock at $28 per share and $60 million in preferred stock in a June 12, 2008 offering. Lehman solicited the state Division of Investment to make the purchases, the suit said (See  Lehman May Seek Pension Investment  ).

The Garden State pension funds’ purchases of preferred and common stock “were based on financial statements and materials that contained material misstatements and omissions regarding the value of Lehman’s assets that the Division of Investment could not have known were false,” the New Jersey officials said in a news release announcing the suit.

Lehman filed for bankruptcy on Sept. 15, 2008, leaving shareholders with virtually worthless stock.

In taking the investment positions, the state said, New Jersey officials relied not only on available Lehman documents but also on company statements made in direct meetings denying it had suffered significant losses and insisting that it was properly and strongly capitalized. Lehman told the New Jersey officials it also had superior hedging, risk management and valuation practices, the suit said.

According to the state announcement, direct claims against Lehman Brothers Holding Inc. are currently barred under bankruptcy law, but the suit names top executives, nine members of the board of directors, and accounting firm Ernst & Young.

According to the New Jersey suit, Lehman originated mortgages, purchased mortgages, packaged mortgages into securities, and marketed the securities to investors. The firm made "substantial investments" in non-prime residential mortgages and one of its subsidiaries, Aurora Loan Services, and permitted loans for the full value of property to people with low credit scores, according to the suit.

The state also charged that Ernst & Young allowed Lehman to improperly account for and disclose its true financial condition, which contradicted an unqualified audit report and interim reviews on Lehman's financial statements distributed to the market and Lehman's shareholders.

The registration statements and prospectuses related to the stock offerings in April and June last year, in which the division relied, were "inaccurate and misleading,'' the suit stated, adding that the company's directors acted as a "rubber stamp'' for senior management.

The Division of Investment manages pension and retirement plan funds for more than 700,000 active and retired New Jersey employees. The funds include the Public Employees' Retirement System, the Teachers' Pension and Annuity Fund, the Police and Firemen's Retirement System, the State Police Retirement System, and the Judicial Retirement System.

The New Jersey lawsuit is available here .