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CalPERS Accuses Lehman of Fraud

Leo Kolivakis's picture




 

CalPERS suit accuses Lehman Bros. of fraud:

The
nation's largest public pension fund accused Lehman Bros. Holdings
Inc., its former top executives and numerous bond underwriters of fraud
and making materially false statements about losses from
mortgage-backed securities during the financial crisis of 2007 and
2008.

The claims are part of a lawsuit that the California Public
Employees' Retirement System, which oversees a pension fund now valued
at $229 billion, filed late Monday in U.S. District Court in San
Francisco.

While the lawsuit did
not specify damages, it noted that CalPERS owned 3.9 million shares of
Lehman common stock and about $700 million worth of Lehman bonds at
the time that Lehman filed for bankruptcy protection in September 2008.

Lehman filed its bankruptcy, the largest in U.S.
history, in September 2008, four days after saying that it would
report a third-quarter loss of $3.9 billion and write down the value of
its subprime mortgage securities and other assets by $7.8 billion.

The
suit alleged that Lehman, under the direction of Chief Executive
Richard S. Fuld Jr., "dramatically" borrowed to fund its real estate
investment activities from 2004 to 2007, engaging in ever-riskier
activity that was not divulged to investors.

CalPERS also named Fuld as a defendant, along with Citigroup Global Markets Inc., Wells Fargo Securities and Mellon Financial Markets.

A lawyer for Lehman could not be reached.

The
action against Lehman is the second by CalPERS against major Wall
Street players involved in the selling of mortgage-backed securities.

In July 2009, the pension fund sued the three largest financial rating firms — Moody's
Investors Service Inc., Standard & Poor's and Fitch Inc. The suit
faulted the rating companies for giving coveted top grades to bonds
that suffered huge losses from the meltdown of the market for subprime
mortgage securities.

The three rating firms have denied wrongdoing.

In a separate article, Liz Moyer reports in the WSJ, Calpers Alleges Top Lehman Execs Misled On Exposures, Financial:

The
largest U.S. public pension fund accused former top executives of
Lehman Brothers (LEHMQ), nine former directors, and several of its bond
underwriters of making false statements about Lehman's financial
condition in the months leading up to its September 2008 bankruptcy.

 

The California Public Employees' Retirement System, which manages
$228 billion of pension assets, made the allegations in a lawsuit filed
in San Francisco federal court late Monday.

 

Calpers
experienced losses in its investments in Lehman stock and bonds between
June 2007 and September 2008, allegedly because of false and
misleading statements made by Lehman's executives about the firm's
exposures to mortgages, its valuations of mortgage and other loan
holdings, its leverage, and its use of quarter-end accounting gimmicks
that masked its true financial condition.

 

The suit doesn't
quantify damages, but notes Calpers held $700 million worth of Lehman
bonds covered in the lawsuit and another 3.9 million shares of Lehman
at the time of the bankruptcy.

 

Calpers
funds dropped $100 billion in value between September 2008 and March
2009 to $160 billion as a result of the financial crisis, according to a
spokesman, who declined to comment further on the lawsuit.

 

The pension fund has since recovered most of that loss, but it is
still targeting those it sees as having a big hand in the crisis. The
Lehman suit is its fourth pending. The others include a shareholder suit
against Bank of America Corp. (BAC) for its acquisition of Merrill
Lynch, a suit against credit ratings agencies over losses in allegedly
inaccurately rated structured investments, and a suit against Bank of
America's Countrywide Financial.

 

A spokeswoman for Lehman's
bankruptcy estate wouldn't comment. A lawyer for former Lehman Chief
Executive Richard Fuld, who is named as a defendant in the suit,
couldn't immediately be reached.

 

Calpers named Fuld as well
as former Lehman Chief Financial Officers Christopher O'Meara and Erin
Callan and nine Lehman directors along with 33 other firms that
underwrote some of Lehman's bond offerings as defendants, alleging they
failed to disclose Lehman's losses and exposures to subprime and Alt-A
lending and the true value of the company's mortgage-related assets.

I'm
not sure where CalPERS is going with this lawsuit but if they're able
to find out exactly what Dick Fuld and Chris O'Meara knew prior to the
storm, then it's worth the cost. I also think CalPERS is sending a clear
message to bankers: if you screw around again, we will come after you
with everything we got.

There are other developments that I find interesting. Reuters reports that tips from whistleblowers to the Securities and Exchange Commission have increased significantly since the Wall Street reform law was enacted last year:

The
number of "high-value" tips on fraud and other violations of securities
law numbered about two dozen a year before the law. But since July, the
agency has sometimes been receiving one or two a day, Thomas Sporkin,
chief of the SEC's Office of Market Intelligence, told the SEC Speaks
event sponsored by the Practising Law Institute.

