Dick Fuld, the former chairman and chief executive of Lehman Brothers, and some of his closest lieutenants used a “lazy accounting gimmick” to hide the bank's insolvency, an explosive report by a court-appointed legal examiner
has found.

Anton Valukas, of Jenner & Block, who was appointed examiner by the judge handling Lehman’s bankruptcy, paints a damning picture of the 158 year-old
bank’s final two years, branding it as a hothouse institution so obsessed
with growth that senior executives said openly they did not want to hear
“too much detail” about the risks they might face in case it held them back.

The examiner concluded that although Lehman’s top management chose to disregard or overrule the firm’s risk controls on a regular basis, and while
certain of their risk decisions were “unwise” and represented poor judgment,
this did not amount to a breach of fiduciary duty.

He was scathing, however, about the bank’s “inherently improper” use of an accounting practice known as Repo 105, designed to remove temporarily $50
billion of debt from its balance sheet, without telling investors or
regulators.

Lehman’s auditor Ernst & Young is also criticised in the report, “for among other things its failure to question and challenge improper or
inadequate disclosure in those financial statements".

When Lehman filed for bankruptcy on September 15, 2008, with about $600 billion in debt, its collapse contributed to the freezing of credit markets
worldwide and to the depth of the global recession.

Judge James Peck, who is handling the Lehman bankruptcy in the Bankruptcy Court of the Southern District of New York, appointed Mr Valukas a year ago
to investigate the events that led to Lehman’s collapse, including any
possible “fraud, dishonesty, incompetence, misconduct, mismanagement or
irregularity”.

On Thursday, Judge Peck unsealed Mr Vulakas’s report, which had been presented to him last month.

The meticulously researched 2,200-page document describes Lehman’s aggressive growth strategy which, Mr Vulakas said, was intended to take advantage of
the sub-prime mortgage crisis that broke in 2006 by increasing its exposure
to real estate when others were cutting back.

Although he concluded that Lehman’s aggressive expansion and its attitude to risk were not so “reckless and irrational” as to give rise to a breach of
fiduciary duty, the examiner emphasised that it was precisely the company’s
lax attitude to risk that drove it to use the Repo 105 accounting device to
cover its tracks.

“Lehman’s failure to disclose the use of an accounting device to significantly and temporarily lower leverage, at the same time that it affirmatively
represented those 'low' leverage numbers to investors as positive news,
created a misleading portrayal of Lehman’s true financial health,” he said.

He noted that the sole function of the Repo 105 transactions was “balance sheet manipulation”, adding that even Lehman’s own accounting personnel
described them as an “accounting gimmick” and a “lazy way of managing the
balance sheet”.

Mr Valukas concluded that there were “colourable claims” against Mr Fuld, Christopher O’Meara, Lehman’s head of risk, Erin Callan, the chief financial
officer, Ian Lowitt, who replaced Ms Callan as chief financial officer, as
well as Ernst & Young “in connection with their failure to disclose the
use of the [Repo 105] practice”.

He described a “colourable claim” as one for which “there is sufficient credible evidence” to support a finding in a court.

Mr Valukas also concluded that, after Lehman’s collapse, Barclays may have received “a limited amount of assets” improperly when it took control of
Lehman’s core US brokerage.

He added that Lehman could have potential claims against JPMorgan Chase and Citibank in connection with demands for collateral and certain changes made
to guarantee agreements in Lehman’s final days.

The long-awaited report, which cost $38 million to produce, is likely to give ammunition to shareholders suing Lehman as well as to government
prosecutors.

Compiled with the help of a team of 70 attorneys, it is based on more than 250 interviews, 5 million documents and 26 million pages of company e-mails.

Hector Sants, chief executive of Britain’s Financial Services Authority (FSA), was the only person who refused to be interviewed.

However, the FSA did provide detailed, written answers to specific questions regarding the FSA’s involvement in the weekend before Lehman’s collapse and
in the Barclays transaction that would have been posed to Mr Sants.