Threat of legal action looms over Lehman chiefs

Published on Saturday 13 March 2010 14:19

PRESSURE is mounting on US regulators to pursue legal action against former Lehman Brothers executives and its auditor Ernst & Young after experts said yesterday that a report into the bank's collapse had unearthed evidence of "materially misleading" accounting.

Lawyers in the US said an exhaustive 2,200 page report published last week provided plenty of ground for the US Securities and Exchange Commission (SEC) and the US justice department to pursue E&Y and executives including former Lehman Brothers chief executive Dick Fuld through the courts.

The report by investigator Anton Valukas found that senior executives, E&Y auditors and the bank's former lawyers at UK magic circle firm Linklaters were aware of its use of an aggressive accountancy method known as "Repo 105", which helped it to mask $50 billion (33bn) of assets on its balance sheet before its collapse in September 2008.

Valukas referred to Repo 105, which allowed the firm to hide the extent of its borrowing, as an "accounting gimmick".

US lawyers insisted last night that Valukas's report provided evidence of "actionable balance sheet manipulation". Michael Missal, a partner at the law firm K&L Gates, told a US newspaper: "It certainly assists private litigants and probably increases the pressure on the government to take some kind of action here."

After the report's publication on Thursday, E&Y said it stood by its work on the bank's accounts in 2007.

A spokesman for Linklaters said the report did not find its legal opinions given to Lehman Brothers to have been "wrong or improper".

Neither the SEC nor US attorneys offices in New York would comment.

Patricia Hynes, a lawyer for Fuld, insisted last week that while the report accused the former bank boss of being "at least grossly negligent" in his oversight of the Wall Street giant, he "did not know what those transactions were – he didn't structure or negotiate them, nor was he aware of their accounting treatment".

Questions are also expected to be asked in the UK after Valukas discovered that Lehman Brothers used its European arm, based in Canary Wharf, to carry out the questionable Repo 105 practises, as no American law firm would sign off on the method.

A host of other banks, including Goldman Sachs and Barclays Capital, moved on Friday to calm nerves that the method had been widespread in the City in the run up to the 2008 banking crisis. They insisted that they had not used the practice to hide liabilities.

Nevertheless, the spotlight is expected to fall on the Financial Reporting Council, the UK regulator for corporate reporting, to explain why methods considered illegal across the Atlantic could be used in the UK .

Nobody at the FRC was available for comment last night. A spokesman for the Financial Services Authority said accounting did not fall within its remit.