Lehman Bros. used accounting trickery to hide problems, examiner says

NEW YORK — A court-appointed examiner investigating the failure of Lehman Bros. has accused the investment bank of using accounting trickery to hide its troubled finances, blaming senior executives and auditor Ernst & Young for major lapses that led to the firm's collapse and helped trigger a global financial meltdown.

The 2,200-page report, unsealed late Thursday, says executives manipulated Leh­man's balance sheet, using a "materially misleading" accounting trick to temporarily remove $50 billion of troubled assets.

The report says Richard Fuld, then chief executive of Lehman, was "at least grossly negligent" and that accounting firm Ernst & Young could be accused of professional malpractice.

"Unbeknownst to the investing public, rating agencies, government regulators and Leh­man's board of directors, Lehman reverse-engineered the firm's net leverage ratio for public consumption," says the report by the examiner, Anton Valukas, a former federal prosecutor.

Lehman's bankruptcy filing in September 2008, the largest in U.S. history, helped spread fear throughout the global financial system and prompted the federal government to step in with a multibillion-dollar rescue package.

The report identifies various causes of the 158-year-old firm's failure, including demands for collateral by rival investment banks such as JPMorgan Chase that squeezed Lehman to bankruptcy.

But the report focuses on an accounting method used by Lehman — known as "Repo 105" within the firm — to reverse-engineer results. According to the report, the move made the firm's use of leverage, or borrowed money, appear less than it actually was by temporarily hiding troubled assets, and it deceived shareholders about Lehman's ability to withstand losses.

The report says Fuld instructed executives to reduce the bank's debt levels and that executives turned to "Repo 105" to comply. Fuld told the examiner that he did not recall use of the accounting device but that he would have been concerned about it had he known, the report says.

Senior executives at Lehman and Ernst & Young were aware that the accounting device was used, the report says.

"Ernst & Young took no steps to question or challenge the nondisclosure by Lehman of its use of $50 billion of temporary, off-balance sheet transactions," it says.

In a statement, Ernst & Young said Lehman's failure was the result of "unprecedented adverse events in the financial markets."

Lehman Bros. used accounting trickery to hide problems, examiner says 03/12/10 [Last modified: Friday, March 12, 2010 9:19pm]

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