 

Whistleblowers
who provide "original information" about large frauds could net as much
as 30 percent of the penalties and recovered funds collected by the SEC
under the Dodd-Frank act.

 

"Sometimes the whistleblower is from within the corporation, sometimes
it's from a competitor, sometimes it's from a counterparty, sometimes
it's even from a jilted spouse," Sporkin said.

 

He also said the tips are now often submitted by a lawyer on behalf of a
whistleblower and are of good enough quality to allow the agency to
begin following up quickly.

More importantly, Bloomberg reports that the FDIC proposes bonus delay for bankers:

BIG
BANK PAY PROPOSAL: Federal regulators have proposed making top
executives at large financial firms wait at least three years to be paid
half or more of their annual bonuses.

 

REINING
IN RISK: The move is designed to cut down on risky financial practices
and tie bonuses to executives' performance over a longer time period.
Pay at Wall Street banks tied to incentives was seen as fueling the
financial crisis.

 

FDIC MOVES: The Federal Deposit Insurance
Corp. also moved Monday to make bigger banks pay a greater portion of
fees to insure all U.S. banks.

Of course this proposal is already being questioned:

Claudia Allen, an attorney and chairwoman of Chicago law firm's Neal Gerber Eisenberg's
corporate governance practice group, said determining the cut off
point between the two extremes is the "holy grail" question of
corporate governance today.

 

"The general question is: Do these
regulations create unnecessary economic costs?" Allen said. "Are they
pro-growth? Are they excessive or just right? There has been a lot of
regulatory interest in how to make sure that boards and executives are
taking prudent risk, not excessive risks."

 

The issue became even
more pronounced after taxpayers stepped in more than two years ago to
bail out financial institutions burdened by debts after a period of
institutionalized risk-taking.

 

Allen said the tough part is
balancing this idea of containing excessive risk with a basic societal
fact that "you have to take some prudent risks to run a business."

 

She said the "question is are the regulators doing it in a way that is prudent, or are we creating other societal costs?"

I
wonder if Ms. Allen has factored in the "societal costs" of millions of
unemployed workers who lost their job following the financial crisis.
For me, it's all about having skin in the game and aligning interests
with shareholders. Warren Buffett was right when he said you got to punish failed bankers:

“If
I was running things, if a bank had to go to the government for help,
the C.E.O. and his wife would forfeit all their net worth,” he said.
“And that would apply to any C.E.O. that had been there in the previous
two years.”

Alignment of interests is why I endorse
CalPERS' latest lawsuit. And it's not just CalPERS. Increasingly,
pension funds are suing banks and companies over a host of issues
ranging from investment losses to overcharging pension plans on currency trades.
In all likelihood, nothing will come out of these lawsuits, but the
message to the financial and corporate elite is clear: if you defraud
investors or cause serious losses through negligence and malfeasance, pensions will come after you.

 

 

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Wed, 02/09/2011 - 03:20 | 945722 Eternal Student
Eternal Student's picture

Thanks for posting this, Leo. I hadn't heard about it elsewhere, and appreciate the info.

Wed, 02/09/2011 - 00:54 | 945500 Founders Keeper
Founders Keeper's picture

Thanks for the article, Leo. These are significant players and spectacular crimes.

IMO, nothing will come of the lawsuits---legally. Calpers is likely pushing the lawsuits to expedite more Federal bailouts for their failed investments. (What? An outfit as big as Calpers doesn't have at least a small department of intelligent employees performing due diligence on multi-billion dollar investments as a matter of fiduciary responsibility? Come on.) There's a lot of blame to go around.

 

 

Wed, 02/09/2011 - 02:09 | 945630 mamba-mamba
mamba-mamba's picture

Well, there can always be a possibility that Lehman flat out lied their asses off to calpers, and knowingly provided false information for purposes of due dilligence evaluation. Usually due dilligence stops short of assuming that the counterparty is operating in bad faith or deliberately deceiving you. Doesn't it?

 

I mean, I don't have any facts. I'm just saying that even a sophisticated buyer can be duped if the seller is willing to blatantly misrepresent facts and provide false documentation.

Wed, 02/09/2011 - 02:25 | 945651 ebworthen
ebworthen's picture

 

"I'm just saying that even a sophisticated buyer can be duped if the seller is willing to blatantly misrepresent facts and provide false documentation."

 Yes, you are right, Uncle Sam dupes a lot of "buyers" (every day) into the "AmeriKan Dream".

 

Wed, 02/09/2011 - 00:48 | 945498 williambanzai7
williambanzai7's picture

I don't think they are going to find what Dick Fuld knew before the storm. We already know his position on these complicated financial matters:

"I didn' now nuttin'"

Which sounds incredulous, but hey Bob Rubin says the same as well as all the rest of them. 

