March 13 (Bloomberg) -- Lehman Brothers Holdings Inc.’s Richard Fuld exuded confidence as he briefed analysts on June 16, 2008, four days after demoting his firm’s finance chief in
the wake of a $2.8 billion quarterly loss.

“I am the one who ultimately signs off and I’m comfortable with our valuations at the end of our second quarter,” then- Chief Executive Officer Fuld said on the conference call. “We
have always had a rigorous internal process.”

The rigor was based on a shaky foundation, according to a 2,200-page report about the firm’s demise by Anton Valukas, the examiner for the bankrupt firm. Lehman Brothers “reverse-
engineered” a key measure of stability, masking the firm’s true
financial condition, Valukas said. Some asset valuations were
also “unreasonable,” he said.

Keen to show that it had reduced leverage, a gauge of a company’s ability to withstand losses, Chief Financial Officer Ian Lowitt said on the June 16 call that the firm had shrunk its
net leverage ratio to 12 times from 15.4 in the second quarter.

It accomplished the feat by reducing net assets by $70 billion, said Lowitt, who had just replaced Erin Callan in his post. “We’re going to operate conservatively,” he said.

Unbeknownst to shareholders, the firm was hiding $50 billion in assets through off-balance-sheet transactions known as Repo 105s that temporarily removed holdings until days after
the quarter closed, according to Valukas. In the first quarter,
the firm had used the same strategy to hide $49 billion in
assets, he said in the report.

‘Shenanigans’

Lehman Brothers actions amounted to no more than “shenanigans,” said Sanford C. Bernstein & Co. analyst Brad Hintz, a former Lehman chief financial officer. “If all you’re
doing is hiding something behind the curtain, the financial
strength isn’t there.”

The repos helped prop up Lehman’s credit rating, Valukas said. The off-balance dealings required more collateral than if Lehman had opted for ordinary transactions visible to
shareholders, he said.

“Repos were just one of many ways to hide losses,” said Janet Tavakoli, president of Chicago-based financial consulting firm Tavakoli Structured Finance Inc. “All of the former
investment banks used those techniques. All of them borrowed too
much money and were overleveraged.”

Lehman Brothers bolstered capital by raising about $12 billion from investors during the first half of 2008, a time when Valukas said the New York-based firm’s financial statements
were misleading.

‘Grossly Negligent’

Investors included Blackrock Inc., the largest publicly traded fund manager in the U.S., a venture run by former American International Group Inc. CEO Maurice “Hank”
Greenberg, and New Jersey government retirees.

Fuld, 63, was “at least grossly negligent in causing Lehman Brothers to file misleading periodic reports,” Valukas said.

Fuld’s lawyer, Patricia Hynes, disputed the examiner’s conclusions.

“Mr. Fuld did not know what those transactions were -- he didn’t structure or negotiate them, nor was he aware of their accounting treatment,” Hynes said in a statement. She also said
none of Lehman’s senior financial officers, lawyers or outside
auditors raised concern about the transactions with Fuld.

Robert Cleary, a lawyer for Callan at Proskauer Rose, didn’t return a call seeking comment. Callan, 44, who left Lehman in July 2008 to join Credit Suisse Group AG, stepped down
from the Swiss bank Dec. 31, spokesman Duncan King said.

Real Estate Overvalued

Lewis Liman, a lawyer for Lowitt, 46, said in an e-mail that his client did nothing wrong. Lowitt is now chief operating officer at Barclays Wealth Americas, whose parent, Barclays Plc,
bought Lehman’s North American brokerage for $1.54 billion.

In its final year, Lehman overvalued real-estate holdings, including a stake in U.S. apartment developer Archstone-Smith Trust, Valukas said. Lehman and Tishman Speyer Properties LP
completed a joint acquisition of Archstone for $22 billion,
including debt, in October 2007.

Lehman presented “unreasonable” valuations of its Archstone stake in the first three quarters of 2008, overvaluing the holding by as much as $450 million in the second quarter,
the examiner wrote.

The bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).