Daniel Acker/BloombergLehman Brothers former headquarters in 2008.
6:21 p.m. | Updated
A lawsuit against former top Lehman Brothers executives, directors and auditors cleared a major hurdle on Wednesday, as a federal judge largely rejected a bid to dismiss the case.
In a 106-page ruling, Judge Lewis A. Kaplan of the United States District Court in Manhattan said that several investors who had bought Lehman securities before the firm failed in September 2008 could continue their claims against former top executives like the chief executive, Richard S. Fuld Jr.; the president, Joseph Gregory; and the chief financial officer, Erin Callan. The Lehman officials, the suit said, had misled investors about the firm’s accounting practices and efforts to manage risk.
“It is entirely plausible to conclude,” the judge said, “that the misleading picture that Lehman portrayed played a material part in keeping its stock higher.” Consequently, he said, some of the investors’ losses may have been “attributable to the alleged fraud.”
The ruling is the latest step in a case that has dragged on since 2008. Now, after several delays, the judge cleared the way for each side to begin discovery and potentially proceed toward a trial.
“This is a significant victory for plaintiffs,” said Steven B. Singer, a partner at Bernstein Litowitz Berger Grossman who is representing pension funds and other investors in the case.
Judge Kaplan did dismiss some smaller claims against the Lehman executives and the most significant accusations facing their auditor, Ernst Young.
“We are pleased that Judge Kaplan’s ruling dismisses most of the claims against us in this matter, and we strongly believe that we will ultimately prevail on the remaining claim,” Charlie Perkins, a spokesman for Ernst, said in a statement.
But the auditing firm still faces a lawsuit from the New York attorney general, who accused the firm of helping Lehman “engage in a massive accounting fraud.” Ernst Young has said it stands by its audits.
The remaining claims against the former Lehman executives charge that the giant investment bank overstated its financial health as it was collapsing in 2008.
The complaint centers on Lehman’s questionable use of so-called Repo 105 transactions, short for repurchase agreements. The transactions, which some accounting experts have labeled as a gimmick, helped Lehman temporarily hide billions of dollars in assets off its balance sheet and appear to reduce its mounting leverage. Lehman executed the transactions in Britain, some say, because it was unclear whether they would be legal under United States law.
“This repetitive, temporary, and undisclosed reduction of net leverage at the end of each quarter is sufficient to make out a claim,” Judge Kaplan said in his ruling.
The practice first came to light through a court-appointed examiner’s report in 2010. The investors seized on the report’s findings while lawyers for Lehman officials played down its significance.
“As if it were manna from heaven, plaintiffs have relied on certain parts of the report, but ignore its conclusions,” said a filing by lawyers for the defendants. “The report found no colorable claim against any party arising out of four of the five topics that are the subject” of the suit.
Lawyers for Mr. Fuld, Ms. Callan and Mr. Gregory did not return requests for comment.
The suit accuses the Lehman executives of exaggerating the firm’s risk management practices on conference calls with investors. For instance, in a March 18, 2008, conference call, Ms. Callan referred to Lehman’s “continued diligence around risk management,” according to the suit.
But as Lehman promoted its standards, investors say, the firm was suffering from excessive risk-taking that spawned its demise.
Judge Kaplan, at least for now, agreed.
The lawsuit, he said, “sufficiently alleges facts giving rise to an inference that these defendants were involved in setting Lehman’s risk policies and knew that the statements concerning enforcement of risk management policies were false.”
Judge Kaplan’s Ruling in Lehman Brothers Litigation
This post has been revised to reflect the following correction:
Correction: July 28, 2011
A photograph in an earlier version of this article was incorrectly credited. The photograph was taken by Daniel Acker for Bloomberg, not Patrick Andrade for The New York Times.
Article source: http://feeds.nytimes.com/click.phdo?i=4988b7b741791209cbd12cdd16f0273e