Wed, 02/09/2011 - 00:40 | 945488 I am a Man I am...
I am a Man I am Forty's picture

it's amazing to watch calpers and wall street work together to totally screw over the average joe, now if calpers could just sue someone who didn't go out of business they would really be on to something

Wed, 02/09/2011 - 02:04 | 945621 mamba-mamba
mamba-mamba's picture

Well, aren't most of the people with calpers pensions average joes? How is calpers screwing the average joe here?

Wed, 02/09/2011 - 04:12 | 945755 StychoKiller
StychoKiller's picture

Who do you "think" is paying for all these Legal Eagles?

Wed, 02/09/2011 - 00:16 | 945414 Big Ben
Big Ben's picture

These guys would hypnotize the animals with financial jargon, then offer them loads of free cash. The boars and hyenas would end up deeply in debt (and just as hungry as before).

Wed, 02/09/2011 - 00:20 | 945428 Kali
Kali's picture

lol true!

Wed, 02/09/2011 - 00:12 | 945400 sgorem
sgorem's picture

In China, a fraud committed the size & scope of THE GREAT FUCKING OF THE AMERICAN TAXPAYER, would be dealt with expediently with a 22 shot in the head. Then the bill for the whole thing, including the bullet would be sent to the family of the fraudster, bankster, politician. Why not here? I can think of hundreds, if not thousands of these dregs out there that haven't even been issued a misdemeaner for their part of the destruction of our country, and maybe the world.

Wed, 02/09/2011 - 00:12 | 945405 ebworthen
ebworthen's picture

Exactly.

 

Wed, 02/09/2011 - 00:19 | 945425 Kali
Kali's picture

+ .22   These people are all guilty of treason.

Tue, 02/08/2011 - 23:53 | 945336 apberusdisvet
apberusdisvet's picture

I would put Fuld, Dimon, Mozilo, Frank, Dodd, Bernanke and Geithner (and the rest of the Masturbators of the Universe) in an iron cage with 5 hungry boars (with tusks) AND 10 hyenas and put the whole scene on C-Span.

Wed, 02/09/2011 - 01:59 | 945615 I Am The Unknow...
I Am The Unknown Comic's picture

...it would be interesting to watch and see which one of the banksters eats another bankster first, as well as which bankster gets eaten first.

I doubt the boars and hyenas would want to eat the toxic bansters.....

Oh, and um, banksters could probaly only be caged by silver....

Tue, 02/08/2011 - 23:36 | 945276 ebworthen
ebworthen's picture

 

This is about attorneys making some dough, not about right and wrong.

The only justice will be when those who robbed the work and lives of innocent hard working people hang by the neck.

 

Tue, 02/08/2011 - 23:34 | 945269 Buck Johnson
Buck Johnson's picture

States need money and there is no way to get the crazy money they need from the populace without massive tax increases.  So now they must go after the banks.

Tue, 02/08/2011 - 22:56 | 945151 Careless Whisper
Careless Whisper's picture

In all likelihood, nothing will come out of these lawsuits,

oh really?  and you arrived at this conclusion, how?

 

Tue, 02/08/2011 - 23:03 | 945184 Ned Zeppelin
Ned Zeppelin's picture

Agree, why bother then? I think where's there's this much smoke, there's fire. 

Tue, 02/08/2011 - 22:49 | 945127 max2205
max2205's picture

Love this battle of the greedy half wits

Tue, 02/08/2011 - 22:43 | 945106 ZackAttack
ZackAttack's picture

Warren Buffett was right when he said you got to punish failed bankers:

“If I was running things, if a bank had to go to the government for help, the C.E.O. and his wife would forfeit all their net worth,” he said. “And that would apply to any C.E.O. that had been there in the previous two years.”

 

Methinks the bailout queen speaks with forked tongue.

Tue, 02/08/2011 - 23:01 | 945164 Ckierst1
Ckierst1's picture

Maybe we need to trash corporatism by trashing the corporation.  No mo corporate veil.  Make it closely held and really get some skin in the game.  Why do we need the gummint to run interference for their corporate elites?  I mean, if you are gonna hammer the top dog and his latest trophy, then why bother to keep it?

Tue, 02/08/2011 - 22:36 | 945092 nmewn
nmewn's picture

What part of Rule 701 did a government pension plan have a problem with...exactly?

Maybe there are too many rules?

Tue, 02/08/2011 - 22:30 | 945064 rosiescenario
rosiescenario's picture

About time someone holds these crooks accountable...if nothing else, they'll be made to go through days of deposition.

Tue, 02/08/2011 - 22:27 | 945058 El Hosel
El Hosel's picture

  Just look at the picture, he looks very innocent.  Must be some kind of mistake.

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