Corporate Governance

From the Pages of The Pomerantz Monitor: Feds Launch Multiple Criminal Investigations of Lehman

By Carolyn Moskowitz

The November issue of The Pomerantz Monitor reports on the ongoing imbroglio at Lehman Brothers. As Lehman?s former CEO was being grilled on Capitol Hill, the FBI announced that it had opened a criminal investigation into the public statements Lehman made, attempting to reassure investors about its financial condition weeks and days before its collapse. Three separate U.S. Attorney?s offices have also launched investigations. According to a lengthy front-page article in the WSJ, there is good reason to believe that Lehman was internally engulfed by fear for its own survival while it put on a happy face for investors.

Rumors about Lehman?s perilous condition had been circulating for months, as it desperately, and unsuccessfully, searched for a capital infusion. When its latest attempt to raise capital from the Korea Development Bank fell through, the news caused Lehman?s stock to fall by 45% on a single day, September 9. J.P. Morgan Chase, Lehman?s clearing bank, demanded that Lehman put up an additional $5 billion in capital as collateral. Lehman then scheduled an investor conference call for the next day, at which it planned to announce earnings ahead of schedule and disclose plans for a restructuring. The night before, however, additional capital raising efforts failed again, and Lehman?s executives recognized that the company would have to raise an additional $3-5 billion in relatively short order.

But Lehman went ahead with the conference call anyway. Although it announced that it had suffered a $3.9 billion quarterly loss, it denied that it needed additional capital. Transcripts of the call reportedly show that a Deutsche Bank analyst asked whether Lehman would need to raise $4 billion, and Lehman?s CFO said that ?we don?t feel that we need to raise that additional amount? and that ?our capital position at the moment is strong.? The U.S. Attorney?s office in Brooklyn, New York is reportedly looking into whether Lehman executives lied in this and other communications.

Investigators are reportedly also looking into whether Lehman?s financial statements were inflated prior to the bankruptcy. The U.S. Attorney for Manhattan has issued subpoenas to individuals that focus on what the firm told investors and other parties about its valuations of approximately $32.6 billion in commercial real estate holdings. When Lehman tried to sell these assets to other institutions prior to its bankruptcy, the potential buyers reportedly concluded that the portfolio was being overvalued by as much as 35%.

The U.S. Attorney?s office for New Jersey is reportedly investigating whether Lehman misled New Jersey?s pension fund when it provided information in connection with a $6 billion stock offering in June, in which New Jersey invested about $180 million.

Full post as published by PomTalk on November 19, 2008 (boomark / email).