State Compensation Insurance Fund (SCIF) is going to court in an attempt to recoup some of the millions of dollars it lost when the value of its Lehman Brother bonds followed the investment bank into the tank. Alleging a scheme by company executives to defraud investors, and rampant negligence on the part of others associated with the sale of Lehman securities, the state’s largest workers’ comp carrier is bringing in a former federal prosecutor well versed in white-collar crime to press its case.
Attorney John Hueston, an Irell & Manella partner and former Enron prosecutor, will handle State Fund’s lawsuit against former top Lehman Brothers executives and underwriters of the ill-fated investment bonds it purchased from 2005 through 2008. The parent company Lehman Brothers Holdings Inc. is not named in the lawsuit due to its Chapter 11 bankruptcy, and its subsidiary Lehman Brothers Inc. is no longer around after being forced to dissolve.
Notable among the list of defendants are Lehman executives Richard S. Fuld, Jr. and Christopher M. O’Meara. Fuld was Lehman’s chairman since 2000 and CEO since 1994, while O’Meara was Lehman’s chief financial officer and controller from 2004 until he took over risk management at the firm in late 2007. The lawsuit, filed in San Francisco Superior Court, alleges the officials made false and misleading statements in their public filings.
In particular, the complaint notes that the officers omitted pertinent information about so-called “Repo 105” transactions that allowed the company to hide billions of dollars of debt from the investing public. This accounting “gimmick” allowed the company to temporarily remove billions of dollars of debt from Lehman’s books at the end of the quarter only to be reinstated following the end of the quarter. But by fall 2008, the jig was up, and Lehman Brothers reported a $3.9 billion loss and $7.8 billion in write-downs.
“The disclosures regarding Lehman’s massive write-downs and liquidity problems (which led to Lehman’s bankruptcy) revealed the truth about Lehman’s financial condition. As a result of these disclosures and resulting bankruptcy, the market value of State Fund’s 2005, 2006, 2007 and 2008 Notes declined to pennies on the dollar,” the lawsuit notes.
According to State Fund spokeswoman Jennifer Vargen, what once was an investment with a face value of $85 million investment was worth just $17 million when it was sold off at the end of 2009. State Fund’s books also show another Lehman bond with a face value of approximately $10 million that is not mentioned in the lawsuit. It also returned just 20 cents on the dollar when it was sold at the end of 2009. The lawsuit seeks unspecified compensatory damages along with punitive damages and interest.
In addition to the fraud allegations against the Lehman Brothers officers, State Fund is taking aim at the company’s directors and a number of firms that underwrote the offerings, including Cabrera Capital Markets, Mellon Financial Markets, Citigroup Global Markets, Wells Fargo Securities and many others.
“The Underwriter Defendants had a duty to discover and compel disclosure of material facts about the 2007 and 2008 Notes offering, as well as to ensure that statements in the 2007 and 2008 Offering Materials were truthful and complete. Had the Underwriter Defendants conducted a reasonable investigation at the time of the 2007 and 2008 Notes offering, the true, but undisclosed, facts would have been readily apparent to them,” the lawsuit states. But it stops short of saying the directors and underwriters were aware of the underlying fraud.
Click here for a copy of the complaint. It is also available in our Resources section under SCIF.
(Filed by Brad Cain in San Francisco)