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UNITEDSTATESBANKRUPTCYCOURTSOUTHERNDISTRICTOFNEWYORK
x
Inre
LEHMANBROTHERSHOLDINGSINC.,
etal.,Debtors.
:
:
:
:
:
:
:
Chapter11CaseNo.
0813555(JMP)
(JointlyAdministered)
x
REPORTOFANTONR.VALUKAS,EXAMINER
March11,2010
Jenner&BlockLLP
353N.ClarkStreet
Chicago,IL
60654
3456
3122229350
919ThirdAvenue
37thFloor
NewYork,NY 100223908
2128911600
CounseltotheExaminer
VOLUME1OF9SectionsI&II: Introduction,ExecutiveSummary&ProceduralBackground
SectionIII.A.1: Risk
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EXAMINERSREPORTTABLEOFCONTENTS
VOLUME1Introduction,SectionsI&II: ExecutiveSummary&ProceduralBackground
Introduction ...................................................................................................................................2
I. ExecutiveSummaryofTheExaminersConclusions......................................................15
A. WhyDidLehmanFail? AreThereColorableCausesofActionThatArise
FromItsFinancialConditionandFailure?..................................................................15
B. AreThereAdministrativeClaimsorColorableClaimsForPreferencesor
VoidableTransfers? ........................................................................................................24
C.
DoColorable
Claims
Arise
From
Transfers
of
LBHI
Affiliate
Assets
to
Barclays,orFromtheLehmanALITransaction?.......................................................26
II. ProceduralBackgroundandNatureoftheExamination................................................28
A. TheExaminersAuthority .............................................................................................28
B. DocumentCollectionandReview................................................................................30
C. SystemsAccess................................................................................................................33
D. WitnessInterviewProcess.............................................................................................35
E. CooperationandCoordinationWiththeGovernmentandParties ........................37
SectionIII.A.1: RiskIII.ExaminersConclusions.......................................................................................................43
A. WhyDidLehmanFail? AreThereColorableCausesofActionThatArise
FromItsFinancialConditionandFailure?..................................................................43
1. BusinessandRiskManagement .............................................................................43
a) ExecutiveSummary............................................................................................43
(1)TheExaminerDoesNotFindColorableClaimsThatLehmans
SeniorOfficers
Breached
Their
Fiduciary
Duty
of
Care
by
FailingtoObserveLehmansRiskManagementPoliciesand
Procedures......................................................................................................47
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(2)TheExaminerDoesNotFindColorableClaimsThatLehmans
SeniorOfficersBreachedTheirFiduciaryDutytoInformthe
BoardofDirectorsConcerningTheLevelofRiskLehmanHad
Assumed.........................................................................................................52
(3)
The
Examiner
Does
Not
Find
Colorable
Claims
That
Lehmans
DirectorsBreachedTheirFiduciaryDutybyFailingtoMonitor
LehmansRiskTakingActivities................................................................54
b) Facts.......................................................................................................................58
(1)FromMovingtoStorage: LehmanExpandsItsPrincipal
Investments....................................................................................................58
(a)LehmansChangedBusinessStrategy .................................................59
(b)TheIncreasedRiskFromLehmansChangedBusiness
Strategy.....................................................................................................62
(c)Application
of
Risk
Controls
to
Changed
Business
Strategy ...........65
(i) StressTestingExclusions................................................................66
(ii) RiskAppetiteLimitIncreaseForFiscal2007...............................70
(iii)DecisionNotToEnforceSingleTransactionLimit.....................73
(d)TheBoardsApprovalofLehmansGrowthStrategy.......................76
(2)LehmanDoublesDown:LehmanContinuesItsGrowthStrategy
DespitetheOnsetoftheSubprimeCrisis..................................................78
(a)LehmansResidentialMortgageBusiness...........................................82
(i)
LehmanDecides
to
Curtail
Subprime
Originations
but
ContinuestoPursueAltAOriginations..................................82
(ii) TheMarch20,2007BoardMeeting...............................................90
(b)TheExplosioninLehmansLeveragedLoanBusiness .....................95
(i) RelaxationofRiskControlstoAccommodateGrowthof
LehmansLeveragedLoansBusiness ...........................................97
(c) InternalOppositiontoGrowthofLeveragedLoansBusiness.......100
(d)GrowthofLehmansCommercialRealEstateBusinessatthe
Start
of
the
Subprime
Crisis.................................................................103
(i) RelaxationofRiskControlstoAccommodateGrowthof
LehmansCommercialRealEstateBusiness..............................105
(ii) InternalOppositiontoGrowthofCommercialReal
EstateBusiness ...............................................................................107
(iii)Archstone ........................................................................................108
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a. LehmansCommitment............................................................108
b. RiskManagementofLehmansArchstone
Commitment..............................................................................112
(e)NagioffsReplacementofGelbandasHeadofFID.........................114
(f)
TheBoard
of
Directors
Awareness
of
Lehmans
Increasing
RiskProfile.............................................................................................116
(3)EarlyWarnings:RiskLimitOverages,FundingConcerns,and
theDeepeningSubprimeCrisis ................................................................117
(a)NagioffandKirkTrytoLimitLehmansHighYieldBusiness......119
(b)JulyAugust2007ConcernsRegardingLehmansAbilityto
FundItsCommitments ........................................................................123
(c) LehmanDelaystheArchstoneClosing .............................................128
(d)
Lehman
Increases
the
Risk
Appetite
Limit
to
Accommodate
theAdditionalRiskAttributabletotheArchstone
Transaction.............................................................................................131
(e)CashCapitalConcerns .........................................................................134
(f) LehmansTerminationofItsResidentialMortgage
Originations ...........................................................................................138
(g)September,October,andNovember2007MeetingsofBoard
ofDirectors.............................................................................................139
(i) RiskAppetiteDisclosures.............................................................139
(ii)
LeveragedLoan
Disclosures ........................................................144
(iii)LeverageRatiosandBalanceSheetDisclosures........................147
(iv)LiquidityandCapitalDisclosures...............................................148
(4)LateReactions: LehmanSlowlyExitsItsIlliquidRealEstate
Investments..................................................................................................150
(a)Fiscal2008RiskAppetiteLimitIncrease...........................................152
(b)January2008MeetingofBoardofDirectors.....................................154
(c) ExecutiveTurnover...............................................................................156
(d)Commercial
Real
Estate
Sell
Off:
Too
Little,
Too
Late ...................157
(e)LehmansCompensationPractices.....................................................161
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c) Analysis ..............................................................................................................163
(1)TheExaminerDoesNotFindColorableClaimsThatLehmans
SeniorOfficersBreachedTheirFiduciaryDutyofCareby
FailingtoObserveLehmansRiskManagementPoliciesand
Procedures....................................................................................................164
(a)LegalStandard.......................................................................................164
(b)Background............................................................................................166
(i) CountercyclicalGrowthStrategywithRespectto
ResidentialMortgageOrigination...............................................171
(ii) LehmansConcentrationofRiskinItsCommercialReal
EstateBusiness ...............................................................................172
(iii)ConcentratedInvestmentsinLeveragedLoans........................175
(iv)FirmWideRiskAppetiteExcesses..............................................179
(v) FirmWideBalanceSheetLimits .................................................181
(vi)StressTesting..................................................................................181
(vii)Summary: OfficersDutyofCare..............................................182
(2)TheExaminerDoesNotFindColorableClaimsThatLehmans
SeniorOfficersBreachedTheirFiduciaryDutytoInformthe
BoardofDirectorsConcerningtheLevelofRiskLehmanHad
Assumed.......................................................................................................183
(3)TheExaminerDoesNotFindColorableClaimsThatLehmans
DirectorsBreached
Their
Fiduciary
Duty
by
Failing
to
Monitor
LehmansRiskTakingActivities..............................................................188
(a)LehmansDirectorsareProtectedFromDutyofCare
