Fraud charges loom for Lehman Bros

Investigation into bank's collapse questions why $50bn in risky assets was not made public

Ex-Lehman Brothers directors and their UK advisers could face a fresh blitz of civil and criminal charges following the publication on Friday of the explosive report into the collapse of the Wall Street bank which claimed it "misrepresented" its financial position.

According to US legal experts yesterday, the former Lehman boss, Dick Fuld, and other directors could be pursued by the Securities and Exchange Commission, the US watchdog, for civil charges of securities fraud. Other government enforcement agencies could also bring criminal charges. The 2,200-page report by Anton Valukas, appointed by a New York bankruptcy court, established that Lehman exploited a loophole between US and UK law which allowed it to keep $50bn (£33bn) of debt off its balance sheet, thus providing a better picture of its health. Mr Valukas described the use of the mechanism – a Repo 105 – as an "accounting gimmick" which led to a "material misrepresentation" to investors about the true state of its finances.

Civil charges are almost certain to be pursued by the SEC if the financial statements were false and directors could be prosecuted under the 2002 Sarbanes-Oxley Act which requires the chief executive and the chief financial officer to certify that the financial statements comply with all applicable statutes and rules.

One US lawyer said that provided Mr Fuld and Lehman's three chief financial officers during 2007 and 2008 knew of the effect of the Repo 105 transactions, criminal charges could also be brought. Any criminal prosecution would need the government to prove intent to defraud or knowledge that statements were false or misleading, he said.

Under the Repo 105 scheme, the bank would temporarily sell $105 of risky loans and investments to other institutions for $100 with a guarantee that it would buy them back a few days later. The 5 per cent difference meant that it could be classed as a proper sale, and not an accounting trick, and the result was that Lehman's balance sheet looked stronger because it had more cash.

The report also concludes there is credible evidence of professional malpractice against UK accountants Ernst & Young which advised Lehman's London subsidiary which carried out the Repo 105 transactions. These were based on an "opinion letter" from Linklaters, the law firm, which signed off on the deals claiming that they were sales and not financing arrangements. The report does not suggest Linklaters acted illegally although New York lawyers had refused to approve the procedure. Both E&Y and Linklaters have denied any wrongdoing.

At the heart of the Valukas review is the revelation that Lehman increased its use of Repo 105 transactions to reduce its leverage by $38.6bn in the fourth quarter of 2007, by $49.1bn in the first quarter of 2008 and $50.4bn in the second quarter of 2008. Lehman is said to have timed these deals to the ends of the quarter, allowing it to flatter its true financial position in its results.

PROMOTED VIDEO
News
peopleStella McCartney apologises over controversial Instagram picture
Voices
voices
Arts and Entertainment
Hayley Williams performs with Paramore in New York
musicParamore singer says 'Steal Your Girl' is itself stolen from a New Found Glory hit
Sport
Ronaldinho signs the t-shirt of a pitch invader
footballProof they are getting bolder
News
William Hague
people... when he called Hague the county's greatest
Extras
indybestKeep extra warm this year with our 10 best bedspreads
News
ebooksAn unforgettable anthology of contemporary reportage
News
people
Voices
voicesBy the man who has
News
people... and stop them from attacking people
Arts and Entertainment
Ed Sheeran performs at his Amazon Front Row event on Tuesday 30 September
musicHe spotted PM at private gig
Sport
Arsene Wenger tried to sign Eden Hazard
footballAfter 18 years with Arsenal, here are 18 things he has still never done as the Gunners' manager
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
The magic of roundabouts

Lords of the rings

Just who are the Roundabout Appreciation Society?
Why do we like making lists?

Notes to self: Why do we like making lists?

Well it was good enough for Ancient Egyptians and Picasso...
Hong Kong protests: A good time to open a new restaurant?

A good time to open a new restaurant in Hong Kong?

As pro-democracy demonstrators hold firm, chef Rowley Leigh, who's in the city to open a new restaurant, says you couldn't hope to meet a nicer bunch
Paris Fashion Week: Karl Lagerfeld leads a feminist riot on 'Boulevard Chanel'

Paris Fashion Week

Lagerfeld leads a feminist riot on 'Boulevard Chanel'
Bruce Chatwin's Wales: One of the finest one-day walks in Britain

Simon Calder discovers Bruce Chatwin's Wales

One of the finest one-day walks you could hope for - in Britain
10 best children's nightwear

10 best children's nightwear

Make sure the kids stay cosy on cooler autumn nights in this selection of pjs, onesies and nighties
Manchester City vs Roma: Five things we learnt from City’s draw at the Etihad

Manchester City vs Roma

Five things we learnt from City’s Champions League draw at the Etihad
Martin Hardy: Mike Ashley must act now and end the Alan Pardew reign

Trouble on the Tyne

Ashley must act now and end Pardew's reign at Newcastle, says Martin Hardy
Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?