July 31 (Bloomberg) -- The more you learn about Lehman Brothers Holdings Inc.'s relationship with R3 Capital Partners, the more it looks as if Lehman may not be telling investors all they need to know.

When Lehman filed its second-quarter financial statements three weeks ago, it was the first time the securities firm disclosed its $1.1 billion investment in R3, the hedge fund that Rick Rieder and other former Lehman executives started in May. Lehman's report gave few details, though it did say Lehman sold R3 lots of assets last quarter. The big question is whether Lehman, which also is R3's landlord, disclosed enough.

To help answer that, consider some of the disclosures R3 made in a private-placement memorandum this month for prospective investors, a copy of which I reviewed. They go to a critical issue: Are R3 and Lehman related parties?

Under the rules known as Financial Accounting Standard No. 57, the answer would be yes, if Lehman has the ability to ``significantly influence the management or operating policies'' of R3. Based on the statements in R3's memo, it looks to me as though Lehman does. Lehman and R3 demur.

The 110-page memo includes six pages describing ``actual and potential conflicts of interest'' arising from R3's relationship with Lehman. For instance, it says that ``LB (Lehman Brothers) interests may comprise as much as 48 percent of the net asset value of the master fund.'' As a result, ``a withdrawal of all or a substantial portion of the LB interests could have an adverse effect on the fund as a whole and its ability to pursue its strategy.''

Stock Holdings

R3 also said its executives may continue to own Lehman restricted stock that they received during their previous jobs, which ``may influence the principals' dealings with LB as well as their investment decisions.'' In other words, R3 might be prevented from fully pursuing its own separate interests.

Ed Ketz, an accounting professor at Pennsylvania State University, said Lehman's potential 48 percent stake in R3's master fund by itself would be ``significant influence in anybody's book,'' even without voting rights.

Here's why details like those matter. Under FAS 57, if R3 is a related party, then Lehman should have disclosed enough information about its R3 transactions so that an outside reader could gain ``an understanding of the effects of the transactions on the financial statements.'' Lehman didn't do this.

Kerrie Cohen, a Lehman spokeswoman, said in a statement, ``Lehman Brothers has provided extensive and appropriate disclosure in our 10Q.''

`Arm's Length'

Lehman's R3 investments are non-voting shares and Lehman has no board seats or rights to pick directors, she said: ``Thus, we do not have the ability to exercise significant influence.''

Cohen said Lehman and R3 ``have dealt with these conflicts by always operating on an arm's-length basis.'' Lehman's investments also are subject to a two-year lockup period that prevents Lehman from divesting.

In an e-mail, Doug Donsky, a spokesman at R3's public- relations firm, FD, wrote, ``Lehman is a passive minority investor in R3 Capital and does not have the ability to influence the management or operating policies of R3.'' As for R3's principals, he said their Lehman stock holdings ``will not influence'' their dealings with Lehman, in spite of what R3's memo says.

Here's what Lehman did disclose about R3: During the second quarter, it acquired ``non-voting, minority ownership stakes'' in R3's master fund, general partner, special limited partner and management company. As of May 31, its investment was $1.1 billion. Lehman said it ``sold assets and transferred derivative risk of approximately $4.5 billion at fair value to R3'' last quarter. The assets primarily were corporate bonds and loans.

Judgment Call

There's no way to know from those facts what effects the transactions with R3 had on Lehman's financial statements, or even how much R3 paid Lehman for the assets it bought. Lehman reported a $2.8 billion net loss last quarter.

Ultimately, the question of ``significant influence'' is a judgment call. Even if an investor's stake is small, that doesn't necessarily preclude the investor from having a lot of sway. Likewise, the test for identifying related parties isn't whether one party is influencing the other's management or policies now. The test is whether it can.

In its memo, R3 says it will hire Lehman to perform ``marketing, financing, derivatives intermediation and trading, prime brokerage, placement agent, price verification, risk control and information technology services.'' Its six principals all came from Lehman, as did the 10 other key professionals it listed.

Insider Knowledge

R3 also said that Lehman ``may come into possession of material, non-public information'' that ``could limit the ability of the fund to buy and sell investments.'' Consequently, ``the investment flexibility of the fund may be constrained as a result of the advisor's relationship with LB.'' It's hard to understand why any insider knowledge Lehman has would be imputed to R3 if they weren't related.

Lehman also ``will have greater access to information'' than other R3 investors about the fund, which Lehman can use in deciding whether to withdraw its investment, and in recommending to clients whether they should, too.

Significant influence or not, it sure looks like Lehman has a lot of pull. Meantime, investors can only wonder what information Lehman isn't disclosing about its dealings with R3.

They shouldn't have to.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in Boulder, Colorado, at jweil6@bloomberg.net

Last Updated: July 31, 2008 00:04 EDT