LiabilitybytheExculpatoryClauseandtheBusiness
JudgmentRule.......................................................................................188
(b)LehmansDirectorsDidNotViolateTheirDutyofLoyalty ..........190
(c) LehmansDirectorsDidNotViolateTheirDutytoMonitor .........191
(i) ApplicationofCaremarktoRiskOversight:InreCitigroupInc. ....................................................................................................191
(ii)
Applicationof
Caremark
and
Citigroup
to
Lehmans
Directors..........................................................................................193
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VOLUME2SectionIII.A.2: Valuation2. Valuation ..................................................................................................................203
a)
Executive
Summary..........................................................................................203
(1)ScopeofExamination .................................................................................210
(2)SummaryofApplicableLegalStandards................................................212
(3)SummaryofFindingsandConclusions...................................................214
b) OverviewofValuationofLehmansCommercialRealEstate
Portfolio..............................................................................................................215
(1)OverviewofLehmansCREPortfolio......................................................217
(a)SummaryofPortfolio ...........................................................................217
(b)
Overview
of
Valuation
of
CRE
Portfolio...........................................220
(i) GREGLeaders ................................................................................220
(ii) ParticipantsintheValuationProcess .........................................220
(c) ChangesintheCREPortfoliofrom2006through2008...................223
(d)PerfectStormImpactonCREValuationin2008..........................227
(2)OutsideReviewofLehmansCREValuationProcess...........................232
(a)SEC ..........................................................................................................233
(b)Ernst&Young .......................................................................................237
c)
Senior
Managements
Involvement
in
Valuation.........................................241
(1)SeniorManagementsGeneralRoleWithRespecttoCRE
Valuation ......................................................................................................243
(2)SeniorManagementsInvolvementinValuationintheSecond
Quarterof2008............................................................................................245
(3)SeniorManagementsInvolvementinValuationintheThird
Quarterof2008............................................................................................247
(a)SeniorManagementsAccount ...........................................................248
(b)PaulHughsonsAccount .....................................................................253
(c)Other
Accounts......................................................................................254
(4)ExaminersFindingsandConclusionsWithRespecttoSenior
ManagementsInvolvementinCREValuation......................................265
d) ExaminersAnalysisoftheValuationofLehmansCommercial
Book ....................................................................................................................266
(1)ExecutiveSummary....................................................................................266
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(2)LehmansValuationProcessforitsCommercialBook .........................270
(3)ExaminersFindingsandConclusionsastotheReasonableness
ofLehmansValuationofItsCommercialBook.....................................274
(a)AsoftheSecondQuarterof2008 .......................................................274
(b)As
of
the
Third
Quarter
of
2008 ..........................................................282
e) ExaminersAnalysisoftheValuationofLehmansPrincipal
TransactionsGroup ..........................................................................................285
(1)ExecutiveSummary....................................................................................285
(2)OverviewofLehmansPTGPortfolio......................................................292
(3)EvolutionofLehmansPTGPortfolioFrom2005Through2008.........296
(4)LehmansValuationProcessforItsPTGPortfolio.................................303
(a)TheRoleofTriMontintheValuationProcessforLehmans
PTGPortfolio.........................................................................................306
(i) LehmansIssueswithTriMontsData ........................................311
(ii) LehmanChangedItsValuationMethodologyforItsPTG
PortfolioinLate2007.....................................................................312
(b)TheRoleofLehmansPTGBusinessDeskintheValuation
ProcessforLehmansPTGPortfolio ..................................................319
(c) TheRoleofLehmansProductControlGroupinPrice
TestingtheValuationofLehmansPTGPortfolio ...........................321
(d)TheInfluenceofLehmansPTGBusinessDeskuponthe
PriceTesting
Function
of
Lehmans
Product
Control
Group.........326
(5)TheExaminersFindingsandConclusionsastothe
ReasonablenessofLehmansValuationofPTGPortfolio.....................329
(a)LehmanDidNotMarkPTGAssetstoMarketBasedYield...........331
(b)TheEffectofNotMarkingtoMarketBasedYield...........................337
(i) EffectofCap*105NotMarkingtoMarketBasedYield .........337
(ii) EffectofIRRModelsNotMarkingtoMarketBased
Yield.................................................................................................342
(iii)Effect
of
Product
Control
Price
Testing
Not
Marking
to
MarketBasedYield .......................................................................349
(iv)EffectofModifyingTriMontsDataintheThirdQuarter
of2008..............................................................................................351
(c) ExaminersFindingsandConclusionsastotheEffectofNot
MarkingLehmansPTGPortfoliotoMarketBasedYield..............353
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f) ExaminersAnalysisoftheValuationofLehmansArchstone
Positions .............................................................................................................356
(1)ExecutiveSummary....................................................................................356
(2)LehmansAcquisitionofArchstone.........................................................364
(a)Background
on
Archstone ...................................................................364
(b)AcquisitionofArchstone .....................................................................365
(i) AnalystReaction ............................................................................367
(ii) LehmansSyndicationEfforts......................................................370
(iii)BridgeandPermanentEquityatClosing...................................374
(iv)CapitalStructureatClosing .........................................................375
(v) PriceFlex .........................................................................................377
(vi)Standard&PoorsCreditRating.................................................380
(3)Lehmans
Valuation
of
Archstone............................................................382
(a)ValuationBetweenCommitmentandClosing.................................386
(b)ValuationasoftheClosingDate ........................................................388
(c) ValuationasoftheFourthQuarterof2007.......................................390
(d)ValuationIssuesDuringtheFirstQuarterof2008...........................391
(i) BarronsArticle ..............................................................................391
a. ArchstonesResponsetotheBarronsArticle.......................392
b. LehmansResponsetotheBarronsArticle ..........................394
(ii)January
2008
Archstone
Update..................................................396
(iii)ValuationasofFebruary29,2008................................................399
(iv)FirstQuarter2008EarningsCallandLenders
DiscussionRegardingModifyingtheArchstoneStrategy ......401
(e)ValuationIssuesDuringtheSecondQuarterof2008......................402
(i) March2008ArchstoneUpdate ....................................................402
(ii) March2008Valuation ...................................................................404
(iii)April2008DowngradebyS&P....................................................407
(iv)Einhorn
Speech
in
April
2008.......................................................407
(v) May2008Valuation.......................................................................408
(vi)SecondQuarter2008EarningsConferenceCall........................411
a. PreparationandLehmansMethodsofAnalyzing
ReasonablenessofValuationsPriortotheCall....................411
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b. DiscussionDuringtheSecondQuarter2008Earnings
Call ..............................................................................................412
(vii)LehmansRevisedPlantoSellArchstonePositions................414
(f) ValuationIssuesDuringtheThirdQuarterof2008.........................416
(i)
DiscussionAmong
Lenders
in
July
2008....................................417
(ii) August2008Valuation..................................................................417
(g)ProductControlsReviewofArchstoneValuations........................418
(4)ExaminersAnalysisofLehmansValuationProcessforits
ArchstonePositions ....................................................................................419
(a)DiscountedCashFlowValuationMethod........................................421
(i) RentGrowth ...................................................................................422
a. NetOperatingIncome..............................................................426
b.
