The investors who filed the lawsuit have "adequately alleged" that the former Lehman executives, including ex-Chief Executive Richard Fuld and ex-finance chief Erin Callan, and other defendants misled them about Lehman's financial health, leverage, risk management and exposure to dicey mortgage and real-estate assets, ruled Judge Lewis A. Kaplan of the U.S. District Court in Manhattan.
The investors—pension funds, companies and individuals who bought $31 billion in Lehman debt and stock—say the defendants made misleading statements and omissions that caused them losses when Lehman collapsed into bankruptcy in 2008. Specifically, they contend, Lehman's use of "Repo 105" transactions—repurchase agreements that allowed Lehman to lower its leverage temporarily—falsely allowed the bank to present itself as financially stronger than it really was. The plaintiffs are seeking class-action status for the suit.
Judge Kaplan rejected the defendants' attempt to dismiss the entire case, but he threw out some claims, particularly some of those against Ernst & Young LLP, Lehman's independent auditor. The judge did allow a claim to continue alleging that E&Y made misstatements in July 2008 about Lehman's compliance with accounting rules when in fact E&Y was aware of the bank's use of Repo 105s, which "cast into doubt" whether its balance sheet was consistent with generally accepted accounting principles.
Steve Singer, an attorney for the plaintiffs, said he was pleased with the ruling. The "vast majority" of the case will go forward, he said, including the core allegations, and all of the defendants remain in the case.
Michael Chepiga, an attorney for Christopher O'Meara and Joseph Gregory, two former Lehman executives who are defendants, said the judge's ruling was "a long, complicated opinion with a lot of issues. We're studying it closely."
Ernst & Young said in a statement that it was "pleased that Judge Kaplan's ruling dismisses most of the claims against us in this matter, and we strongly believe that we will ultimately prevail on the remaining claim." Adam Wasserman, an attorney for Lehman's independent directors, said he was "confident" that the evidence "will demonstrate that the independent directors acted diligently and appropriately."
Robert Cleary, an attorney for Ms. Callan, declined to comment. A spokeswoman for UBS AG, one of Lehman's underwriters, also declined to comment. Attorneys for other defendants, including Mr. Fuld, couldn't be reached. Lehman itself isn't a defendant in the case.
A 2010 report by a bankruptcy-court examiner, exposing Lehman's use of Repo 105s, raised questions about whether its executives and auditors should face any regulatory action or other sanctions. To date, however, the only case that has been brought is a civil fraud lawsuit by the New York attorney general's office against Ernst & Young, which has denied any wrongdoing.