This is a class action lawsuit against Lehman Brothers, certain former and current officers and directors and underwriters alleging federal security fraud violations.
This case arises from Lehman's lack of transparency and undisclosed exposure to losses from its massive real estate and mortgage portfolio while the Defendants repeatedly and publicly distinguished Lehman from its peers and claimed a strong capital base and superior hedging and risk management practices. As a result, Defendants were able to raise billions of dollars from public investors through false and misleading offering documents. Ultimately, however, Lehman petitioned for bankruptcy on September 15, 2008 - the largest corporate bankruptcy in the history of the United States.
Lehman was a major participant in all aspects of the mortgage and real estate markets, including originating residential and commercial mortgages; securitizing loans; marketing various asset -backed instruments ; and investing directly in real estate. Well before the Class Period started on June 12, 2007, the real estate and mortgage markets were in the midst of an unprecedented meltdown that adversely affected the market value of real estate and mortgage assets. Hundreds of companies with mortgage exposure had taken massive mortgage-related writedowns, ceased operations or petitioned for bankruptcy. In an environment defined by:
(i) a decline in property values;
(ii) an increase in mortgage defaults;
(iii) a decline in the value of mortgage backed securities ("MBSs" );
(iv) rating agency downgrades of MBSs; and
(v) severe financial difficulties experienced by mortgage originators and other investment banks,
firms like Citigroup, Merrill Lynch, Morgan Stanley , Bear Stearns , and UBS booked enormous gross losses related to their mortgage assets and the credit squeeze in 2007. For example, in June 2007, Bear Stearns announced that it would provide a $3.2 billion bailout of two of its hedge funds after they experienced significant mortgage-related losses . Those funds collapsed in July after incurring additional losses on their mortgage positions.
Lehman, however, increased its leverage position as it expanded its real estate and mortgage portfolio before and during the Class Period, reaching over thirty times shareholder equity by the end of the first quarter of 2008. Lehman assured investors, falsely, that its exposure to the real estate market meltdown was well contained, due, in part, to its claimed excellence in "hedging against losses in that sector."
Lehman's efforts to appear better situated than other institutions (or than its actual circumstances) were pervasive throughout the Class Period. Lehman's financial reports during the Class Period lacked transparency, masking Lehman's exposure to mortgage-related losses. For instance, despite the severe conditions in the real estate and mortgage markets during the second quarter of 2007 (ending May 31, 2007), Lehman's SEC filings disclosed no gross writedowns of its real estate and mortgage-related assets during the quarter, but instead reported that the Company increased its holdings of such assets. Likewise, when reporting its third quarter 2007 results on September 18, 2007, Lehman omitted material information regarding Lehman's (internal) gross writedowns of its real estate mortgage portfolio. Even when specifically asked for a simple breakdown of the gross versus net writedowns (offset by hedges) associated with the mortgage assets, Defendant Christopher O'Meara, the Chief Financial Officer at the time, refused to provide the information: "[K]nowing the gross numbers particularly in that business, I don't think is really a meaningful thing."
By September 15, 2008, Lehman's share price declined over 94% from the previous day to $0.21 per share. Before the markets opened on September 15, Lehman filed its petition for bankruptcy, claiming assets of $639 billion and liabilities of $613 billion. Bankruptcy proceedings are underway, and Lehman is in the process of selling assets to satisfy its creditors. The asset sales have been at fractions of book value or previously assumed levels of value.
In the aftermath, the Federal Bureau of Investigation, as well as the United States Department of Justice, are investigating Lehman and its senior executives for fraud.
Name (Stock Symbol)
Lehman Brothers Holdings Inc. (LEHMQ.PK)
Lehman Brothers Holdings, Inc., through its subsidiaries, provided financial services to corporations, governments and municipalities, institutions, and high-net-worth individuals worldwide. It is in bankruptcy.
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