SensitivityAnalysis...................................................................429
(ii)ExitCapitalizationRate..................................................................431
(iii)ExitPlatformValue .......................................................................433
(iv)DiscountRate..................................................................................436
(b)SumofthePartsMethod .....................................................................438
(c) ComparableCompanyMethod ..........................................................440
(i) PotentialOvervaluationBasedonPrimaryComparable
Companies ......................................................................................445
(5)Examiners
Analysis
of
the
Reasonableness
of
Lehmans
ValuationofitsArchstonePositionsonaQuarterlyBasis ...................446
(a)ReasonablenessasoftheFourthQuarterof2007.............................446
(b)ReasonablenessasoftheFirstQuarterof2008.................................449
(i) BarronsArticle ..............................................................................450
(ii) DiscussionsAmongArchstone,TishmanandLenders ...........458
(iii)LehmansValuationDuringtheFirstQuarterof2008.............459
(iv)SumoftheParts .............................................................................460
(v)
DCF
Method ....................................................................................464
(vi)ExaminersFindingsandConclusionsastothe
ReasonablenessofLehmansArchstoneValuationasof
theEndoftheFirstQuarterof2008 ............................................466
(c) ReasonablenessasoftheSecondQuarterof2008............................468
(i)SecondQuarterEarningsCall ........................................................469
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(ii)SumoftheParts ..............................................................................476
(iii)DCFModel......................................................................................477
(iv)RentGrowth ...................................................................................478
(v)ExitCapitalizationRate..................................................................479
(vi)Quantification
of
Changes
in
Assumptions...............................480
(vii)ExaminersFindingsandConclusionsastothe
ReasonablenessofLehmansArchstoneValuationasof
theEndoftheSecondQuarterof2008 .......................................481
(d)ReasonablenessasoftheThirdQuarterof2008...............................484
(i)SumoftheParts................................................................................487
(ii)DCFModel.......................................................................................488
(iii)RentGrowth ...................................................................................489
(iv)Exit
Capitalization
Rate.................................................................490
(v)QuantificationofChangesinAssumptions ................................491
(vi)ExaminersFindingsandConclusionsastothe
ReasonablenessofLehmansArchstoneValuationasof
theEndoftheThirdQuarterof2008..........................................492
g) ExaminersAnalysisoftheValuationofLehmansResidential
WholeLoansPortfolio......................................................................................494
(1)ResidentialWholeLoansOverview.........................................................494
(2)LehmansU.S.ResidentialWholeLoansin2008 ...................................497
(3)LehmansValuationProcessforitsResidentialWholeLoans..............501
(a)LehmansMay2008PriceTesting ......................................................504
(b)LehmansAugust2008PriceTesting.................................................515
(4)ExaminersIndependentValuationofLehmansResidential
WholeLoansPortfolio................................................................................520
(5)ExaminersFindingsandConclusionsWithRespecttothe
ReasonablenessofLehmansValuationofItsResidentialWhole
LoansPortfolio ............................................................................................525
(h)Examiners
Analysis
of
the
Valuation
of
Lehmans
RMBS
Portfolio ........527
(i) ExaminersAnalysisoftheValuationofLehmansCDOs .........................538
(1)LehmansPriceTestingProcessforCDOs ..............................................543
(2)PriceTestingResultsfortheSecondandThirdQuarters2008............551
(a)LehmansPriceTestingofitsCeagoCDOs.......................................553
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(3)ExaminersReviewofLehmansLargestU.S.ABS/CRECDO
Positions .......................................................................................................562
(4)ExaminersFindingsandConclusionsWithRespecttothe
ReasonablenessofLehmansValuationofitsCDOs.............................567
(j)
ExaminersAnalysis
of
the
Valuation
of
Lehmans
Derivatives
Positions .............................................................................................................568
(1)OverviewofLehmansDerivativesPositions.........................................568
(2)LehmansUseofCreditSupportAnnexestoMitigate
DerivativesRisk ..........................................................................................574
(3)LehmansPriceTestingofitsDerivativesPositions ..............................578
(k)ExaminersAnalysisoftheValuationofLehmansCorporateDebt
Positions .............................................................................................................583
(1)OverviewofLehmansCorporateDebtPositions .................................583
(2)LehmansPriceTestingofitsCorporateDebtPositions.......................585
(3)ExaminersFindingsandConclusionsWithRespecttothe
ValuationofLehmansCorporateDebtPositions..................................589
(a)RelianceonNonTrades.......................................................................590
(b)QualityControlErrorsMismatchedCompanies ..........................591
(c)NoTestingofInternalCreditRating..................................................592
(l) ExaminersAnalysisoftheValuationofLehmansCorporate
EquitiesPositions..............................................................................................594
(1)Overview
of
Lehmans
Corporate
Equities
Positions............................594
(2)LehmansValuationProcessforitsCorporateEquitiesPositions.......596
(3)ExaminersFindingsandConclusionsWithRespecttothe
ValuationofLehmansCorporateEquitiesPositions............................599
(a)ImpairedDebtwithNoEquityMarkDown.....................................601
(b)StaticMarks............................................................................................603
VOLUME2(CONT.)SectionIII.A.3: Survival3. LehmansSurvivalStrategiesandEfforts ...........................................................609
a) IntroductiontoLehmansSurvivalStrategiesandEfforts..........................609
(1)ExaminersConclusions.............................................................................609
(2)IntroductiontoLehmansSurvivalStrategies ........................................612
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b) LehmansActionsin2008PriortotheNearCollapseofBearStearns......622
(1)RejectionofCapitalInvestmentInquiries ...............................................623
(a)KIAOffer................................................................................................624
(b)KDBMakesItsInitialApproach.........................................................625
(c)ICDs
Initial
Approach .........................................................................626
(2)DivergentViews..........................................................................................627
(a)CompetitorsRaiseCapital ...................................................................627
(b)InternalWarningsRegardingCapital................................................629
c) ActionsandEffortsFollowingtheNearCollapseofBearStearns ............631
(1)LehmansAttempttoIncreaseLiquidity.................................................633
(2)LehmansAttempttoReduceitsBalanceSheet .....................................634
(3)LehmanSellsStocktoPrivateandPublicInvestors..............................638
(4)SpinCo ..........................................................................................................640
(a)EvolutionofSpinCo..............................................................................642
(b)ExecutionIssues ....................................................................................644
(i) EquityHole.....................................................................................645
(ii) OutsideFinancingforSpinCo......................................................649
(iii)SECIssues .......................................................................................653
a. AuditingandAccountingIssues ............................................653
b. TaxFreeStatus ..........................................................................658
(iv)Valuation
of
Assets........................................................................659
(c) BarclaysSpinCo ...............................................................................661
(5)PotentialStrategicPartners........................................................................662
(a)BuffettandBerkshireHathaway ........................................................664
(i) March2008......................................................................................664
(ii) LastDitchEffortwithBuffett.......................................................667
(b)KDB .........................................................................................................668
(i) DiscussionsBegin ..........................................................................668
(ii) DiscussionsResume:SecondRoundofTalksbetweenKDBandLehman...........................................................................673
(iii)ThirdRoundofTalksbetweenKDBandLehman....................677
(iv)KDBsSeptember9,2008Announcement..................................681
(c) MetLife....................................................................................................687
(d)ICD ..........................................................................................................691
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(e)BankofAmerica....................................................................................694
(i) InitialDiscussionsintheSummerof2008 .................................694
(ii) TalksResumeinSeptember .........................................................696
(f) Barclays...................................................................................................703
(6)Government
Communications..................................................................711
(a)TreasuryDinner ....................................................................................712
