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.