How Lehman Hid Its Problems While it Collapsed

The New York Times is reporting on a report, complied by an examiner for Lehman, that finds that it failed from multiple causes, including bad mortgages. That is not too much of a surprise, but what is telling is the finding that Lehman used "materially misleading" accounting gimmicks to hide its financial problems. The NYT has the details here.
The full report by Anton Valukas is also online.

Continued Pursuit of New Defendants for Lehman Losses

The collapse of the financial markets that began in mid-2008 has spawned quite a bit of litigation, and at the forefront of much of that litigation is Lehman Brothers. That is not too much of a surprise, given the fact that the government refused to prevent its bankruptcy. Once Lehman went under, any security that was based on its creditworthiness also collapsed. See,  Investors Filing Claims Against Lehman Brokers,  Lehman Note Sales Under Fire, and Lehman Principal Protected Note Arbitrations On the Rise.

Investors have been filing, and in some cases winning, cases against UBS, who sold a significant amount of principal protected notes to the investing public. Last week, investors scored another victory in Lehman related litigation - a federal court judge in New York denied, in part, a motion to dismiss a class action complaint against Lehman, its affiliates, and certain individuals who signed registration statements for the offering statements for one group of Lehman offerings.

The complaint seeks damages for alleged violations of the Securities Act of 1933 in the issuance, distribution and sale of over ninety separate offerings of mortgage pass-through certificates by affiliates and subsidiaries of Lehman Brothers Holdings, Inc. (collectively, "Lehman") between September 2005 and July 2007. The Certificates are a form of mortgage-backed security ("MBS").

The complaint alleges, in part, that the registration statements for the securities failed to disclose certain material facts, and were therefore misleading. The complaint seeks damages from the individual defendants for these alleged misstatements and omissions under Section 11 and 15 of the Securities Act of 1933, on the theory that they signed the registration statements and on the theory that they controlled Lehman Brothers, Inc., the depositor in the securitization process, and the trusts that issued the Certificates.

The defendants include include certain officers and directors who participated in the registration and sale of these securities. They moved to dismiss the complaint as against them.

Legally, in order to win a claim under Section 11 of the Securities Act of 1933, the plaintiff must allege that (1) it purchased a registered security, (2) the defendant adequately participated in the offering in a manner giving rise to liability under Section 11, and (3) the registration statement "contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading." Section 15 creates liability for individuals or entities that "control[led] any person liable" under Section 11.

The court dismissed the claims in 88 of the subject offerings, since the plaintiffs did not purchase securities in those offerings, and therefore lacked standing to bring those claims. However, the court denied the motion to dismiss as to the remaining 6 offerings, leaving the individual defendants to defend themselves in the class action. We can also reasonably assume that another case will be brought, with investors in the other 88 offerings as plaintiffs.

Investors continue to seek out new defendants in order to recoup their losses in investments that were tied to Lehman, and we can expect to see more of the same in the future.

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Technorati Tags: Lehman, notes, litigation

Investors Filing Claims Against Lehman Brokers

Investors are starting to file arbitration claims against their Lehman brokers, in an attempt to collect their losses on investments in Lehman principal protected notes. I warned of this eventuality some time ago, as customers who lost money in the notes are going to look to recover those losses. Obviously suing Lehman is not going to accomplish anything, but some customers and their attorneys believe that suing the broker just might.

Lehman brokers have been through quite a bit. These professionals relied management's statements that "all is well" with the company, and were blindsided by the failure of Lehman.  The demise of Lehman was devastating for many, for not only did they lose their jobs, they lost their investments, their deferred compensation and for many, their retirement funds, which were invested in Lehman stock.

Now the other shoe is dropping. Many Lehman brokers recommended the principal protected notes to their customers, relying on the information provided to them by Lehman itself. With the corporation gone, these brokers are being forced to defend themselves from claims for those losses - in effect paying twice for the failure of their employer.

Those claims are going to be difficult for the customers to win, but the brokers still have to defend themselves from the claims. Should a customer prevail in an arbitration and obtain an award, that award has to be paid in 30 days, or the broker's securities license will be suspended. And an arbitration award can be confirmed in a court, at which time it becomes a judgment, enforceable like any other judgment.

The solution? Unfortunately there is no good solution. If customers are going to blame their broker for the demise of Lehman, the brokers must defend themselves. Using an experienced securities arbitration defense attorney is the first step, and hiring one who is familiar with Lehman principal protected notes is another. These cases will be difficult for the customer to win, but the experience of the attorney will not only provide a better chance for success, it might even result in reduced defense costs, as there is no learning curve.
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Mark Astarita, Esq. is a securities attorney who represents brokers and firms in every aspect of their litigation, compliance and regulatory matters. He can be contacted at 212-509-6544 or by email at astarita@beamlaw.com

Lehman Note Investor Obtains 1/2 an Award

A FINRA arbitration panel has awarded damages against UBS in favor of an investor who purchased Lehman principal protected notes.

While the WSJ is presenting the award as a significant win for the investor, and an indicator of the outcome of other cases relating to the Lehman notes, I am not so sure this is that big a win. According to the details contained in the article, the investor obtained 1/2 of the claimed damages, plus interest, costs and an undetermined amount for attorneys fees.

Some would say that any recovery is a good recovery, but is this really a win for the investor? The Lehman notes are worthless.

As in most arbitration awards, the three-person arbitration panel didn't give reasons for its findings. According to the WSJ, the investor argued  that the notes were "speculative derivative securities" and were "unsuitable" for unsophisticated investors. Investors, and brokers, need to be careful in these cases.

I addressed these issues in my column, Lehman Principal Protected Note Arbitrations. While 1/2 the loss is better than a total loss for the customer, it is not necessarily a win for the customer, nor should it be the standard for the other Lehman Note cases that have been filed.

I do not know the details of the case, but if the investment was unsuitable, then it was unsuitable, and the investor should receive compensation for the loss. In addition, suitability cases are fact specific and investor specific. You simply can't attribute the parameters of an award in one case to other cases.

I will continue to update the blog as new awards become available.

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[Edited and updated 12/8/09]

Fuld on Lehman's Anniversary

The demise of Lehman Brothers is coming up on an anniversary, and Reuters spoke to the man who led Lehman at the time - Richard Fuld. Most will recall that Fuld was blamed for the downfall of Lehman, and was then humiliated before a Congressional panel last October. He was told by one politician that he was the designated "villain" of the day and screamed at by protesters who called for him to be jailed. Reuters found him at his home in Idaho.  More>>>