MercoPress. South Atlantic News Agency

Lehman Brothers had been using “accounting gimmicks” for years

Court-appointed examiner Anton Valukas report is lapidary

Former bosses at Lehman Brothers have been accused of using an “accounting gimmick” to hide billions in losses which helped bring about its collapse. The technique, called “Repo 105”, was used to temporarily remove 50 billion US dollars of assets from the US investment bank's balance sheet in 2008, according to a one-year investigation.

This gave the appearance that Lehman was in a stronger financial position than it really was. The 2,200-page report by court-appointed examiner Anton Valukas said the bank had been insolvent for weeks before it filed for bankruptcy in September 2008.

The allegations are likely to give ammunition to shareholders suing Lehman.

Former chief executive Dick Fuld and chief financial officers Chris O'Meara, Erin Callan and Ian Lowitt could face claims for negligence or breach of fiduciary duty.

They failed to disclose the use of Repo 105, said Mr Valukas, chairman of law firm Jenner and Block.

Mr Fuld's lawyer said her client “did not know what those transactions were. He didn't structure them or negotiate them, nor was he aware of their accounting treatment.”

Mr Valukas also suggested Lehman may be able to pursue claims against banks like JP Morgan and Citigroup. They could have contributed to Lehman's slide into bankruptcy by taking 16 billion in collateral out of the firm's coffers as it struggled to stay afloat, he said.

“Repo 105” is a legal accounting device that involves shifting around assets to reduce the size of a company's balance sheet, and effectively give the appearance that debts have been cut.

Lehman began using Repo 105 in 2001, but the practice was “dramatically” ramped up from late 2007, the report said.

An e-mail from Bart McDade, former head of equities, suggested Lehman was addicted to Repo 105. “I am very aware... it is another drug we're on,” he wrote.

London appears to have played a key role in approving Lehman's use of Repo 105. The report says Lehman at first tried to find a US law firm that would approve its shifting around of assets.

Unable to get US clearance, Lehman turned to London law firm Linklaters, which advised that the practice was allowed under UK law.
So, assets Lehman wanted to “hide” were transferred to the London operation, which would “conduct the [Repo] transaction on their behalf,” the report said.