Remember when Lehman went bankrupt? Good times. The thing about that was that pretty much right up until the minute Lehman filed, people like Dick Fuld and Erin Callan were going around saying things like "we stand extremely well capitalized to take advantage of these new opportunities" and "[w]e have maintained our strong liquidity and capital profiles even in this difficult environment."
Knowing what happened next, some people thought that was kind of fucked up of them. And so a team of spoilsports including among other luminaries the Northern Ireland Local Government Officers’ Superannuation Committee sued Fuld, Callan, Joe Gregory, and a bunch of enablers like Ernst & Young (Lehman's auditors) and UBS (who underwrote a lot of Lehman structured note offerings).
Today a federal court ruled on a motion to dismiss. It's mostly bad news for Fuld, Callan & co., as the court let the lawsuit proceed on most of the important claims, including claims that Lehman misrepresented its net leverage using "Repo 105" transactions, lied about its "strong risk management culture with regard to the setting of risk limits" by repeatedly exceeding those limits, and misrepresented its credit-risk concentration in real estate.
But some bits of the ruling should make the ex-Lehman crowd happy:
Lehman's liquidity was just fine. Kind of puzzling, no, what with it not turning out that way? But the court found that "the statements that Lehman’s liquidity pool was sufficient to meet its expected needs over the next twelve months and that its liquidity position was 'strong' were statements of opinion," and so the fact that in hindsight those opinions look to have been a little on the optimistic side was NBD.
Dick Fuld didn't insider trade. The court found insufficient allegations that Dick Fuld sold Lehman stock while he knew embarrassing secrets about Lehman's risk management/lack thereof, and so bounced the (civil) insider trading claims. This will be a relief for Fuld, since as Jeff Skilling will tell you trading your company's stock while lying about your liquidity crisis is a worse idea than just lying about your liquidity crisis.
"Repo 105" is not A-okay exactly but maybe B-okay. The court let the lawsuit go ahead on the theory that the Repo 105 trades misrepresented Lehman's net leverage position, but did dismiss claims that they violated U.S. accounting standards (SFAS 140) by treating the transactions as sales rather than financings. Early reports made much of the fact that Lehman couldn't get a legal opinion that the Repo 105s were sales from a U.S. firm and had to go abroad, but the judge was not interested:
[T]he fact that Lehman allegedly was unable to obtain a “true sale at law” opinion from a U.S.-based law firm does not call into question the conclusion of U.K.-based Linklaters that the transactions were, in fact, true sales at law under U.K. law. Nothing in SFAS 140 requires the true sale at law opinion to be based on U.S. law.