Legal News

When U.S. Firms Balked at Lehman?s Moves, Lehman Took them East

By Ashby Jones

We tip our hat this morning to the folks over at the NYT’s Dealbook blog, who on Friday offer up this detailed discussion of an accounting maneuver allegedly used by Lehman Brothers to make some $50 billion of assets disappear from its balance sheet.

The quick background: The news out Friday on Lehman, which went belly-up in the throes of the September 2008 market meltdown is this: A blistering bankruptcy examiners’ report released late Thursday blames senior executives at Lehman Brothers and auditor Ernst & Young for serious lapses that led to the largest bankruptcy in U.S. history and hastened the worst financial crisis since the Great Depression.

In particular, it alleges that Lehman executives manipulated its balance sheet, withheld information from the board, and inflated the value of toxic real estate assets. Click here for the WSJ story; here for the NYT story. Click here, also, for Amir Efrati’s piece on the examiner, Jenner & Block’s Anton Valukas. Through January of this year, Jenner had received $38.4 million for its work on the report.

But our interest in the Dealbook item was piqued by mention of a certain large U.K.- based law firm, Linklaters. Dealbook item explores one of the moves at the heart of Lehman’s alleged shenanigans, a maneuver called “Repo 105.” Reports Dealbook:

When Lehman first designed Repo 105 in 2001, however, there was one catch. The firm couldn't get any American law firms to sign off on the aggressive accounting . . .

. . .

Enter Linklaters, which grounded its legal brief in English, rather than American, law. The firm explicitly said: "This opinion is limited to English law as applied by the English courts and is given on the basis that it will be governed by and construed in accordance with English law."

According to Dealbook, “Linklaters provided Lehman with exactly what it wanted to hear.”

In a statement to Dealbook, Sarah Peters, a spokeswoman for the law firm, made sure to mention that the opinion was made under U.K. law.

The U.S. examiner's report into the failure of Lehman Brothers includes references to English Law opinions which Linklaters gave in relation to a number of Lehman transactions. The examiner – who did not contact the firm during his investigations – does not criticise 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.

In other words, the maneuver could only be carried out outside the U.S.

Our question: What’s up with this? What’s to stop a company from jurisdiction shopping until it finds a country that smiles on whatever shenanigans it feels like pulling? It’s one thing, if the behavior affects a limited number of markets, but in this instance, it obviously didn’t — there’s hardly a country in the world that hasn’t been beaten down by the financial crisis.

Even if Linklaters acted well within the bounds of U.K. law, should it (or any firms in like situations) give guidance that provides broader context? Or does the blame funnel back, yet again, to the brass at Lehman, who should have been well aware of the potential impact of their decisions?

Full post as published by Law Blog - WSJ.com on March 12, 2010 (boomark / email).