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Judge Tosses Key Claims in Lehman Executive Class Action

A federal judge dismissed some key claims in a class action lawsuit against former officers of Lehman Brothers Holdings Inc., including claims based on repurchase agreements, known as Repo 105, as well as claims based on overvalued real estate.

The ruling by U.S. District Judge Lewis Kaplan in Manhattan mostly accords with an earlier decision. The California plaintiffs, seven public entities and an insurance company, can proceed with limited claims against some former executives including ex-Chairman Richard Fuld, according to an opinion filed by Kaplan in U.S. District Court today.

Fuld, 66, was chief executive officer of New York-based Lehman, once the fourth-largest U.S. investment bank, before its 2008 bankruptcy. In August 2011, he agreed to settle a different investor lawsuit using a $90 million payment from the defunct firm’s insurers. Those investors, like these in the ongoing suit, blamed Lehman officers and directors for losses on Lehman securities.

A bankruptcy examiner said Lehman foundered because of too much debt, which it tried to hide from investors, and risky real estate investments.

Patricia Hynes, a lawyer for Fuld, didn’t immediately respond to an e-mail seeking comment on Kaplan’s opinion.

Now out of bankruptcy and paying creditors by installments, Lehman continues to sell assets to try to raise its planned payments by 2016 or so of 18 cents on the dollar.

Key Aspects

The California entities purchased Lehman securities from Oct. 25, 2004, through March 31, 2008, and accused management of misleading investors about key aspects of the company’s business, according to the opinion.

Kaplan found that there was sufficient evidence for the lawsuit to stand only for a few specific instances of misrepresentations. Those included a Dec. 13, 2007, annual report from Lehman and a Nov. 6, 2007, executive committee meeting.

“The examiner’s report concluded that a trier of fact could find that Repo 105 transactions were used to create a materially misleading picture of Lehman’s financial condition beginning in late 2007,” Kaplan said in the ruling.

Fuld will also have to face allegations that he fraudulently gifted a multimillion-dollar Jupiter Island, Florida, residence to his wife, Kathleen Fuld, for $100 in November 2008, according to the opinion.

“The allegation that the Fulds at the time of the transfer believed that they would incur debts beyond their ability to pay would permit proof of the obvious,” Kaplan said.

Joseph Cotchett, a lawyer for the plaintiffs, didn’t immediately return a call for comment.

The bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Christie Smythe in New York at csmythe1@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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