Lehman Brothers' former heads criticised for lapses

The examiner said there had been no systematic wrong-doing

A report into the collapse of Lehman Brothers criticises senior executives and auditor Ernst & Young for serious lapses that led to the firm's collapse.

Lehman was insolvent for weeks before filing for bankruptcy in 2008, a court-appointed examiner had found.

The report accuses senior management of "actionable balance sheet manipulation" and using accounting gimmicks.

Ernst & Young said that its last audit of Lehman was "fairly presented" according to accounting rules.

Possible claims

The report said that there could be grounds for legal action against former executives.

However, the court-appointed examiner, Anton Valukas, chairman of law firm Jenner & Block, said that there had been no systematic wrong-doing.

And he pointed out that those responsible for the firm had used their business judgment and were largely not liable for the firm's collapse.

However, he said that Lehman, which is now being liquidated for the benefit of creditors, could have claims against former Lehman chief executive Dick Fuld and chief financial officers Chris O'Meara, Erin Callan and Ian Lowitt for negligence or breach of fiduciary duty.

The examiner said there was also sufficient evidence to support a possible claim that the firm's auditor, Ernst & Young, had been "negligent" and that Lehman could pursue claims against the firm for "professional malpractice".

Ernst & Young said in a statement: "Our last audit of the company was for the fiscal year ending November 30, 2007. Our opinion indicated that Lehman's financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view."

Mr Valukas did not find that Lehman's directors had explicitly violated their fiduciary duty, but said that Wall Street paid a large role in causing an acute liquidity crisis at Lehman in its final days.

The examiner suggested Lehman may also be able to pursue claims against banks including JPMorgan and Citigroup for taking some $16bn in collateral out of Lehman's coffers as it struggled to stay afloat.

Debt move

His long-awaited report, which took more than a year to prepare, contains allegations about an accounting "gimmick", known as "Repo 105".

Mr Valukas said this was used for the sole purpose of manipulating Lehman's books, and gave the appearance that Lehman was reducing its overall debt levels in 2008 when in reality it was not.

Lehman used "Repo 105" to temporarily remove $50bn of assets from its balance sheet in 2008, according to the report.

An attorney for Mr Fuld said on Thursday that the former Lehman boss "did not know what those transactions were".

"He didn't structure them or negotiate them, nor was he aware of their accounting treatment," attorney Patricia Hynes said.