TRENTON - The state of New Jersey has filed suit against top executives and members of the board of directors of bankrupt Lehman Brothers Holdings Inc., charging that misrepresentations by the company led the Division of Investment in the Department of Treasury to purchase $182 million in Lehman securities in April and June 2008 that resulted in an estimated $118 million in losses, Governor Jon S. Corzine announced today. The state also sued Lehman’s long-time accountants Ernst & Young.
“With this suit we intend to hold Lehman executives and directors accountable for the fraud and misrepresentation that caused more than $100 million in losses to New Jersey’s pension funds,” Governor Corzine said.
The Office of Attorney General Anne Milgram filed the lawsuit in Superior Court in Mercer County. It sets forth violations of New Jersey and federal securities laws, negligent misrepresentation, breach of fiduciary duty, fraud, and aiding and abetting. It seeks to recover compensatory and punitive damages.
The state charges that the purchases of preferred and common stock were based on financial statements and materials that contained material misstatements and omissions regarding the value of Lehman’s assets that the Division of Investment could not have known were false.
In addition, executives from Lehman had disavowed to representatives of the Division of Investment the company’s exposure to the collapsing real estate market and had claimed that Lehman had sufficient liquidity, a strong capital base and superior hedging, risk management and valuation practices.
The suit declares that when those representations were made, Lehman executives knew, or should have known, that Lehman’s overvalued residential and commercial real estate portfolio was making it increasingly illiquid.
Lehman filed for bankruptcy on Sept. 15, 2008, leaving shareholders with virtually worthless stock.
“Lehman’s executives kept telling investors its financial position was solid when, in fact, the opposite was true,’’ Attorney General Milgram said. “The state bought and held Lehman securities at artificially inflated prices and lost millions, which we seek to recover with this suit.”
William G. Clark, the director of the Division of Investment, said, “The integrity of our financial markets requires that investors be able to rely on a company’s financial statements and the representations of its senior management team. Clearly, the information put out by the company misrepresented Lehman’s true financial condition.”
The Division of Investment manages pension and retirement plan funds for more than 700,000 active and retired New Jersey employees. The funds include the Public Employees’ Retirement System, the Teachers’ Pension and Annuity Fund, the Police and Firemen’s Retirement System, the State Police Retirement System, and the Judicial Retirement System. The New Jersey Investment Council oversees the work of the division.
The state had purchased $2 million in preferred stock in an April 1, 2008 offering, and nearly $120 million of common stock at $28 per share and $60 million in preferred stock in a June 12, 2008 offering. The Division of Investment was solicited to make these purchases by Lehman representatives, the suit states.
Direct claims against Lehman Brothers Holding Inc. are currently stayed under bankruptcy law, but the state has sued nine top executives, nine members of the board of directors, and Ernst & Young, the accounting firm. (Lehman Brothers, Inc., Lehman’s broker/dealer subsidiary, is not named in the suit because claims against it are stayed by a court order.)
Executives and former executives sued are Richard Fuld Jr., chairman and chief executive officer; Christopher M. O’Meara, a former chief financial officer, controller and executive vice president; Joseph M.Gregory, a former president and chief operating officer; Erin Callan, a former chief financial officer and global controller; Ian Lowitt, a co-chief administrator; David Goldfarb, the chief strategic officer; Herbert H. McDade 3d, a former global head of the equities division and former president and chief operating officer; Thomas Russo, an executive vice president and chief legal officer; and Mark Walsh, the head of Lehman’s Global Real Estate Group, Fuld, O’Meara, Gregory, Callan, Lowitt, Goldfarb, McDade and Russo all served on Lehman’s executive committee.
Board directors sued are Michael Ainslie, John F. Akers, Roger S. Berlind, Thomas H. Cruikshank, Marsha Johnson Evans, Christopher Gent, Roland A. Hernandez, Henry Kaufman, and John D. Macomber. The directors each received between $325,000 and $397,000 in compensation for serving on the board in fiscal year 2007.
Lehman originated mortgages, purchased mortgages, packaged mortgages into securities, and marketed the securities to investors. The firm made substantial investments in non-prime residential mortgages. One of its subsidiaries, Aurora Loan Services, permitted loans for the full value of property to people with low credit scores, according to the suit. The company also aggressively invested in high-risk commercial properties.
