Lehman Insider's Letter Warned About Violating Code of Ethics

It seems that most people will guard their bosses dirty secrets until their boss starts to turn against them.


MARCH 19, 2010
Lehman Insider's Letter Warned About Violating Code of Ethics
Top Executives Told Firm Misled Investors on Assets; Problems in Mumbai
Wall Street Journal
By MICHAEL CORKERY

Matthew Lee, a Lehman Brothers Holdings Inc. senior vice president, warned in a May 2008 letter that he believed "senior management" may have violated Lehman's internal code of ethics by misleading investors and regulators about the true value of the firm's assets.

Mr. Lee addressed his letter to then-Chief Financial Officer Erin Callan and Chief Risk Officer Chris O'Meara, among others, only days before he was ousted from the firm. Portions of the letter were excerpted in the U.S. Bankruptcy Court examiner's report on Lehman released last week. A full version of the letter was reviewed Friday by The Wall Street Journal. Ms. Callan didn't return a phone call seeking comment.

Mr. Lee's complaints echo those of many investors and analysts at the time, who questioned whether Lehman was delaying write-downs to avoid potentially crippling losses. Mr. Lee, a 14-year veteran who headed the firm's global balance-sheet and legal-entity accounting, said Lehman had "tens of billions of dollars of unsubstantiated balances, which may or may not be 'bad,' or non-performing assets."

"I believe the manner in which the Firm is reporting [certain] assets is potentially misleading to the public and various governmental agencies," Mr. Lee wrote.

On Friday, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) asked the Justice Department to investigate alleged accounting manipulations that took place at Lehman and that were detailed in the 2,200-page examiner's report.

In the May 18, 2008, letter, Mr. Lee specifically criticized the accounting controls in Lehman's Mumbai office. "There is a very real possibility of a potential misstatement of material facts being efficiently distributed by that office," Mr. Lee wrote.

At the time, one India investment was drawing scrutiny from Lehman critics, including David Einhorn of hedge fund Greenlight Capital Inc. Mr. Einhorn questioned why the Wall Street firm had written up the value of a power plant there, known as KSK Energy Ventures, during the first quarter of 2008. In a speech to investors on May 21, Mr. Einhorn, who was betting that Lehman's stock would decline, said the firm had booked a $400 million to $600 million gain in the first quarter by writing up the value of KSK Energy...

Mr. Lee's lawyer, Erwin Shustak, of San Diego, said his client had complained orally for several months to his boss, Martin Kelly, Lehman's former global financial controller, about many of the same issues he raised "formally" in his letter. Mr. Kelly declined to comment, through a Barclays PLC spokesman, where he now works. According to the examiner's report, Mr. Kelly had raised concerns to top executives about the firm's accounting tactic, known as "Repo 105," which temporarily moved billions of dollars off its balance sheet, according to the examiner's report. The Lehman bankruptcy estate declined to comment...