Fuld Understated Pay to Congress, Lehman's Budde Says

By James Sterngold
     April 29 (Bloomberg BusinessWeek) -- Before Lloyd Blankfein
of Goldman Sachs (GS) took his place, Richard S. Fuld Jr.'s angry
face was the universal symbol of Wall Street greed. On Oct. 6,
2008, three weeks after Lehman Brothers filed the largest
bankruptcy in U.S. history, Lehman's former CEO found himself
before Representative Henry A. Waxman, the California Democrat
who chaired the House Committee on Oversight and Government
Reform. Waxman has stared down plenty of CEOs over the years, yet
this had to be one of the most intense confrontations of his
     "Mr. Fuld will do fine," Waxman said. "He can walk away from
Lehman a wealthy man who earned over $500 million. But taxpayers
are left with a $700 billion bill to rescue Wall Street and an
economy in crisis."
     Fuld said he was a victim, not an architect, of the
collapse, blaming a "crisis of confidence" in the markets for
dooming his firm. Reckless management had nothing to do with it.
"Lehman Brothers," he said, "was a casualty."
     Fuld and Waxman went on to disagree about just how much
money Fuld had taken out of Lehman before it went under. Fuld,
now 64, said his total compensation from 2000 through 2007 was
less than $310 million, not the $485 million that appeared on
Waxman's chart. He said 85% of his pay was in Lehman stock that
had become worthless. "I never sold my shares," Fuld said at one
point. At another, he said he had not sold the "vast majority" of
     "That just seems to me an incredible amount of money,"
Waxman responded.
     Among those closely observing Fuld was a 49-year-old former
Lehman lawyer named Oliver Budde who was watching the hearing at
home on C-Span. Budde (pronounced Boo-da) was certain Waxman's
figures weren't too high. They were too low, and he could prove
it. Fuld, he believed, had understated the amount he was paid
during those years by more than $200 million, and now he had done
it under oath, for the entire world to see.
     For nine years, Budde had served as an associate general
counsel at Lehman. Preparing the public filings on executive
compensation had been one of his major responsibilities, and he
had been infuriated by what he saw as the firm's intentional
under-representation of how much top executives like Fuld were
paid. Budde says he argued with his bosses for years over the
matter, so much so that he eventually quit the firm. After he
left, he couldn't let the matter rest. He contacted the
Securities & Exchange Commission and the Lehman board of
directors but says neither showed interest in meeting him. He was
so shocked by Fuld's testimony in front of Congress that he
started thinking about writing a book going public with his
story, which is told here for the first time.
     "I wasn't surprised, because these guys don't surprise me
anymore," Budde says. "But it just struck me—they're doing it
again. I wasn't going to sit back and watch."
     By his own admission, Budde lacks the aggressive career
drive usually found on Wall Street. He speaks proudly of having
been a "free spirit" in his younger days when he was a ski bum
and took a year off during college to sail the Caribbean as a
steward on a yacht. He grew up in Cheshire, Conn., and went to
Columbia University, where he received a BA in economics in 1983.
After college, he drifted into a job as a cabdriver in New York,
which ended when an irate driver sprayed him with a can of mace
after a fender bender on the FDR Drive. The experience made an
office job suddenly seem tempting, and he found work as a
paralegal at Skadden Arps, eventually going to law school on the
firm's dime. He served as an associate for six years, working
long hours, handling mostly corporate and securities-related
matters. In 1997, when it became clear that he would not make
partner, he decided to leave, landing as a vice-president in
Lehman's corporate general counsel's office.
     Budde says things were good at Lehman. His weekends were his
own again. He owned a house near Stowe, a ski town in Vermont,
and managed to escape there frequently. "It was a perfect
arrangement," he says. "I left Friday afternoons for Vermont and
came back Monday mornings. It was a job I was proud of. There was
no 'ick' factor, at least at first."
     At the time, Lehman made its money largely on bonds, and
Fuld was a source of inspiration at the firm, a tough trader who
was putting the company back in the game after a series of
corporate missteps.
     The first inklings of trouble for Budde came a couple of
years into his tenure, when he says he objected to a tax deal
that an outside accounting firm had proposed to lower medical
insurance costs. This was an unusual move for a junior Wall
Street lawyer. "My gut feeling was that this was just reshuffling
some papers to get an expense off the balance sheet," he
explains. "It was not the right thing, and I told them." Budde's
bosses disagreed with him and O.K.'d the deal.