(b)ShortSales ..............................................................................................713
(c) PossibilityofFederalAssistance.........................................................716
(7)LehmansBankruptcy ................................................................................718
VOLUME3SectionIII.A.4: Repo1054. Repo105 ...................................................................................................................732
a) Repo105ExecutiveSummary......................................................................732
b) Introduction .......................................................................................................750
c) WhytheExaminerInvestigatedLehmansUseofRepo105
Transactions.......................................................................................................764
d) ATypicalRepo105Transaction .....................................................................765
(1)TheGenesisofLehmansRepo105Programin2001............................765
(2)Repo105TransactionsVersusOrdinaryRepoTransactions ...............766
(a)LehmansAccountingTreatmentofRepo105Transactions
VersusOrdinaryRepoTransactions ..................................................768
(b)LehmansAccountingPolicyforRepo105Transactions................775
(c) TheAccountingPurposeoftheLargerHaircut ...............................777
(d)LehmanDidNotRecordaCashBorrowingbutRecordeda
DerivativeAssetinaRepo105Transaction......................................781
(3)AnatomyofRepo105TransactionsandtheLinklatersTrueSale
OpinionLetter .............................................................................................782
(4)Types
of
Securities
Used
in
Repo
105
Transactions...............................793
(5)ProductControllersManuallyBookedRepo105Transactions ...........797
e) ManagingBalanceSheetandLeverage .........................................................800
(1)LehmanManagementsFocusinLate2007onReducingthe
FirmsReportedLeverage..........................................................................802
(a)LehmansCalculationofNetLeverage .............................................804
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(2)ByJanuary2008,LehmanDecidedtoCutitsNetLeveragein
HalftoWinBacktheConfidenceoftheMarket,Lendersand
Investors .......................................................................................................805
(a)BartMcDade,asNewlyAppointedBalanceSheetCzar,
Advised
the
Executive
Committee
in
March
2008
to
Cap
LehmansUseofRepo105Transactions ...........................................809
(b)McDadeBecamePresidentandCOOonJune12,2008and
AuthorizedtheReductionofRepo105Usage..................................819
(3)TheMarketsIncreasedScrutinyoftheLeverageofInvestment
Banks.............................................................................................................822
(a)TheCostofDeleveraging ....................................................................825
(4)StickyInventoryandFIDsBalanceSheetBreachesHampered
LehmansAbilitytoManageItsNetLeverage.......................................828
(5)Deleveraging
Resulted
in
Intense
Pressure
at
Quarter
End
to
MeetBalanceSheetTargetsforReportingPurposes.............................843
(6)LehmansEarningsCallsandPressReleaseStatements
RegardingLeverage....................................................................................845
(a)AnalystsStatementsRegardingLehmansLeverage .....................850
f) ThePurposeofLehmansRepo105ProgramWastoReverse
EngineerPubliclyReportedFinancialResults..............................................853
(1)LehmanDidNotDiscloseItsAccountingTreatmentFororUse
ofRepo105TransactionsinItsForms10Kand10Q...........................853
(a)LehmansOutsideDisclosureCounselWasUnawareof
LehmansRepo105Program ..............................................................855
(2)LehmansRepo105PracticeImprovedtheFirmsPublicBalance
SheetProfileatQuarterEnd .....................................................................856
(a)ContemporaneousDocumentsConfirmThatLehman
UndertookRepo105TransactionstoReduceItsBalance
SheetandReverseEngineerItsLeverage..........................................859
(b)WitnessStatementstotheExaminerRegardingtheTrue
Purposeof
Lehmans
Repo
105
Practice............................................867
(3)QuarterEndSpikesinLehmansRepo105UsageAlsoSuggest
theTruePurposeofLehmansRepo105PracticeWasBalance
SheetManipulation.....................................................................................870
(4)Repo105TransactionsServedNoBusinessPurposeOtherThan
BalanceSheetReduction ............................................................................877
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(a)Repo105TransactionsCameataHigherCostthanOrdinary
RepoTransactions.................................................................................877
(b)WitnessesAlsoStatedThatFinancingWasNottheReal
MotiveforUndertakingRepo105Transactions...............................882
g)
TheMateriality
of
Lehmans
Repo
105
Practice ...........................................884
(1)TheRepo105ProgramExposedLehmantoPotential
ReputationalRisk....................................................................................884
(2)LehmansRepo105PracticeHadaMaterialImpacton
LehmansNetLeverageRatio...................................................................888
(a)LehmanSignificantlyExpandedItsRepo105PracticeinLate
2007andEarly2008 ..............................................................................890
(3)BalanceSheetTargetsforFIDBusinessesWereUnsustainable
WithouttheUseofRepo105Transactions .............................................899
(4)RatingAgenciesAdvisedtheExaminerthatLehmansAccountingTreatmentandUseofRepo105Transactionsto
ManageItsNetLeverageRatioWouldHaveBeenRelevant
Information ..................................................................................................902
(5)GovernmentRegulatorsHadNoKnowledgeofLehmansRepo
105Program.................................................................................................910
(a)OfficialsfromtheFederalReserveBankWouldHave
WantedtoKnowaboutLehmansUseofRepo105
Transactions...........................................................................................910
(b)SecuritiesandExchangeCommissionCSEMonitorsWere
UnawareofLehmansRepo105Program.........................................913
h) KnowledgeofLehmansRepo105ProgramattheHighestLevelsof
theFirm ..............................................................................................................914
(1)RichardFuld,FormerChiefExecutiveOfficer .......................................917
(2)LehmansFormerChiefFinancialOfficers .............................................921
(a)ChrisOMeara,FormerChiefFinancialOfficer ...............................921
(b)ErinCallan,FormerChiefFinancialOfficer......................................930
(c)Ian
Lowitt,
Former
Chief
Financial
Officer .......................................937
(3)LehmansBoardofDirectors.....................................................................945
i) Ernst&YoungsKnowledgeofLehmansRepo105Program ..................948
(1)Ernst&YoungsComfortwithLehmansRepo105Accounting
Policy.............................................................................................................948
(2)TheNettingGrid.....................................................................................951
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(a)QuarterlyReviewandAudit...............................................................953
(3)Ernst&YoungWouldNotOpineontheMaterialityof
LehmansRepo105Usage.........................................................................954
(4)MatthewLeesStatementsRegardingRepo105toErnst&
Young............................................................................................................956
(5)AccountingMotivatedTransactions........................................................962
j) TheExaminersConclusions ...........................................................................962
(1)Materiality....................................................................................................963
(a)WhetherLehmansRepo105TransactionsTechnically
CompliedwithSFAS140DoesNotImpactWhethera
ColorableClaimExists .........................................................................964
(2)DisclosureRequirementsandAnalysis...................................................967
(a)
Disclosure
Obligations:
Regulation
S
K
and
the
MD&A ...............968
(b)DutytoDisclose ....................................................................................972
(c) LehmansPublicFilings.......................................................................973
(i) SummaryofLehmans2000through2007PublicFilings........974
(ii) Lehmans2007Form10K,FirstQuarter2008Form10
Q,andSecondQuarter2008Form10Q.....................................977
a. TreatmentofRepoTransactionsandSFAS140....................978
b. NetLeverage..............................................................................980
c. Derivatives .................................................................................981
d. AReaderofLehmansForms10Kand10QWould
NotHaveBeenAbletoAscertainThatLehman
EngagedinTemporarySalesUsingLiquidSecurities ........984
(d)ConclusionsRegardingLehmansFailuretoDisclose ....................985
(3)ColorableClaims.........................................................................................990
(4)FiduciaryDutyClaims ...............................................................................991
(a)BreachofFiduciaryDutyClaimsagainstBoardofDirectors ........991
(b)BreachofFiduciaryDutyClaimsagainstSpecificLehman
Officers....................................................................................................992
(i) RichardFuld ...................................................................................996
a. ThereIsSufficientEvidencetoSupportaFindingBy
theTrierofFactThatFuldWasatLeastGrossly
NegligentinCausingLehmantoFileMisleading
PeriodicReports ........................................................................997
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(ii) ChrisOMeara ..............................................................................1002
a. ThereIsSufficientEvidenceToSupportaColorable
ClaimThatOMearaWasatLeastGrosslyNegligent
inAllowingLehmantoFileMisleadingFinancial
Statements
and
Engage
in
Material
Volumes
of
Repo
105Transactions......................................................................1007
b. ThereIsSufficientEvidenceToSupportaColorable
ClaimThatOMearaBreachedHisFiduciaryDuties
byFailingtoInformtheBoardandHisSuperiorsof
LehmansRepo105Practice..................................................1009
(iii)ErinCallan ....................................................................................1013
a. ThereIsSufficientEvidenceToSupportaFindingBy
theTrierofFactThatCallanBreachedHerFiduciary
Dutiesby
Causing
Lehman
to
Make
Materially
