In what is likely to kick-start a series of costly and long-running court cases, the exhaustive investigation found that the two Wall Street banks
demanded significant amounts of capital and extra guarantees in the run-up
to Lehman's
downfall – with JP Morgan Chase requesting $5bn (£3.3bn) just three
days before Lehman's bankruptcy filing.
At the same time, Lehman directors, including chairman Dick Fuld and former
finance director Erin Callan, failed to disclose key practices, and
certified misleading statements. The
astonishing claims are made in a 2,200-page, nine-volume report
written by court-appointed examiner Anton
Valukas, which Judge James Peck admitted read "like a best
seller".
The explosive report also calls into question:
• The use of accounting tactics designed to move $50bn from Lehman's balance
sheet.
• The work of auditor Ernst & Young.
• Barclays' subsequent purchase of Lehman's US assets.
Among Mr Valukas's findings – which are designed to help the court and the
bank's trustees establish where there may be legal grounds for future claims
– he asserts that the evidence "may support the existence of a .
. .[valid] claim that JP Morgan breached the implied covenant of good faith
and fair dealing by making excessive collateral requests" to Lehman.
"The demands for collateral by Lehman's lenders had direct impact on
Lehman's liquidity pool," he says.
Turning to the role of the bank's directors, Mr Valukas argues that none of
the board breached their fiduciary duties in the run-up to Lehman's
downfall. He found that while the directors should have exercised greater
caution in decisions taken, they did not cross the line into "gross
negligence".
However, he does touch significantly on the role of what is known as "Repo
105" – essentially a set of accounting techniques which, all
told, removed approximately $50bn of assets from the bank's balance sheet
for the two quarters before it collapsed.
"Lehman never publicly disclosed its use of Repo 105," the report
reads, even though Martin Kelly, the bank's chief financial controller,
raised the issue with Ms Callan and her successor Ian Lowitt.
The report also moves forward the long-running legal battle between Barclays –
which bought the bulk of Lehman's US brokerage assets days after it
collapsed – and Lehman's trustees. Mr Valukas found that a "limited
amount of assets" belonging to Lehman were "improperly transferred
to Barclays". His comments provide extra weight behind Lehman's
trustees' existing claim that Barclays received an $8bn "windfall"
when it bought the assets, a trial over which is due to begin on April 26.
In addition, the report finds that there is enough evidence for a possible
claim against Ernst & Young, Lehman's auditor. The report, which was
lodged with the court in February, was made public yesterday after Judge
Peck agreed to it being unsealed.
Spokesmen for JP Morgan Chase, Barclays and Ernst & Young declined to
comment or had not commented at the time of going to press. Citigroup said
in an e-mailed statement that the bank is reviewing the report, and that a
preliminary analysis shows the examiner “has not identified any wrongdoing
on Citi’s part.”
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