Lehman staff and auditors may be sued over accounting 'trick'

POTENTIAL legal actions hang over senior Lehman Brothers executives and the bank's auditors after a report into the collapse of the group said serious lapses contributed to its downfall.

The damning report claimed Lehman was insolvent for weeks before it filed for bankruptcy in September 2008, triggering a global financial meltdown.

The 2,200-page document by court-appointed examiner Anton Valukas into what went wrong says there might be grounds for legal action for negligence or breach of fiduciary duty against former top executives. These include Dick Fuld, the former Lehman chief executive, and chief financial officers Chris O'Meara, Erin Callan and Ian Lowitt.

Valukas said there was also sufficient evidence to support a possible claim that the bank's auditor, Ernst & Young, had been "negligent" and that the bank's liquidators might pursue claims against the firm for "professional malpractice".

He also accuses management of "actionable balance sheet manipulation" and using accounting tricks to hide debts.

The report stops short of saying that there was systematic wrong-doing at the firm, and acknowledges that top Lehman officers used their business judgment and were largely not responsible for the bank's collapse.

Ernst & Young yesterday said its final audit of Lehman was "fairly presented" and met international accounting rules.

Much of the report contains allegations about an accounting device known as "Repo 105". This mechanism allows banks to shift around assets to reduce superficially the size of a company's balance sheet.

Valukas said Repo 105 was used to "give the appearance that Lehman was reducing its overall debt" levels in 2008 when in reality it was not.

The report estimates that the bank used the practice to temporarily remove $50 billion (33bn) of assets from its balance sheet in 2008 alone.

Lehman began using Repo 105 in 2001, but the practice was "dramatically" ramped up from late 2007, the report said. Valukas said Lehman tried to find a US law firm that would approve its shifting around of assets in this way, but, unable to get US clearance, the bank turned to London law firm Linklaters. The City firm advised that the practice was allowed under UK law.

The report said assets Lehman wanted to hide were transferred to the London operation, which would "conduct the (Repo] transaction on their behalf".

But it said certain Lehman officers "breached their fiduciary duties by exposing Lehman to potential liability for filing materially misleading periodic reports, and Ernst & Young was professionally negligent in allowing those reports to go unchallenged".

A Linklaters' spokesman said the US examiner's report included references to legal opinions that the law firm gave in relation to a number of Lehman transactions, but "does not criticise those opinions or say or suggest that they were wrong or improper".