By Linda Sandler, Bob Van Voris and Don Jeffrey
March 12 (Bloomberg) -- JPMorgan Chase & Co. and Citigroup Inc. helped cause the failure of Lehman Brothers Holdings Inc. by demanding more collateral and changing guarantee agreements, according to a court-ordered report on the biggest bankruptcy in U.S. history.
“The demands for collateral by Lehman’s lenders had direct impact on Lehman’s liquidity,” said Anton Valukas, the bankruptcy examiner, in a 2,200-page document filed yesterday in Manhattan federal court. “Lehman’s available liquidity is central to the question of why Lehman failed.”
Former Lehman Chief Executive Officer Richard Fuld, ex- Chief Financial Officer Erin Callan, former Executive Vice President Ian Lowitt and former Managing Director Christopher O’Meara certified misleading statements about the bank’s finances, according to the report. Fuld, 63, was “at least grossly negligent,” Valukas said. New York-based Lehman collapsed in September 2008 with $639 billion in assets.
In addition to his conclusions regarding New York-based Citigroup and JPMorgan, Valukas said of London-based Barclays Plc’s purchase of Lehman’s North American brokerage that a “limited amount of assets” belonging to Lehman were “improperly transferred to Barclays.” He added that the value of the assets may not be “material.”
Kerrie Cohen, a Barclays spokeswoman in New York, and Brian Marchiony, a JPMorgan spokesman, declined to comment.
Preliminary Review
Danielle Romero-Apsilos, a spokeswoman for 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.”
Lewis Liman, a lawyer for Lowitt, who is now at Barclays, said in an e-mailed statement his client did nothing wrong.
“In the three months during which he held the job, Mr. Lowitt worked diligently and faithfully to discharge all of his duties as Lehman’s CFO,” Liman said. “Any suggestion that Mr. Lowitt breached his fiduciary duties is baseless.”
Barclays is Britain’s second-biggest bank. Citigroup is the third biggest U.S. bank, and JPMorgan is second. Bank of America Corp. is the biggest U.S. bank by assets.
Fuld was warned months before the bankruptcy by Treasury Secretary Henry Paulson that Lehman might fail if it continued to report losses without finding a buyer or formulating a survival plan, according to Valukas’s report.
‘Grossly Negligent’
Fuld was “at least grossly negligent in causing Lehman to file misleading periodic reports” while its risks were rising because of long-term assets financed with short-term debt, Valukas said in the report.
Lehman’s executives engaged in conduct ranging from “non- culpable errors of business judgment” to “actionable balance sheet manipulation,” as they used “accounting gimmicks” to move assets off the balance sheet without disclosing that to the government, rating-agencies, investors or Lehman’s board.
Fuld’s lawyer, Patricia Hynes, disputed the examiner’s allegation that the Lehman estate has a claim against him relating to transactions called “Repo 105 transactions.”
“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 concerns about the transactions with Fuld.
Erika Burk, a lawyer who represents O’Meara in Lehman- related securities lawsuits, didn’t return a call seeking comment after regular business hours yesterday. Robert Cleary, a lawyer for Callan, said he hadn’t seen the report and declined to comment.
A Judge’s Son
Valukas, 66, a judge’s son, is chairman of the Chicago- based law firm Jenner & Block LLP, where his clients have included David Radler, Hollinger International Inc.’s former president. As U.S. Attorney in Chicago from 1985 to 1989, he was dubbed the Midwest’s Rudolph Giuliani for his hard line on white-collar crime, according to a 1989 New York Times profile.
In his report, he said that Ernst & Young LLP, Lehman’s auditing firm, failed to question inadequate disclosures by the Lehman executives.
The examiner said Lehman’s directors are “immunized from personal liability” concerning the way the company handled risk because management hadn’t presented any “red flags” to them.
“Our last audit of the company was for the fiscal year ending Nov. 30, 2007,” said Charlie Perkins, a spokesman for Ernst & Young, in an e-mailed statement. “Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.”
$38 Million
Valukas spent a year and $38 million producing the report. He interviewed more than 100 people including U.S. Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and former U.S. Securities and Exchange Commission Chairman Christopher Cox, and scrutinized more than 10 million documents, plus 20 million pages of e-mails from Lehman, according to filings in U.S. Bankruptcy Court in New York.
“There are a limited number of colorable claims for avoidance actions against JPMorgan and Citibank,” Valukas said in the report. He defined a colorable claim as sufficient credible evidence to persuade a jury to award damages at trial.
Barclays bought Lehman’s brokerage for $1.54 billion. Lehman has sued Barclays for at least $5 billion, saying it made a “windfall” on the purchase. Barclays responded that it’s owed $3 billion. A bankruptcy-court trial is set for April 26.
Improperly Transferred
The assets improperly transferred to Barclays included equipment with a book value of less than $10 million and customer information of “questionable value” that Barclays didn’t obtain in a “wrongful or unlawful” way, Valukas said. He found “limited colorable claims” against the bank for the transfers. The examiner found no evidence that any securities transferred to Barclays in the sale of the brokerage were owned by Lehman or its affiliates.
JPMorgan and Citigroup were two of New York-based Lehman’s main short-term lenders. On Feb. 24, Lehman said it settled with JPMorgan over the last of $29 billion in claims the bank filed against Lehman.
Citigroup, which handled currency trades for Lehman, received a new guarantee from Lehman when the now-bankrupt firm was already insolvent and didn’t give enough value in return, the report said.
“The examiner concludes that a colorable claim exists to avoid the amended guaranty as constructively fraudulent,” Valukas’s report said.
Lehman CEO Bryan Marsal said in an e-mail that he would “carefully evaluate” Valukas’s report to assess how it might help “ongoing efforts to advance creditor interests.”
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
