Lehman Brothers used '$50bn accounting gimmicks'
A report into the collapse of US investment bank Lehman Brothers found "credible evidence" that senior managers approved misleading financial statements in the run-up to the group's demise.
Lehman's auditor Ernst & Young has also been heavily criticised for its "failure to question and challenge improper or inadequate disclosures" in the report by court-appointed examiner Anton Valukas, which follows a year-long probe.
The long-awaited report accuses senior management, including the former chief executive Dick Fuld, of using "accounting gimmicks" and of "balance sheet manipulation" that hid the dire state of the bank's balance sheet
Lehman was in fact insolvent for weeks before filing for bankruptcy in 2008, according to the report, which states there could be grounds for legal action against former executives.
It alleges $50bn (€36.28bn) of assets were temporarily removed from Lehman's balance sheet in both the first and second quarters of 2008, using an accounting mechanism known as Repo 105, to lower the level of leverage - or debt - on its balance sheet.
"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," the report said.
Ernst & Young today said Lehman's last set of financial statements were "fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view".
Lehman went into administration on September 15, 2008, setting in train a sequence of events that tipped the banking sector - and later the global economy - into its biggest crisis in living memory.
The bank's administration is still rumbling on and is expected to last for many years as administrators seek to recover money for the many thousands of creditors left out of pocket.
However, it is thought the Lehman report could allow the Lehman estate to seek legal action and possibly pave the way for class action lawsuits by investors who bought shares in the bank before its collapse.
PricewaterhouseCoopers, which is handling Lehman's administration in the UK and Europe, said: "We are reviewing the examiner's report for its applicability to the Lehman European estates, but its principal scope concerns events and issues arising at the Lehman Brothers Holding Inc level."
Mr Valukas did not find that Lehman's bosses had explicitly violated their fiduciary duty.
His report also suggested banks including JPMorgan and Citigroup may have compounded Lehman's woes by taking around $16bn (€11.6bn) in collateral from the bank in the final days leading up to its bankruptcy.