MisleadingStatements ...........................................................1017
b. ThereIsSufficientEvidencetoSupportaColorable
ClaimThatCallanBreachedHerFiduciaryDutyof
CarebyFailingtoInformtheBoardofDirectorsof
LehmansRepo105Program ................................................1019
(iv)IanLowitt......................................................................................1021
(c) Remedies ..............................................................................................1024
(5)MalpracticeClaimsAgainstErnst&Young .........................................1027
(a)Background
and
Legal
Standards ....................................................1028
(i) ProfessionalStandards................................................................1028
(ii) CommonLawStandards ............................................................1031
(b)ThereIsSufficientEvidencetoSupportaColorableClaim
ThatErnst&YoungWasNegligent.................................................1032
(i) MalpracticeinFailuretoAdviseAuditCommitteeof
Repo105ActivityandLeesAllegations..................................1033
(ii) Lehmans2008Forms10Q ........................................................1040
(iii)Lehmans
2007
Form
10
K ..........................................................1048
(iv)EffectonPriorFilings..................................................................1050
(v) CausationandDamages .............................................................1051
(c) PossibleDefenses ................................................................................1053
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VOLUME4SectionIII.A.5: SecuredLenders5. PotentialClaimsAgainstLehmansSecuredLenders.....................................1066
a)
Introduction
and
Executive
Summary.........................................................1066
(1)JPMorgan....................................................................................................1068
(2)Citibank ......................................................................................................1073
(3)HSBC...........................................................................................................1077
(4)OtherLenders............................................................................................1080
(5)TheFederalReserveBankofNewYork................................................1081
(6)LehmansLiquidityPool..........................................................................1082
b) LehmansDealingsWithJPMorgan.............................................................1084
(1)Facts.............................................................................................................1084
(a)OverviewofJPMorganLehmanRelationship ...............................1084
(b)TripartyRepoPriorto2008 ...............................................................1089
(c)JPMorganRestructuresItsApproachtoTripartyRisk .................1094
(d)LehmanBeginsPostingAdditionalCollateral ...............................1101
(e)JPMorganConcernOverLehmanCollateralinAugust2008 ......1105
(f) TheAugustAgreements ....................................................................1113
(g)BackgroundtotheSeptember9CollateralRequestand
September
Agreements ......................................................................1125
(h)September9CallsBetweenStevenBlackandRichardFuld ........1138
(i) SeptemberAgreements ......................................................................1143
(j) DailyLiquidityPoolUpdatesFromLehmantoJPMorgan ..........1156
(k)September11CollateralRequestPursuanttotheSeptember
Agreements..........................................................................................1158
(l) AdditionalValuationAnalysesbyJPMorganBeginning
September11........................................................................................1165
(m)LehmanRequestsforReturnofCollateral.....................................1168
(2)AnalysisofPotentialClaims ...................................................................1172
(a)TheEvidenceDoesNotSupportaColorableClaimAgainst
JPMorganforEconomicDuress........................................................1173
(i) LegalBackground:EconomicDuress .......................................1173
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(ii) ThereIsNoAvailableEvidenceofanExpressUnlawful
ThreatMadebyJPMorganinConnectionWiththe
FormationoftheSeptemberAgreements ................................1174
(iii)TheAvailableEvidenceSuggestsJPMorganDidNot
Have
an
Improper
Purpose........................................................1178
(iv)ThereWasaDegreeofNegotiationOvertheTermsof
theSeptemberAgreements ........................................................1181
(b)ThereIsInsufficientEvidencetoSupportaColorableClaim
ThattheSeptemberAgreementsAreInvalidforLackof
Consideration ......................................................................................1183
(c)ThereisSufficientEvidencetoSupporttheExistenceofa
Technical,ButNotColorable,ClaimThattheSeptember
AgreementsAreInvalidforLackofAuthority..............................1186
(i)
TonucciMay
Have
Acted
With
Apparent
Authority.............1190
(ii) ThereIsSubstantialEvidenceThatLehmanRatifiedthe
SeptemberAgreements...............................................................1193
(d)ThereIsInsufficientEvidencetoSupportaColorableClaim
ThatJPMorganFraudulentlyInducedtheSeptember
Agreements..........................................................................................1198
(e)ThereIsInsufficientEvidencetoSupportaColorableClaim
forBreachofContractoftheSeptemberAgreementsBased
onJPMorgansRefusaltoReturnCollateral ...................................1200
(i)
LegalBackground:
Contractual
Obligations
Under
SeptemberAgreements...............................................................1200
(ii) ThereWasNoWrittenNoticeforCollateralReturn..............1208
(f) ThereIsEvidencetoSupportaColorable,ButNotStrong,
ClaimThatJPMorganBreachedtheImpliedCovenantof
GoodFaithandFairDealingbyDemandingExcessive
CollateralinSeptember2008.............................................................1210
(i) LegalStandardsGoverningImpliedCovenantofGood
FaithandFairDealing.................................................................1211
(ii) ThereIsSufficientEvidenceToSupportaColorable,But
NotaStrong,ClaimThatJPMorganViolatedtheImplied
CovenantbyDemandingExcessiveCollateral .......................1214
(iii)ATrierofFactWillLikelyHavetoResolveaWaiver
Defense ..........................................................................................1220
c) LehmansDealingsWithCitigroup..............................................................1224
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(1)Facts.............................................................................................................1224
(a)CitigroupProvidedContinuousLinkedSettlementService
andOtherClearingandSettlementOperationstoLehman.........1224
(i) BackgroundInformationontheContinuousLinked
SettlementService
Citi
Provided
to
Lehman...........................1224
(ii) OtherClearingandSettlementServicesThatCiti
ProvidedtoLehman....................................................................1227
(iii)CitisClearingandSettlementExposuretoLehman,
Generally.......................................................................................1229
(iv)TheTermsofLehmansCLSAgreementwithCiti.................1231
(b)LehmanProvideda$2BillionCashDepositwithCition
June12,2008ToSupportitsClearingNeeds..................................1233
(i) TheMarketEnvironmentandOtherCircumstances
SurroundingCitisRequestforthe$2BillionCashDepositonJune12.......................................................................1235
(ii) ThePartiesDidNotSharetheSameUnderstandingof
theTermsofthe$2BillionCashDeposit .................................1242
a. WhatLehmanUnderstoodtheTermsoftheDeposit
ToBe..........................................................................................1243
b. WhatCitiUnderstoodtheTermsoftheDepositToBe.....1245
c. TheExactTermsoftheComfortDepositAre
Unknown
Because
the
Terms
Were
Not
Reduced
to
Writing......................................................................................1250
(iii)CitiKnewtheComfortDepositwasIncludedin
LehmansLiquidityPool ............................................................1250
(c) CollateralPledgeDiscussionsBetweenLehmanandCiti
BeganinJune2008andContinuedUntilSeptember2008 ...........1251
(i) TheUnexecutedPledgeAgreement: thePartiesAgreed
toNegotiatetheTermsbutNotExecutetheAgreement
UntilItWasNeeded....................................................................1251
(ii)
CitiHad
Difficulty
Pricing
the
Collateral
Offered
by
LehmanasaSubstitutefortheCashDeposit..........................1254
(iii)TheGuarantyAmendmentWasSignedinaFireDrill
onSeptember9,2008...................................................................1261
a. EventsPriortotheSigningoftheSeptember9
GuarantyAmendmentfromCitisPerspective..................1263
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b. EventsPriortotheSigningoftheSeptember9
GuarantyAmendmentfromLehmansPerspective..........1265
c. NegotiationsBetweenLehmanandCitiPersonnel
RegardingWhichLehmanEntitiesWereToBeAdded
to
the
Parent
Guaranty
by
the
September
9
Guaranty
Amendment .............................................................................1268
(iv)September12,2008:ALehmanCollateralAccountatCiti
wasActivatedAfterTwoMonthsofDiscussion,and
LehmanSignedanAmendmenttotheDirectCustodial
ServicesAgreement .....................................................................1273
(d)LehmansClearingEnvironmentatCitiDuringtheWeekof
September8,2008................................................................................1276
(i) CitiRequiredLehmanToOperateUnderLower
DaylightOverdraft
Limits..........................................................1276
(ii) LehmanDepositedAmountsinExcessofthe$2Billion
DepositatVariousTimesin2008WithCiti.............................1279
(iii)CitiEndeavoredToHelpLehmaninSeptember2008,
PriortotheBankruptcyFiling ...................................................1281
(iv)LehmansAccountsatCitiClosedonFridaySeptember
12WithFundsinExcessofthe$2BillionDeposit..................1284
(e)CitisParticipationinLehmanWeekendEvents........................1285
(f) CitisActionsTowardLehmanAfterLehmanFiledfor
BankruptcyProtection........................................................................1287
(i) CitiContinuedtoProvideCLSServicesforLehman,But
NotinanEntirelyUninterruptedManner...............................1287
(ii) PriortoLehmansBankruptcyFiling,CitiSetOffa
PortionoftheCashDeposit .......................................................1290
(2)AnalysisofPotentialColorableClaims .................................................1291
(a)ValidityoftheSeptember9GuarantyAmendment......................1291
(i) EconomicDuress..........................................................................1291
a.
