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Lehman CFOs face ‘Repo 105’ questions

Former Lehman Brothers chief financial officers Erin Callan, Chris O’Meara and Ian Lowitt have a fight on their hands to clear their names, following a report into the collapsed investment bank’s use of repo transactions to disguise its financial position.

The weighty Chapter 11 proceedings examiner’s report into the collapse reveals that a particular type of repo transaction, commonly used by companies to raise short-term cash, had been used by Lehmans to remove risky assets and liabilities from its balance sheet and book the transaction as a sale – thus distorting its financial position.

The three former CFOs are all singled out in the extraordinarily plain-speaking, revelatory document from which a tale of internal hand-wringing that was usually ignored and subsequent selective memory loss emerges.

In his report, the examiner says there is sufficient evidence against Lehman’s last CFO, Ian Lowitt – its co-chief accounting officer prior to his promotion – to support a claim that he was negligent in failing to meet his fiduciary duties. In an interview for the report, Lowitt recalled that Lehmans “established a ‘regime of limits,’ meaning balance sheet targets, for each business unit to manage to and that Repo 105 was one way to ‘sell down assets’ to meet the targets.” It adds that Lowitt “took no action to ensure Lehman filed accurate and complete financial statements”, but that he had “certified Lehman’s second quarter 2008 Form 10-Q, exposing it to potential liability for making material mis-statements and omissions in publicly-filed financial statements.”

The report also finds sufficient evidence to support a ‘colourable claim’ that Lowitt’s predecessor Erin Callan, CFO for just seven months from December 2007, breached her fiduciary duties by “causing Lehman to make materially misleading statements” and by failing to inform the board of directors of Lehman’s Repo 105 programme. It alleges Callan made no mention of Lehman’s Repo 105 programme in a first-quarter 2008 earnings call in which she discussed the bank’s ordinary repo transactions – and reveals she told the bankruptcy examiner that she recalled very little about them.
“Callan said she had little to no independent recollection of Lehman’s use of Repo 105 transactions,” the report says.

It also says there is enough evidence to support a claim that Callan’s predecessor, Chris O’Meara, CFO for the three years up until her appointment, was “at least grossly negligent in allowing Lehman to file misleading financial statements and engage in material volumes of Repo 105 transactions” and that he breached his fiduciary duties by failing to inform the board and his superiors of Lehman’s Repo 105 practice.

According to the examiner, there is evidence that, as CFO, O’Meara actively managed Lehman’s Repo 105 program even though he later “professed limited knowledge of and involvement with it”. He allegedly approved an increase in Lehmans’ cap on use of the Repo 105 transaction, from $22bn to $25bn, in February 2007. The report further suggests that O’Meara – who was made chief risk officer in 2008 – was “instrumental” in creating internal rules intended to ensure the transactions were not undertaken solely at quarter-end.

“A reasonable inference could be drawn that there was no legitimate business purpose for the ‘80 percent rule’, other than to mask Lehman’s Repo 105 practice,” it adds.

Find detailed coverage of the report and the potential fallout here

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