Lehman Used Linklaters Opinion to Justify Aggressive Accounting, Report Says
Updated: Jenner & Block chairman Anton Valukas has released a 2,200-page report on the collapse of Lehman Brothers that details the investment bank’s use of an accounting device dubbed a “Repo 105” to keep debt levels off the books.
Lehman was unable to find a U.S. law firm that would provide an opinion letter classifying the Repo 105 transactions as “true sales” rather than short-term loans, according to Legal Week’s story on the bankruptcy examiner’s report. So Lehman relied instead on an opinion letter by Linklaters intended to apply to the bank’s European operations. There is no suggestion Linklaters acted in conflict with U.K. law, the story says.
The bankruptcy examiner’s report, a year in the making, had earned Jenner & Block $38.4 million in fees as of January, the Wall Street Journal (sub. req.) reports. According to a separate Wall Street Journal (sub. req.) story, the report “alleges that Lehman executives manipulated its balance sheet, withheld information from the board, and inflated the value of toxic real estate assets.”
A New York Times account of the report says it “lays out, in new and startling detail, how Lehman Brothers used accounting sleight of hand to conceal the bad investments that led to its undoing.” Repos were among the “accounting gimmicks” used by the bank, according to the newspaper.
In repos—shorthand for repurchase agreements—firms lend assets to other firms for short periods of time in exchange for short-term loans, the Times says. Such agreements are standard on Wall Street and can help provide crucial financing.
But Lehman used “aggressive accounting” in the transactions, the Times says, selling securities at the end of a quarter and buying them back days later. Because the assets represented 105 percent or more of the cash Lehman received, the transactions were treated as sales rather than financings, the Wall Street Journal story says.
A Repo 105 was used to keep about $50 billion off Lehman’s balance sheet in the second quarter of 2008.
Valukas’ report could influence pending investigations into whether former Lehman executives misled investors about its financial health and whether it improperly valued real estate assets, the Wall Street Journal says.
“The report provides a type of roadmap for Lehman’s bankruptcy estate, creditors and other authorities to pursue possible actions against former Lehman executives, the bank’s auditors and others involved in the financial titan’s collapse,” according to the Wall Street Journal story.
Updated at 10:50 a.m. to include Legal Week story.