LegalFramework ....................................................................1292
b. TheEvidenceDoesNotSupporttheExistenceofa
ColorableClaimAgainstCitiforEconomicDuress ..........1293
(ii) TheFailureofConsideration......................................................1297
a. LegalFramework ....................................................................1298
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b. TheEvidenceDoesNotSupporttheExistenceofa
ColorableClaimAgainstCitiforFailureof
Consideration ..........................................................................1298
(b)BreachoftheDutyofGoodFaithandFairDealingin
Connection
With
the
CLS
Services
Agreement ..............................1300
(i) TheEvidenceDoesNotSupporttheExistenceofa
ColorableClaimAgainstCitiforBreachoftheDutyof
GoodFaithandFairDealinginConnectionWiththe
CLSServicesAgreement.............................................................1301
d) LehmansDealingsWithHSBC ....................................................................1303
(1)OverviewofHSBCsRelationshipWithLehman ................................1305
(a)HSBCProvidedCRESTClearingandSettlementServicesto
Lehman.................................................................................................1306
(b)Overview
of
the
Operative
Agreements..........................................1309
(2)TheExaminersInvestigationofParticularTransactions ...................1311
(a)HSBCCancelleda$1BillionIntradayCreditFacility ...................1311
(b)LehmanMaintaineda$1BillionSegregatedDepositwith
HSBC.....................................................................................................1312
(c) LehmanDeposited$750MillionwithHSBConJune24...............1314
(d)LehmanCommitted$25MilliononAugust15toHSBCs
SyndicatedLendingFacility..............................................................1315
(e)Lehman
Pledged
$6
Million
to
HSBC
as
Collateral
for
Letters
ofCredit................................................................................................1317
(f) OtherSignificantExposures..............................................................1318
(3)HSBCRequiredLehmantoProvideApproximately$1Billionin
CollateralWhileQuietlyEndingTheirRelationship...........................1319
(a)HSBCDeterminedtoEndItsRelationshipwithLehman.............1319
(b)HSBCDemandedCollateralforIntradayCredit ...........................1322
(c) HSBCAgreedToAccommodateLehmanatQuarterEnd ...........1325
(d)
Lehman
Deposited
the
Cash
Collateral
With
HSBC......................1326
(e)LehmanNegotiatedNewTermsandExecutedtheCash
Deeds ....................................................................................................1327
(i) LehmanSecuredConcessionsintheU.K.CashDeeds..........1327
(ii) LehmanExecutedtheHongKongCashDeedLateon
September12 ................................................................................1329
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(f) HSBCandLBHIStipulatedToSetoffandReturnSomeofthe
FundsCoveredbytheU.K.CashDeeds .........................................1332
(4)OtherIssuesStemmingfromHSBCsCollateralDemand..................1333
(a)LehmanIncludedtheDepositsCoveredbytheCashDeeds
inIts
Reported
Liquidity
Pool...........................................................1333
(b)HSBCConsideredWithholdingPaymentsorRequiring
PrefundingofTradesintheAsiaPacificRegionPriorto
LehmansBankruptcy ........................................................................1336
(5)TheEvidenceDoesNotSupporttheExistenceofColorable
ClaimsArisingFromHSBCsDemandThatLehmanProvide
CashCollateralandExecuteCashDeedsinOrderforHSBCto
ContinueProvidingClearingandSettlementServices .......................1336
(a)TheParametersoftheExaminersAnalysis....................................1336
(b)The
Facts
Provide
Little
to
No
Support
for
Invalidating
the
U.K.CashDeeds..................................................................................1339
(i) AnalyticalFramework ................................................................1339
a. EnglishLawGovernsContractClaimsArisingfrom
theU.K.CashDeeds...............................................................1339
b. EnglishContractLawTreatsDeedsDifferentlyfrom
OtherContracts .......................................................................1340
(ii) TheEvidenceDoesNotSupporttheExistenceofa
ColorableClaimThattheU.K.CashDeedsAreInvalid
forWantofConsideration..........................................................1341
(iii)TheEvidenceDoesNotSupporttheExistenceofa
ColorableClaimforEconomicDuressBecausethe
CRESTAgreementAllowedHSBCToCeaseClearing
andSettlementatItsAbsoluteDiscretion................................1343
a. ElementsofEconomicDuress...............................................1343
b. ApplicationtoLehmanFacts ................................................1344
c. OtherTransactionsDoNotGiveRisetoEconomic
DuressClaims..........................................................................1346
(iv)TheEvidenceDoesNotSupporttheExistenceofa
ColorableClaimthatHSBCViolatedaDutyofGood
FaithandFairDealingbyDemandingCashCollateral.........1348
a. EnglishLawDoesNotRecognizeaPrincipleofGood
FaithandFairDealingofGeneralApplication ..................1349
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b. ApplicationtoLehmanFacts ................................................1349
(v) TheEvidenceDoesNotSupporttheExistenceofa
ColorableClaimthatHSBCViolatedtheNotice
ProvisionoftheCRESTAgreement..........................................1352
a.
Constructionof
Terms............................................................1352
b. ApplicationtoLehmanFacts ................................................1353
(vi)TheCashDeedsWereNotContractsofAdhesionor
StandardFormContracts............................................................1355
a. CharacteristicsofStandardFormContractsor
ContractsofAdhesion............................................................1355
b. ApplicationtoLehmanFacts ................................................1355
(c) OtherPotentialTheoriesofLiability................................................1357
(i)
English
Law
Governs
the
Remaining
Potential
Claims
EvenThoughTheyAreNotCoveredbytheChoiceof
LawProvisionoftheCashDeeds..............................................1357
a. AnalyticalFramework............................................................1357
b. ApplicationtoRemainingPotentialClaims........................1359
(ii) TheEvidenceDoesNotSupportTheExistenceOfa
ColorableClaimForUnjustEnrichmentBecause
LehmanConveyedaBenefitonHSBCPursuantto
LehmansValidContractualObligations.................................1360
a.
