`Stupid' Lehman E-Mails Didn't Stay `Just Between Us'

Photographer: Andrew Harrer/Bloomberg

Anton Valukas, bankruptcy examiner of Lehman Brothers Holdings Inc. Close

Anton Valukas, bankruptcy examiner of Lehman Brothers Holdings Inc.

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Photographer: Andrew Harrer/Bloomberg

Anton Valukas, bankruptcy examiner of Lehman Brothers Holdings Inc.

“Just between us,” it may be “stupid” to use certain words in e-mail to “discuss” the “big trouble” you might face if you’re ever investigated for financial wrongdoing or a subsequent cover-up.

Those are some of the terms that examiner Anton R. Valukas searched for in 34 million pages of Lehman Brothers Holdings Inc. e-mails and reports, to find out who knew what about the risks that drove the fourth-largest securities firm into bankruptcy, according to his 2,200-page study on the collapse.

Valukas concluded that former Chief Executive Officer Richard “Dick” Fuld certified misleading financial statements. Valukas also said former Lehman Chief Financial Officers Christopher O’Meara, Erin Callan and Ian Lowitt didn’t disclose a financing method called Repo 105 that hid as much as $50 billion of Lehman’s debt as its credit dried up.

“What investigators are looking for is any turn of phrase that can give them insight into what people were thinking at that time,” said Peter Henning, a former Securities and Exchange Commission lawyer who teaches at Wayne State University Law School in Detroit. “That can be valuable because e-mails are real-time and often unfiltered and can help to establish intent.”

At least three lawsuits using Valukas’s findings have been filed against Fuld, 64, and other Lehman executives, who asked a federal judge in Manhattan on June 4 to dismiss a class-action suit over Repo 105, saying balance sheet variations were disclosed.

Search Terms

Fuld’s lawyer, Patricia Hynes, has said he didn’t know about Repo 105. Robert Cleary, Callan’s lawyer, has said she served Lehman diligently. They didn’t respond to e-mails seeking further comment about Valukas’s searches. Kelly Hnatt, a lawyer for Lowitt, and Michael Chepiga, a lawyer who represents O’Meara, declined to comment immediately.

The search terms came out of a session where 20 lawyers at Valukas’s firm, Chicago-based Jenner & Block LLP, were “told to sit down and be as imaginative as you can,” said Robert Byman, a partner at the firm who helped with work on Lehman. The terms were changed if searches produced too many hits, he said.

E-mails searched by the examiner, a former federal prosecutor, show what life was like at New York-based Lehman as employees struggled to manage $613 billion of debt that eventually doomed the company in September 2008. Lehman has said it may spend another five years selling assets to pay unsecured creditors as little as 14.7 cents on the dollar.

Rising Risks

Valukas, 67, whose key terms included “risk,” “concern,” “breach,” “big trouble” and “too late,” said Fuld was warned about rising business risks in early 2007, yet encouraged risk-taking until the next year. A March 2007 e-mail Fuld got from Michael Gelband, Lehman’s former head of capital markets, cites forecasts of a slowing economy by top money managers Stanley F. Druckenmiller of Duquesne Capital Management LLC and Paul Tudor Jones of Tudor Investment Corp.

“This is not the B-team,” Gelband wrote. “I heard your view at the risk meeting that odds are in your favor but risk/reward is not good here so I’m trying to get out of as much illiquid risk as possible.”

“Thanks for the update -- let’s talk tonite -- I am out now,” Fuld replied.

The CEO kept pushing for growth as Lehman neared its risk limits, said Valukas, citing an April 18, 2007, e-mail to Lowitt and others from Kentaro Umezaki, a former head of fixed income strategy for Lehman.

Dick’s Presentation

Discussing Fuld’s talk to the fixed-income division the night before, Umezaki wrote, “Basically they heard we don’t have a balance sheet problem: in fact we have excess capacity,” he said. “I continue to be somewhat confused as to what the real objectives of the firm are around managing financial and risk constraints vs. revenue growth.”

“Of course I totally understand the ‘motivational’ aspects of Dick’s presentation,” he told Lowitt, who was co-chief administrative officer at the time.

When Fuld was told in the tight credit markets of January 2008 that Lehman might get money from the Kuwait Investment Authority he wrote, “Let’s discuss” -- a Valukas search term that turned up several urgent e-mail exchanges.

Lehman shouldn’t show it needed equity, David Goldfarb, Lehman’s former chief strategy officer, wrote Fuld in two e- mails. “We would join the bad company of the many who had to raise equity,” he said. “Perception issue.”

Terrific Message

Fuld said Lehman could get around that by charging more for its stock. “I was thinking they buy a special issue at a premium,” he wrote. “It would send a terrific message.” The deal never happened.

The search word “stupid” turned up in an e-mail by Roger Nagioff, Lehman’s head of fixed income from May 2007, whose job was partly to limit the investment bank’s leverage, according to Valukas.

“I am probably 3 months too late in the job,” Nagioff wrote to Goldfarb on June 26, 2007. “A big deal got pulled today and others are being restructured down . . . we are probably going to get punished for our stupidity.”

“Target,” another Valukas search term, turned up in e- mails about Repo 105 as bankruptcy drew nearer.

“Is there an official target to how much Repo 105 we want to do this quarter?” Paul Mitrokostas, chief operating officer of the fixed income division, wrote to Clement Bernard, the unit’s chief financial officer, and others in April 2008, about five months before Lehman failed.

‘Cannot Do More’

“I have not heard of an official target other than we cannot do more than what we have done at the end of Q1,” Bernard replied, referring to the end of the first quarter, when repos had doubled in 15 months to $49 billion, according to the e-mails.

Lehman has said it gave the examiner 20 million pages of e- mails and data, preserved after the bankruptcy filing. It’s using its own search terms to trawl the documents for information helpful to its lawsuits and other purposes, said CEO Bryan Marsal in an e-mail.

“This data preservation permits us to reconstruct many of the events and activities preceding the bankruptcy,” he said.

The class-action lawsuit is In re Lehman Brothers Equity/Debt Securities Litigation, 08-cv-05523, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net.

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