London at centre of Lehman Brothers 'accounting gimmick'

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Ernst & Young, Linklaters and Lehman Brothers' London operations played key roles in the investment bank's attempts to mask $50bn (£33bn) of assets on its balance sheet in the run-up to its eventual implosion in September 2008.

By James Quinn and Sean Farrell - Published: 7:53PM GMT 12 Mar 2010


The two advisers are under fire for their knowledge of a series of complex transactions known officially within the bank as "Repo 105", but referred to by senior staff as "window dressing" and an "accounting gimmick".

The pair's actions are questioned in court-appointed investigator Anton Valukas's exhaustive report into the bank's collapse, which also found that British bank Barclays received assets it should not have when later buying Lehman's US brokerage business.

The report also finds that the bank had to use its European arm, based in London, to undertake the questionable accounting practices as they were not considered legal in the US.

Repo 105, the unusual accounting device at the heart of Lehman's downfall, essentially allowed the bank to mask its borrowing at the end of each quarter, decreasing its apparent risk profile to the outside world.

According to the report, the complicated ruse allowed Lehman to claim its assets were $38.6bn lower than they actually were at November 2007. By May 2008, Repo 105 was concealing $50.4bn.

In echoes of Arthur Andersen's role in auditing fraudulent energy giant Enron, Mr Valukas goes so far as to assert that E&Y could face legal claims for "professional malpractice" stemming from a number of negligent actions.

<SNIP>http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7431033/London-at-centre-of-Lehman-Brothers-accounting-gimmick.html

[dkf]

1. Wow the UK papers use much stronger language than I've seen in the US papers.

Of course it is the telegraph.

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2. Linklaters defends handling of Lehman Brothers deals

Report for United States Bankruptcy Court says City law firm approved off balance sheet transactions that disguised true state of Lehman Brothers' finances

guardian.co.uk, Friday 12 March 2010 18.58 GMT

Linklaters, one of London's premier law firms, is battling to defend its reputation after a US report into the failure of Lehman Brothers showed it approved controversial deals that shifted billions of dollars of debt off the balance sheet in the years before the bank collapsed.

The hard-hitting report found that the crucial deals, which were also sanctioned by Lehman's auditors, Ernst & Young, were described as "window dressing" by bank staff and masked the precarious state of its finances while it was under scrutiny from regulators and investors.

Linklaters is expected to come under intense pressure to reveal the full extent of its dealings with Lehman in the run-up to the bank's crash in September 2008. The firm is one of the "magic circle" of solicitors operating in the City, which in recent years have expanded rapidly to compete with US rivals.

The impact of the bank's crash has been described as incalculable by some economists after governments around the world were forced to implement trillion-pound bailouts for their own banks caught up in the disaster. Investors are preparing lawsuits against the bank and are expected to turn their fire on lawyers and auditors advising it.

The report, for the United States Bankruptcy Court by examiner Anton Valukas, claims Lehman booked fund transfers as sales and failed to disclose them in regulatory filings in the US. Valukas alleges that Lehman turned to Linklaters after New York law firms said that they were unable to approve the deals under US law.

<SNIP>http://www.guardian.co.uk/business/2010/mar/12/linklaters-lehman-brothers

[PHIMG]

3. Gimmich is euphimism for "rip off", "crime", "fraud", right? n/t