|
By Ronald Fink
The British law firm that approved the repurchase agreements that helped Lehman Brothers hide large amounts of debt advised the firm not to disclose its approval to anyone except the firm's auditor, the report examining the failure of the investment firm disclosed Thursday.
By providing Lehman with a letter stating that the deals constituted a "true sale" under UK law in its opinion, the law firm of Linklaters enabled the bank to take assets financed through repos off of its balance sheet. Such an opinion is required by the Financial Accounting Standards Board's rule known as SFAS 140.
But Lehman's accounting policy acknowledged that the deals qualified for off-balance sheet treatment only in the UK. So Linklaters advised the bank's European subsidiary, Lehman Brothers International (Europe), to not disclose the letter to anyone but Ernst & Young, Lehman's auditor, according to the examiner's report.
The letter from Linklaters, the examiner wrote, says that "this opinion is addressed to you [LBIE] solely for your benefit" and that "it is not to be transmitted to anyone else, nor is it to be relied upon by anyone else for any other purpose." The examiner's report went on to note, however, that the letter stated that "a copy of this opinion may be provided by Lehman Brothers to its auditors for the purpose of preparing the firm's balance sheets."
By taking the transactions off of Lehman Brothers' balance sheet, the deals helped hide $50 billion in Lehman debt in the months before its failure in September 2008, making the firm look less highly leveraged than it really was.
The repos provided cash in return for 5 percent interest but had to be repurchased by Lehman in a few days. While the examiner, Anton Valukas, did not say whether the transactions violated SFAS 140, he concluded that Lehman's failure to disclose the true nature and extent of the transactions misled investors and could be grounds for charging its executives with fraud. He accused former CEO Richard Fuld and former CFO Erin Callan of "gross negligence at the very least" for signing off on results that lacked proper disclosure.
In a statement emailed to CFOZone concerning the advice the firm offered to Lehman, a Linklaters spokeswoman said that "the examiner -- who did not contact the firm during his investigations -- does not criticize those opinions or say or suggest that they were wrong or improper. We have reviewed the opinions and are not aware of any facts or circumstances which would justify any criticism."
Valukas, chairman of the US law firm of Jenner & Block, was appointed by the bankruptcy court handling Lehman's collapse to investigate its cause.
 |
in CFO Conversations by 
Subscribe to this comment's feed