     The incident opened his eyes to more serious issues,
particularly what he began to see as a lack of transparency in
how the firm disclosed restricted stock units, or RSUs, that it
granted to senior executives. There were three types of RSUs:
annual awards that usually vested in five years, longer-term
awards that took until retirement to vest, and a final type that
vested only if there were a change in control (i.e., if Lehman
were acquired). In that 2000-07 time frame, Budde—relying on SEC
filings—calculated that Fuld received $105 million in annual
five-year RSU awards.
     What Lehman failed to disclose properly, Budde says, were
certain longer-term awards. Lehman took advantage of an
interpretation of the SEC disclosure rules to underreport the
value of these awards in the company's annual proxy statement and
thereby mislead shareholders about just how much top executives
were making. He complained to his superiors in the general
counsel office, he says, and was told that the policy had been
checked with outside attorneys at Simpson, Thacher & Bartlett.
(Andrew Keller, the partner on the Lehman account, did not return
calls seeking comment.) Those lawyers had deemed it acceptable to
exclude unvested RSUs from the annual compensation tables in the
SEC filings.
     Budde thought this logic was flawed and believed the
compensation committee made the problem worse when it pushed back
the vesting of certain long-term RSUs. The firm's intention, says
a former Lehman executive, was to promote long-term loyalty, but
Budde suspected that it was a way to further postpone the
disclosure of RSUs as compensation.
     Lehman tweaked its policy in another way Budde found
dubious. In its 2003 proxy statement, the firm reported that the
board's compensation committee had decided to rewrite,
retroactively, the terms under which the awards had been made in
previous years. "Each tranche of the Extended RSUs will now vest
following termination of employment with the Firm," the company
disclosed. This meant the executives would get them when they
left the firm, unless they were fired for cause. Lehman also
disclosed that Fuld's extended RSUs were worth $90.4 million at
the time. Budde believed that Lehman should have included that
figure in the annual compensation table. Instead, the figure was
put at the end of a long paragraph filled with financial jargon,
where it was likely to be overlooked.
     Budde says Lehman could also claim that it was disclosing
these stock grants in its Section 16 statements, also known as
"insider reports," which record top executives' transactions
involving company stock. Budde created meticulous spreadsheets
adding up Fuld's RSUs, options exercised, and any other shares
bought or sold over the years. A disparity amounting to tens of
millions of dollars shows up clearly if you compare the Section
16 information with the proxy statements, Budde says. "I just
assumed that somebody was checking this stuff," he says. "They
     According to W. Alan Kailer, a Dallas attorney with Hunton &
Williams who has written articles and books on compensation
disclosure, it would have been more transparent to disclose these
types of awards in the compensation table the year they were
granted to the executives, rather than waiting for them to vest.
"This is an interpretation issue," he says, "but the best
practice would be to report at the time that the award was
originally made."
     In February 2006, just after he received his bonus for the
previous year, Budde resigned from Lehman.
     To Budde's delight, later that year the SEC announced that
it would require clear reporting of unvested RSUs and other
stock-based awards in the proxy statement.
     The first year Lehman had to alter its proxy reporting was
2008. Budde was ready to see how the firm would handle the
change. At his home in Vermont, he pored over the documents when
they were released in March. "I looked several times, and my jaw
just dropped," he said. "What happened to the RSUs? It took me,
someone who has written these documents, two or three times to
spot the problems."
     Budde calculated that while Lehman reported Fuld's RSUs as
worth $146 million, the real figure, based on the Section 16
reports, was $409.5 million. Lehman had counted just 2 of 15 RSU
awards. "You just didn't need to do this to this degree," he
says. "It was disgraceful."