The suit details a long series of assurances from Lehman executives that Lehman’s liquidity and financial position was solid, despite the collapsing real estate market and a decline in the value of its mortgage-related assets.
Lehman raised $12 billion in capital in February, April and June 2008 by issuing millions of shares of preferred and common stock. Lehman raised $1.9 billion in a preferred offering in February, and another $4 billion in April. At an annual stockholders’ meeting in April, CEO Fuld was quoted as saying, “the worst of the credit crisis is behind us.”
Another $6 billion offering was made in June. Lehman executives told Division of Investment officials, “we don’t need to do this offering, but we’re getting beaten up with the press over Lehman’s liquidity position and we want to shore up capital to take the issue off the table.”
When division director Clark questioned company executives about their market values, he was told that Lehman had prudent risk management practices and Lehman was reducing the company’s risk profile, the suit states. The company maintained after raising the capital that it was “extremely well-capitalized to take advantage of new opportunities.”
Following the close of the stock offering on June 9, 2008, Lehman’s stock price continued to drop and never recovered above the June 9 close of $29.48. On Sept. 11, shares closed at $3.03. On Sept. 15, Lehman filed for bankruptcy.
The Division of Investment’s suit states that Lehman’s failure to properly disclose possible losses associated with its real estate and mortgage-related positions misled the Division of Investment as to Lehman’s true financial position.
The state also charges that Ernst & Young allowed Lehman to improperly account for and disclose its true financial condition, which contradicted an unqualified audit report and interim reviews on Lehman’s financial statements distributed to the market and Lehman’s shareholders.
The registration statements and prospectuses related to the stock offerings in April and June last year, in which the division relied, were “inaccurate and misleading,’’ the suit states, adding that the company’s directors acted as a “rubber stamp’’ for senior management.
The suit was filed for the state by Pearl S. Pearlman and Jeffrey W. Herrmann of Cohn Lifland Pearlman Hermann & Knopf, a Saddle Brook law firm; and Merrill G. Davidoff, Lawrence Lederer, Robin Switzenbaum and David Anziska of Berger & Montague, a Philadelphia law firm.
Senior Deputy Attorney General Carol G. Jacobson supervised the filing of the complaint against Lehman.
A copy of the complaint is available on-line at www.nj.gov/oag/newsreleases09/031709-nj-v-fuld.pdf.
“With this suit we intend to hold Lehman executives and directors accountable for the fraud and misrepresentation that caused more than $100 million in losses to New Jersey’s pension funds,” Governor Corzine said.
The Office of Attorney General Anne Milgram filed the lawsuit in Superior Court in Mercer County. It sets forth violations of New Jersey and federal securities laws, negligent misrepresentation, breach of fiduciary duty, fraud, and aiding and abetting. It seeks to recover compensatory and punitive damages.
The state charges that the purchases of preferred and common stock were based on financial statements and materials that contained material misstatements and omissions regarding the value of Lehman’s assets that the Division of Investment could not have known were false.
In addition, executives from Lehman had disavowed to representatives of the Division of Investment the company’s exposure to the collapsing real estate market and had claimed that Lehman had sufficient liquidity, a strong capital base and superior hedging, risk management and valuation practices.
The suit declares that when those representations were made, Lehman executives knew, or should have known, that Lehman’s overvalued residential and commercial real estate portfolio was making it increasingly illiquid.
Lehman filed for bankruptcy on Sept. 15, 2008, leaving shareholders with virtually worthless stock.
“Lehman’s executives kept telling investors its financial position was solid when, in fact, the opposite was true,’’ Attorney General Milgram said. “The state bought and held Lehman securities at artificially inflated prices and lost millions, which we seek to recover with this suit.”
William G. Clark, the director of the Division of Investment, said, “The integrity of our financial markets requires that investors be able to rely on a company’s financial statements and the representations of its senior management team. Clearly, the information put out by the company misrepresented Lehman’s true financial condition.”
The Division of Investment manages pension and retirement plan funds for more than 700,000 active and retired New Jersey employees. The funds include the Public Employees’ Retirement System, the Teachers’ Pension and Annuity Fund, the Police and Firemen’s Retirement System, the State Police Retirement System, and the Judicial Retirement System. The New Jersey Investment Council oversees the work of the division.
