Lehman Executives, Auditor Must Defend Investor Lawsuit, Judge Rules

July 27, 2011

Former Lehman Brothers Holdings Inc. executives, directors, auditors and underwriters on Wednesday lost their bid to dismiss an investor lawsuit seeking to hold them responsible for losses tied to the investment bank’s collapse.

In a 106-page ruling, U.S. District Judge Lewis Kaplan in Manhattan said the plaintiffs, which include pension funds, companies and individuals, sufficiently alleged that Lehman materially misled them about its accounting and its ability to manage risk ahead of its Sept. 15, 2008, bankruptcy.

The investors had bought some of the more than $31 billion of equity and debt that Lehman had issued under a 2006 shelf registration statement and subsequent filings. Among the defendants who failed to win dismissal are former Lehman Chief Executive Richard Fuld, and former auditor Ernst & Young.

Kaplan said “it is entirely plausible” that the “misleading picture” Lehman portrayed about its financial conditions inflated its stock price, and resulted in investor losses.

The complaint “adequately alleges misstatements and omissions that overstated Lehman’s financial strength, misstated and understated the extent to which it was leveraged, misstated its risk management practices, and understated its exposure to Alt-A and commercial real estate assets,” Kaplan wrote. “Alt-A” refers to mortgages that typically did not require documentation of income or assets.

(Reporting by Jonathan Stempel, editing by Maureen Bavdek)

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