Elementsof
Unjust
Enrichment ............................................1361
b. ApplicationtoLehmanFacts ................................................1362
(iii)TheEvidenceDoesNotSupportaColorableClaimThat
HSBCBreachedaFiduciaryDutytoLehmanBecause
HSBCandLehmanWereSophisticatedPartiesina
RelationshipGovernedbyanAgreementThatLimited
HSBCsObligations .....................................................................1363
a. ElementsofBreachofFiduciaryDutyand
Misappropriation ....................................................................1364
b.
Applicationto
Lehman
Facts ................................................1365
(iv)TheEvidenceDoesNotSupportaColorableClaimthat
HSBCsDemandforCollateralTortiouslyInterfered
WithLehmansOtherBusinessorContractsBecause
HSBCWasActingToProtectItsOwnEconomic
Interests .........................................................................................1367
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a. ElementsofTortiousInterference ........................................1368
b. ApplicationtoLehmanFacts ................................................1369
(v) TheEvidenceDoesNotSupportaFindingthatHSBC
FraudulentlyorNegligentlyMisrepresentedItsPlanto
Withdraw ......................................................................................1371
a. ElementsofFraudandMisrepresentation..........................1371
b. ApplicationtoLehmanFacts ................................................1373
e) LehmansDealingsWithBankofAmerica .................................................1375
f) LehmansDealingswithBankofNewYorkMellon .................................1376
(1)BNYMDemandsandReceivesaCollateralDeposit ...........................1377
(2)TheDepositIsSignificantBecauseofInternalLehmanConcerns
AboutIncludingItinItsPool..................................................................1379
g)
LehmansDealings
With
Standard
Bank.....................................................1382
h) LehmansDealingsWiththeFederalReserveBankofNewYork ..........1385
(1)TheFRBNYSupervisesDepositTakingInstitutionsandAssists
inManagingMonetaryPolicy,butLacksAuthorityToRegulate
InvestmentBankHoldingCompanies...................................................1385
(2)InResponsetotheBearStearnsNearCollapse,theFRBNY
CreatedaVarietyofFacilitiesToBackstoptheLiquidityof
BrokerDealers;Lehman,InTurn,DrewonTheseFacilities..............1387
(a)ThePrimaryDealerCreditFacility ..................................................1387
(b)The
Market
Greeted
the
Creation
of
the
PDCF
as
aPositive
StepTowardBackstoppingBrokerDealerLiquidity,andas
ShoringUpLehmansLiquidity .......................................................1390
(c) InAdditiontoaLiquidityBackstop,LehmanViewedthe
PDCFasanOutletforItsIlliquidPositions....................................1392
(d)LehmanWasReluctanttoDrawonthePDCFBecauseofa
PerceivedStigmaAttachedtoBorrowingfromtheFacility.....1396
(e)LehmanAccessedthePDCFTenTimesin2008;Lehmans
UseofthePDCFWasConcentratedinPeriodsImmediately
Afterthe
Bear
Stearns
Near
Collapse,
and
Immediately
After
LBHIFiledforBankruptcy ................................................................1398
(3)OtherFRBNYLiquidityFacilities ...........................................................1400
(a)TheTermSecuredLendingFacility .................................................1400
(b)OpenMarketsOperations..................................................................1401
i) LehmansLiquidityPool................................................................................1401
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(1)IntroductionandExecutiveSummary...................................................1401
(2)TheImportanceofLiquiditytoBrokerDealersandInvestment
BankHoldingCompaniesGenerally .....................................................1406
(3)LehmansLiquidityPool..........................................................................1408
(a)The
Purpose
and
Composition
of
Lehmans
Liquidity
Pool........1408
(b)LehmanTestedItsLiquidityPoolandSharedtheResultsof
TheseTestswithRatingAgencies ....................................................1413
(c) MarketParticipantsFormedFavorableOpinionsof
LehmansLiquidityontheBasisofLehmans
RepresentationsAboutItsLiquidityPool.......................................1415
(4)LehmansClearingBanksSoughtCollateralPledgesandCash
DepositsToSecureIntradayCreditRisk;LehmanIncludedThis
CollateralinItsLiquidityPool................................................................1417
(a)LehmanPledgedCLOsandOtherSecuritiestoJPMorganThroughouttheSummerof2008toMeetTripartyRepo
MarginRequirements.........................................................................1417
(b)TheSecuritiesPostedtoMeetJPMorgansMargin
RequirementsWereIncludedinLehmansLiquidityPool ..........1422
(c) OnJune12,2008,LehmanTransferred$2BilliontoCitias
ComfortforContinuingCLSSettlement.....................................1424
(d)TheCitiComfortDepositWasIncludedinLehmans
LiquidityPool......................................................................................1430
(e)OnAugust25,2008,LehmanExecutedaSecurityAgreement
withBankofAmerica,GrantingtheBankaSecurityInterest
ina$500MillionDeposit ...................................................................1433
(f) LBHIandJPMorganExecutedanAmendmenttotheJune
2000ClearanceAgreement,aSecurityAgreementanda
HoldingCompanyGuaranty,allDatedAugust26,2008.............1436
(g)LehmanAssetsSubjecttotheAugustSecurityAgreement
WereIncludedinLehmansLiquidityPool....................................1439
(h)September
2,
2008:
Lehman
Transferred
Just
Under
$1
Billion
toHSBCtoContinueClearingOperations,andEncumbered
ThiswithCashDeedsExecutedonSeptember9and
September12........................................................................................1441
(i) TheHSBCDepositWasRepresentedasLiquidandWas
IncludedinLBHIsLiquidityPool ...................................................1446
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(j) LehmanandJPMorganExecutedAnotherRoundofSecurity
DocumentationDatedSeptember9,2008;LehmanMade$3.6
Billionand$5BillionPledgestoJPMorganSubjecttothe
TermsofTheseAgreements..............................................................1446
(k)
Lehman
Made
a
Deposit
to
Bank
of
New
York
Mellon
to
CoverIntradayExposure,andIncludedThatDepositinIts
LiquidityPool......................................................................................1448
(l) TheCumulativeImpactofLehmansInclusionofClearing
BankCollateralandDepositsinItsLiquidityPool........................1450
(5)DisclosuresConcerningtheInclusionofClearingBank
CollateralinLehmansLiquidityPool...................................................1454
(a)LehmanDidNotDiscloseonItsJune16,2008Second
QuarterEarningsCallThatItWasIncludingthe$2Billion
CitiComfort
Deposit
in
Its
Liquidity
Pool..................................1454
(b)LehmanDidNotDiscloseinItsSecondQuarter200810Q,
FiledJuly10,2008,ThatItWasIncludingBoththe$2Billion
CitibankComfortDepositandApproximately$5.5Billion
ofSecuritiesCollateralPledgedtoJPMorganinItsLiquidity
Pool........................................................................................................1455
(c) LehmanDidNotDiscloseOnItsSeptember10,2008
EarningsCallThataSubstantialPortionofItsLiquidityPool
WasEncumberedbyClearingBankPledges .................................1457
(d)Senior
Executives
Did
Not
Disclose
to
the
Board
of
Directors
attheSeptember9,2008FinanceCommitteeMeetingthe
FactThataSubstantialPortionofItsLiquidityPoolWas
EncumberedbyClearingBankPledges ..........................................1460
(e)LehmanOfficersDidNotDisclosetotheBoardofDirectors
ThatItsLiquidityPositionWasSubstantiallyImpairedby
CollateralHeldatClearingBanksUntiltheEveningof
September14,2008..............................................................................1464
(f) LowittsViewsonIncludingClearingBankCollateralinthe
LiquidityPool......................................................................................1466
(6)RatingAgenciesWereUnawareThatLehmanWasIncluding
ClearingBankCollateralinItsLiquidityPool .....................................1467
(a)Fitch.......................................................................................................1467
(b)Standard&Poors...............................................................................1468
(c) Moodys................................................................................................1469
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(7)TheFRBNYDidNotViewtheClearingBankCollateralinthe
LiquidityPoolasUnencumbered.......................................................1469
(8)TheSEC,LehmansPrimaryRegulator,WasUnawareofthe
ExtenttoWhichLehmanWasIncludingClearingBank
Collateral
in
Its
Liquidity
Pool;
to
the
Extent
It
Was
Aware,
the
SECDidNotViewThisPracticeasProper...........................................1472
(9)CertainLehmanCounselWereAwareThatAgreementswithIts
ClearingBanksWereStructuredtoIncludeClearingBank
CollateralinItsLiquidityPool,butDisclaimedKnowledge
ConcerningWhatAssetsWereAppropriateorInappropriatefor
theLiquidityPool .....................................................................................1476
(10)LehmansAuditorsMonitoredLehmansLiquidityPool,but
ViewedtheCompositionofthePoolasaRegulatoryIssue...............1478
(11)There
Is
Insufficient
Evidence
To
Support
aDetermination
ThatAnyOfficerorDirectorBreachedaFiduciaryDutyin
ConnectionWiththePublicDisclosureofLehmansLiquidity
Pool..............................................................................................................1479
VOLUME4(CONT.)SectionIII.A.6: Government6. TheInteractionBetweenLehmanandtheGovernment .................................1482
a)