The state had purchased $2 million in preferred stock in an April 1, 2008 offering, and nearly $120 million of common stock at $28 per share and $60 million in preferred stock in a June 12, 2008 offering. The Division of Investment was solicited to make these purchases by Lehman representatives, the suit states.
Direct claims against Lehman Brothers Holding Inc. are currently stayed under bankruptcy law, but the state has sued nine top executives, nine members of the board of directors, and Ernst & Young, the accounting firm. (Lehman Brothers, Inc., Lehman’s broker/dealer subsidiary, is not named in the suit because claims against it are stayed by a court order.)
Executives and former executives sued are Richard Fuld Jr., chairman and chief executive officer; Christopher M. O’Meara, a former chief financial officer, controller and executive vice president; Joseph M.Gregory, a former president and chief operating officer; Erin Callan, a former chief financial officer and global controller; Ian Lowitt, a co-chief administrator; David Goldfarb, the chief strategic officer; Herbert H. McDade 3d, a former global head of the equities division and former president and chief operating officer; Thomas Russo, an executive vice president and chief legal officer; and Mark Walsh, the head of Lehman’s Global Real Estate Group, Fuld, O’Meara, Gregory, Callan, Lowitt, Goldfarb, McDade and Russo all served on Lehman’s executive committee.
Board directors sued are Michael Ainslie, John F. Akers, Roger S. Berlind, Thomas H. Cruikshank, Marsha Johnson Evans, Christopher Gent, Roland A. Hernandez, Henry Kaufman, and John D. Macomber. The directors each received between $325,000 and $397,000 in compensation for serving on the board in fiscal year 2007.
Lehman originated mortgages, purchased mortgages, packaged mortgages into securities, and marketed the securities to investors. The firm made substantial investments in non-prime residential mortgages. One of its subsidiaries, Aurora Loan Services, permitted loans for the full value of property to people with low credit scores, according to the suit. The company also aggressively invested in high-risk commercial properties.
The suit details a long series of assurances from Lehman executives that Lehman’s liquidity and financial position was solid, despite the collapsing real estate market and a decline in the value of its mortgage-related assets.
Lehman raised $12 billion in capital in February, April and June 2008 by issuing millions of shares of preferred and common stock. Lehman raised $1.9 billion in a preferred offering in February, and another $4 billion in April. At an annual stockholders’ meeting in April, CEO Fuld was quoted as saying, “the worst of the credit crisis is behind us.”
Another $6 billion offering was made in June. Lehman executives told Division of Investment officials, “we don’t need to do this offering, but we’re getting beaten up with the press over Lehman’s liquidity position and we want to shore up capital to take the issue off the table.”
When division director Clark questioned company executives about their market values, he was told that Lehman had prudent risk management practices and Lehman was reducing the company’s risk profile, the suit states. The company maintained after raising the capital that it was “extremely well-capitalized to take advantage of new opportunities.”
Following the close of the stock offering on June 9, 2008, Lehman’s stock price continued to drop and never recovered above the June 9 close of $29.48. On Sept. 11, shares closed at $3.03. On Sept. 15, Lehman filed for bankruptcy.
The Division of Investment’s suit states that Lehman’s failure to properly disclose possible losses associated with its real estate and mortgage-related positions misled the Division of Investment as to Lehman’s true financial position.
The state also charges that Ernst & Young allowed Lehman to improperly account for and disclose its true financial condition, which contradicted an unqualified audit report and interim reviews on Lehman’s financial statements distributed to the market and Lehman’s shareholders.
The registration statements and prospectuses related to the stock offerings in April and June last year, in which the division relied, were “inaccurate and misleading,’’ the suit states, adding that the company’s directors acted as a “rubber stamp’’ for senior management.
The suit was filed for the state by Pearl S. Pearlman and Jeffrey W. Herrmann of Cohn Lifland Pearlman Hermann & Knopf, a Saddle Brook law firm; and Merrill G. Davidoff, Lawrence Lederer, Robin Switzenbaum and David Anziska of Berger & Montague, a Philadelphia law firm.
Senior Deputy Attorney General Carol G. Jacobson supervised the filing of the complaint against Lehman.
A copy of the complaint is available on-line at www.nj.gov/oag/newsreleases09/031709-nj-v-fuld.pdf.