     Considering his options, Budde decided to go to the SEC as a
whistleblower. He sent a detailed two-page e-mail on Apr. 14,
2008, to the SEC's Enforcement Div., under the subject line
"Possible Material Noncompliance with New Executive Compensation
Disclosure Rules." Lehman was already in crisis mode at the time,
but the meltdown of the firm was still several months away. After
detailing what he believed was Fuld's failure to disclose more
than $250 million in restricted stock awards, Budde wrote: "The
last thing the country needs right now is another investment bank
in crisis. I have wrestled with this over the past five weeks,
since I first read the proxy. This is not a shot at retribution,
and I am in no way a disgruntled former employee (disappointed,
even disgusted, yes). I walked away freely from Lehman, and my
ethical concerns in a number of areas were no secret to my
superiors there." He got a standardized form thanking him for his
letter in return. He never heard anything else. (The SEC does not
comment on private communication with its enforcement division.)
     Budde also wrote to Lehman's board members but was ignored
by them as well. A former Lehman official, who spoke anonymously
because internal board business is confidential, confirmed that
the board had received Budde's warnings. Budde said that Fuld had
understated his compensation by more than $200 million during the
October 2008 congressional hearing. While Fuld said he earned
less than $310 million from 2000 through 2007, he actually had
received $529.4 million, according to Budde's calculations.
     In direct contradiction to Fuld's claim to Waxman that he
had not sold the majority of his shares, Budde estimates that
Fuld earned $469 million from stock sales between 2000 and 2008.
These calculations are supported by the working paper from a
Harvard University study that was made public late last year and
is scheduled to be published this summer in the Yale Journal on
Regulation. In "The Wages of Failure: Executive Compensation at
Bear Stearns and Lehman, 2000-2008," Harvard Law professor Lucian
Bebchuk; Alma Cohen, a visiting professor from Tel Aviv
University; and Holger Spamann, a Harvard Law lecturer, calculate
that Fuld earned $522.7 million from 2000 to 2007, only slightly
less than Budde's tally. The study found that Fuld earned $461.2
million of that total from the sale of 12.4 million shares of
Lehman stock, more than the 10.8 million shares, including
unvested RSUs, he owned at the time of Lehman's bankruptcy.
     The authors of the Harvard paper said they were motivated by
an incorrect popular assumption that top executives of investment
banks, particularly Bear Stearns and Lehman Brothers, had
suffered big personal losses in their share holdings and that
this proved the compensation systems at the firms were not to
blame for the crisis. Instead, they concluded, executives
including Fuld had sold many of their shares before the crisis
hit and ended up losing much less than they let on.
     Through his attorney Patricia Hynes, Fuld declines to
comment. "We're not giving any interviews," says Hynes. Fuld did
not respond to detailed questions faxed to his office. Calls to
John Akers, former chairman of IBM, and John Macomber, former
chairman of Celanese Corp., who both served on the compensation
committee of Lehman's board, were not returned.
     Fuld continued getting money out of Lehman Brothers right up
until the end. In March 2008, with the credit crisis gathering
force and talk circulating of Lehman's precarious state, Fuld and
his lieutenants argued in the proxy statement that they deserved
large incentive awards for "successfully navigating the difficult
credit and mortgage environments and maintaining the firm's
strong risk controls." The board agreed, awarding Fuld $40
million for his work in 2007, of which $35 million was in
restricted stock.
     When the bank collapsed in September 2008, the restricted
stock was rendered worthless. However, the board did allow Fuld
to cash in a Lehman investment partnership despite rules that
normally allowed redemptions only if the executive left Lehman or
died, according to a report on the bankruptcy by Anton R.
Valukas, the bankruptcy examiner. Two months before Lehman filed
for bankruptcy, the board agreed to pay Fuld $4 million for his
limited partnership interest.
     In advance of his testimony, Simpson Thacher & Bartlett
racked up 889.3 hours of work prepping Fuld and producing
documents for Congress. The bill, paid by the bankruptcy estate,
came to $491,197.
     One question that remains is why Budde stayed on at Lehman
for as long as he did, given what he says he observed there.
"It's kind of like the frog in the boiling water," he says. "It
took a while to figure out how bad it was. My moral compass was
always there, but I felt I was learning important stuff. I always
told my boss how I felt, and I made my objections."
     Budde doesn't have a job. He's living off savings in Vermont
and says he's enjoying a simpler life. He is considering putting
his financial background to a more productive use, by helping a
pension fund do socially responsible investing, for example. "I
don't want to come across as a Boy Scout," he says, "but this is
the job you're licensed by society to do as a lawyer, to stand
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