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2010-04-23%20Lehman%20Third TABLE OF CONTENTS Page I. NATURE OF ACTION ...................................................................................................... 1 II. JURISDICTION AND VENUE .......................................................................................... 2 III. PARTIES AND RELEVANT NON-PARTIES .................................................................. 3 A. Plaintiffs .................................................................................................................. 3 B. Relevant Non-Parties ............................................................................................... 3 C. Defendants ............................................................................................................... 4 IV. CLASS ACTION ALLEGATIONS APPLICABLE TO ALL CLAIMS ........................... 5 V. VIOLATIONS OF THE SECURITIES ACT ..................................................................... 7 A. The Offering Materials Were Materially False And Misleading ............................ 8 1. The Offering Materials Failed To Disclose Lehman’s Repo 105 Transactions ......................................................................................... 8 a. Additional Material Misstatements And Omissions Relating To Repo 105 .................................................. 15 b. GAAP Violations Relating To Repo 105 ...................................... 18 2. The Offering Materials Misrepresented Lehman’s Risk Management Practices ............................................................................... 20 3. The Offering Materials Contained Untrue Statements Regarding Lehman’s Liquidity Risk And Risk Of Bankruptcy ................ 27 4. The Offering Materials Overstated The Value Of Lehman’s Commercial Real Estate Holdings ............................................................ 28 a. Archstone Valuations .................................................................... 29 b. PTG Asset Valuations ................................................................... 30 c. Additional Facts Showing That Lehman’s Commercial Real Estate Holdings Were Overvalued .................................................................................... 32 5. The Offering Materials Failed To Disclose Lehman’s Risk Concentrations ........................................................................................... 33 B. The Lehman/UBS Structured Product Offerings .................................................. 36 VI. CAUSES OF ACTION UNDER THE SECURITIES ACT ............................................. 41 -i- COUNT I Violations Of Section 11 Of The Securities Act Against The Securities Act Defendants ..................................................................................... 41 COUNT II Violations Of Section 12(a)(2) Of The Securities Act Against Defendant UBS ..................................................................................................... 44 COUNT III Violations Of Section 15 Of The Securities Act Against Defendants Fuld, O’Meara, Callan, Gregory And Lowitt ..................................... 45 VII. VIOLATIONS OF THE EXCHANGE ACT .................................................................... 46 A. Repo 105 Transactions .......................................................................................... 47 1. Lehman Utilized Repo 105 For A Fraudulent Purpose ............................. 47 2. Lehman Utilized Repo 105 To Avoid Recording Losses On Illiquid Or “Sticky” Assets While Creating The False Appearance Of Deleveraging .................................................................... 50 B. Liquidity Risk And Overstated Liquidity Pool ..................................................... 52 C. Risk Management .................................................................................................. 52 D. The Insider Defendants’ False And Misleading Statements During The Class Period .................................................................................................... 55 E. Additional Evidence Of Scienter ........................................................................... 67 1. The Insider Defendants Knew Of Repo 105 And The Artificial Balance Sheet Manipulation ...................................................................... 67 2. Insider Defendants Knew Of Lehman’s Disregard Of Risks And Its Liquidity Problems ....................................................................... 71 F. Section 10(b) Allegations Against E&Y ............................................................... 76 1. Material Misstatements By E&Y .............................................................. 76 2. E&Y’s Scienter ......................................................................................... 77 3. E&Y’s Violation Of Auditing Standards .................................................. 80 G. Loss Causation ...................................................................................................... 83 VIII. CAUSES OF ACTION UNDER THE EXCHANGE ACT .............................................. 86 COUNT IV Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder Against The Insider Defendants And E&Y ...................................................................................................................... 86 COUNT V Violations Of Section 20(a) Of The Exchange Act Against The Insider Defendants ................................................................................................. 88 -ii- COUNT VI Violations Of Section 20A Of The Exchange Act Against Defendant Fuld ...................................................................................................... 90 PRAYER FOR RELIEF ................................................................................................................ 91 -iii- GLOSSARY OF TERMS AICPA: American Institute of Certified Public Accountants. ALCO: Asset Liability Committee. Alt-A: Alternative A-paper. Aurora: Aurora Loan Services LLC. ASB: Auditing Standards Board. AU: Statements on Auditing Standards issued by the ASB. AU § 110: Responsibilities and Functions of the Independent Auditor. AU § 230: Due Professional Care in the Performance of Work. AU § 311: Planning and Supervision. AU § 312: Audit Risk and Materiality in Conducting an Audit. AU § 316: Consideration of Fraud in a Financial Statement Audit. AU § 336: Using the Work of a Specialist. AU § 411: The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. AU § 561: Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report. AU § 722: Interim Financial Information. AU § 9336: Interpretation of AU Section 336, Using the Work of a Specialist. BNC: BNC Mortgage LLC. Cap * 105: A method Lehman used to assign value to the collateral underlying its PTG assets. Cash Capital Surplus: A measure of the excess of long-term funding sources over long-term funding requirements. CDO: Collateralized Debt Obligation. -iv- CEO: Chief Executive Officer. CFO: Chief Financial Officer. CLO: Collateralized Loan Obligation. CMBS: Commercial Mortgage-Backed Securities. Commercial Portfolio: Comprised of debt instruments, such as commercial mortgage loans and CMBSs. COO: Chief Operating Officer. Concentration Limits: Exposure limits in a single, undiversified business or area. CRE: Commercial Real Estate. CW: Confidential Witness. Examiner: Anton R. Valukas, the examiner appointed by the court in Lehman’s bankruptcy proceedings, In re Lehman Brothers Holdings Inc., 08-13555 (JMP) (Bankr. S.D.N.Y.). Exchange Act: Securities Exchange Act of 1934. FASB: Financial Accounting Standards Board. FASCON 1: Financial Accounting Standards Board – Statement of Financial Accounting Concepts No. 1, Objectives of Financial Reporting by Business Enterprises. FASCON 2: Financial Accounting Standards Board – Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information. FASCON 5: Financial Accounting Standards Board – Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of Business Enterprises. FID: Lehman’s Fixed Income Division. GAAP: Generally Accepted Accounting Principles. GAAS: Generally Accepted Auditing Standards. GREG: Lehman’s Global Real Estate Group. -v- GRMG: Lehman’s Global Risk Management Group. IRR: Internal Rate of Return. Leveraged Loans: Loans extended to companies or individuals that already have high levels of debt. Liquidity: A measure of the extent to which a firm has cash (or has the ability to convert current assets to cash) to meet immediate and short-term obligations. MBS: Mortgage-Backed Securities. MD&A: Management Discussion and Analysis. PCAOB: Public Company Accounting Oversight Board. PTG: Principal Transactions Group. REIT: Real Estate Investment Trust. Repo: Secured financing transaction allowing a borrower to use securities as collateral for a short-term loan sold for cash to a counterparty with a simultaneous agreement to repurchase the same or equivalent securities at a specific price at a later date. Repo 105: Repo financing transactions accounted for as “sales” as opposed to financing transactions based upon their larger haircuts (or overcollateralization), which ranged from approximately 5% to 8%. Risk Appetite: A measure Lehman used to aggregate the market risk, credit risk, and event risk it faced and to represent the amount the firm was prepared to lose in one year. SEC: United States Securities
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