Introduction .....................................................................................................1482
b) TheSECsOversightofLehman...................................................................1484
(1)TheCSEProgram......................................................................................1484
(2)LehmansParticipationintheCSEProgram ........................................1487
(3)TheSEC/OIGFindings.............................................................................1490
(4)TheViewFromtheTop ...........................................................................1492
c) TheFRBNYsOversightofLehman.............................................................1494
d) TheFederalReservesOversightofLehman ..............................................1502
e)
TheTreasury
Departments
Oversight
of
Lehman ....................................1505
f) TheRelationshipoftheSECandFRBNYinMonitoringLehmans
Liquidity...........................................................................................................1507
(1)TheSECPerformedOnlyLimitedMonitoringofLehmans
LiquidityPool............................................................................................1508
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(2)TheSECandFRBNYDidNotAlwaysShareInformationAbout
Lehman.......................................................................................................1511
g) TheGovernmentsPreparationfortheLehmanWeekend
MeetingsattheFRBNY..................................................................................1516
h)
Onthe
Evening
of
Friday,
September
12,
2008,
the
Government
ConvenedaMeetingoftheMajorWallStreetFirmsinanAttempt
toFacilitatetheRescueofLehman...............................................................1523
i) LehmansBankruptcyFiling .........................................................................1535
VOLUME5SectionIII.B: AvoidanceActions
B. AreThereAdministrativeClaimsorColorableClaimsforPreferencesor
VoidableTransfers......................................................................................................1544
1. ExecutiveSummary..............................................................................................1544
2. ExaminersInvestigationofPossibleAdministrativeClaimsAgainst
LBHI(FirstBullet).................................................................................................1546
a) Summary ..........................................................................................................1546
b) Introduction .....................................................................................................1547
c) LehmansCashManagementSystem ..........................................................1549
(1)LBHIsRoleasCentralBanker................................................................1550
(2)
Global
Cash
and
Collateral
Management .............................................1551
(3)LehmansExternalandVirtualBankAccounts....................................1554
(4)BankAccountReconciliations.................................................................1560
d) EffectoftheBankruptcyontheCashManagementSystem.....................1562
e) CashTransfersGivingRisetoAdministrativeClaims..............................1564
(1)CashTransfersfromLBHIAffiliatestoLBHI.......................................1565
(2)CashReceivedbyLBHIonBehalfofLBHIAffiliates..........................1566
(3)OtherRelevantTransactions ...................................................................1568
3.
Examiners
Investigation
of
Possible
Avoidance
Actions
(Third,
Fourth
andEighthBullets)................................................................................................1570
a) Summary ..........................................................................................................1570
b) LBHISolvencyAnalysis.................................................................................1570
(1)Introduction ...............................................................................................1570
(2)MarketBasedValuationAnalysis..........................................................1573
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(a)BasisforUtilizationofaMarketBasedValuationAnalysis.........1573
(b)MarketValueofAssetsApproach....................................................1577
(i) ImpliedAssetValue ....................................................................1578
(ii) SmallEquityCushion..................................................................1580
(iii)Limitations
of
the
Market
Based
Approach.............................1581
a. ApplicationofRetrojection....................................................1583
b. TheApplicationofCurrentAwareness...........................1584
(3)Conclusion .................................................................................................1587
c) LBHIAffiliateSolvencyAnalysis .................................................................1587
(1)Summary ....................................................................................................1587
(2)DescriptionoftheExaminersAnalysis.................................................1595
(3)DebtorbyDebtorAnalysis .....................................................................1610
(a)Lehman
Commercial
Paper
Inc.........................................................1610
(b)CESAviation,CESAviationVLLC,CESAviationIX ..................1615
(c) LBSpecialFinancing...........................................................................1618
(d)LBCommodityServices.....................................................................1622
(e)LuxembourgResidentialPropertiesLoanFinanceS.A.R.L..........1627
(f) LBOTCDerivatives............................................................................1628
(g)LB745LLC...........................................................................................1629
(h)LBDerivativeProducts ......................................................................1631
(i)
LBFinancial
Products.........................................................................1633
(j) LBCommercialCorporation .............................................................1635
(k)BNCMortgageLLC............................................................................1638
(l) EastDoverLimited .............................................................................1638
(m)LehmanScottishFinance ..................................................................1640
(n)PAMIStatlerArms..............................................................................1641
d) UnreasonablySmallCapital..........................................................................1642
(1)Summary ....................................................................................................1645
(2)AnalysisoftheUnreasonablySmallCapitalTest ............................1648
(a)SummaryofLegalStandard..............................................................1648
(b)LehmansCountercyclicalStrategy..................................................1650
(c) LehmansRepoBookandLiquidityRisk........................................1654
(i) BearStearnsDemonstratestheLiquidityRiskAssociated
WithRepoFinancing...................................................................1656
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(ii) QualityandTenorofLehmansRepoBook.............................1658
(d)DeleveragingtoWinBackMarketConfidence ..........................1662
(e)BeginningintheThirdQuarterof2008,LehmanCouldHave
ReasonablyAnticipatedaLossofConfidenceWhichWould
HaveTriggered
Its
Liquidity
Risk....................................................1665
(f) LehmanWasNotSufficientlyPreparedtoAbsorba
LiquidityCrisisMarkedbyaSuddenLossofNon
Government,NonAgencyRepoFunding ......................................1674
(i) LehmansLiquidityPool ............................................................1675
(ii) LiquidityStressTests ..................................................................1678
(iii)OtherCapitalAdequacyMetrics...............................................1687
a. CashCapitalSurplus..............................................................1687
b.
Equity
Adequacy
Framework...............................................1688
c. CSECapitalRatio....................................................................1690
(g)LBHIAffiliateUnreasonablySmallCapitalAnalysis................1692
e) InsiderPreferencesAgainstLBHI(ThirdBullet) .......................................1694
(1)Summary ....................................................................................................1694
(2)LegalSummary .........................................................................................1696
(3)SourcesofPotentialPreferentialActivity..............................................1698
(4)DeterminationsandAssumptionsonSection547(b)Elements .........1705
(5)
Scope
of
Defenses
Under
Section
547(c) ................................................1710
(6)FindingsforLBSF......................................................................................1713
(7)FindingsforLBCS.....................................................................................1718
(8)FindingsforLCPI......................................................................................1722
f) PreferencesAgainstNonLBHILehmanAffiliates(FourthBullet).........1730
g) AvoidanceAnalysisofLBHIandLBHIAffiliatesAgainstFinancial
ParticipantsandPreChapter11Lenders(FourthandEighth
Bullets) ..............................................................................................................1731
(1)Summary ....................................................