Lehman Brothers and Ernst & Young
Lehman Brothers
General Information
- Lehman Brothers Holdings Inc.
- Investment bank; the smallest giant on Wall Street
- Survived 158 years
- 60 offices around the world
- More than 28,000 staff
Brief Timeline
1993 – Richard Fuld became the CEO of Lehman
- Grew from traditional investment bank to using borrowed money to play the market itself.
2000 – Borrowed significant amount of money to fund their investment in the housing markets.
2007 – The firm closed its subprime lender: BNC Mortgage
- Repo 105 is used as a tool for Lehman to extend and delay their downfall.
- $27 million reduction in goodwill
2008 – Reported loss of 3 billion dollars; sets $6 billion dollars stock sale
Sept. 15th, 2008 – Filed for Chapter 11 Bankruptcy Protection
- Largest bankruptcy filing in US history, holding over $600 billion assets.
Effects to the Accounting Industry
- The decisions made that led to the fall of Lehman were most miss calculation in investment choices
- Since the issue is very recent, it is still under investigations.
Repo 105
It’s a repurchase agreement
– Short term loan in exchange for collateral
– Lehman: Categorized as sales instead of loan (Flashy Accounting!)
– Used international law of Britain to define sales
– Over 50 Billion in Repo 105 transactions
– Repo 105 used to temporarily remove the securities inventory from the balance sheet
– Repo money used to pay down liabilities
– Decreased leverage misled investors into thinking the company was very healthy
Ernst and Young
General Information
– Big 4 Accounting Firm
– Involved in a few other scandals (Akai Holdings, Sons of Gwalia)
– Responsible for: External Auditing and Investigating the internal fraud claim
Brief Timeline
- 2003: HealthSouth Corp
– $109 million settlement of investor lawsuits
- 2009: Bally’s Total Fitness Holding Corp.
– Fined 8.5 million for approving fraudulent statements
- 2009: Akai Holdings ($200 million settlement)
– falsified court documents to avoid negligence charges
- 2009: Sons of Gwalia
– $125 Million (AUS) negligent of gold and dollar hedging contracts
Ernst and Young Case
– No substance to transaction except to remove unwanted assets
– Repo 105 existed to manipulate financial information
– Financial statements may be materially misleading even when they do not violate GAAP
– Perfectly legal which makes it difficult to charge
– Matthew Lee (long time employee) = Whistle Blower
– Did not see or approved Repo 105
– Ignored Matthew Lee’s Claim
– Investigating the internal fraud claim = prohibited by Sarbanes-Oxley Act
Future Outlook
– May experience reputation loss, but yet early to tell what will happen next
– There is potential for:
– Reforms of GAAPS and regulations
– Shows the weakness of Sarbanes-Oxley
For more information, click on the following:
“The Credit of Crisis Visualized”
Brief documentary on “The Fall of Lehman”
Work Cited List
Works Cited
” A timeline of failure on Wall Street, from Lehman Brothers to Washington Mutual | Business | The Guardian .” Latest news, comment and reviews from the Guardian | guardian.co.uk . N.p., n.d. Web. 3 Apr. 2011. <http://www.guardian.co.uk/business/2008/sep/27/wallstreet.useconomy3>.
Buckstein, Jeff. “State targets E&Y in Repo 105 lawsuit.” The Bottom Line. N.p., n.d. Web. 3 Apr. 2011. <http://www.thebottomlinenews.ca/index.php?section=article&articleid=494>.
Christodoulou, Mario. “Lehman smoking gun leaves E&Y facing questions.” Accountancy Age. N.p., n.d. Web. 3 Apr. 2011. <www.accountancyage.com/aa/news/1808180/lehman-smoking-gun-leaves-e-y-facing-questions >.
“Cuomo Sues Ernst & Young for Assisting Lehman Brothers in `Repo 105‚Ä≤ Fraud ¬´ Best make Moneys.” Best make Moneys. N.p., n.d. Web. 3 Apr. 2011. <http://best-make-moneys.com/cuomo-sues-ernst-young-for-assisting-lehman-brothers-in-repo-105-fraud.html>.
“FACTBOX: Five facts about Lehman Brothers’ past and present | Reuters .” Business & Financial News, Breaking US & International News | Reuters.com. N.p., n.d. Web. 3 Apr. 2011. <http://www.reuters.com/article/2008/09/09/us-lehman-factbox-idUSN0930860520080909>.
HENNING, PETER J.. “In Lehman Brothers’ Collapse, a Dwindling Chance of Charges – NYTimes.com.” Mergers, Acquisitions, Venture Capital, Hedge Funds – DealBook – NYTimes.com. N.p., n.d. Web. 3 Apr. 2011. <http://dealbook.nytimes.com/2011/03/15/in-lehmans-collapse-a-dwindling-chance-of-charges/?src=dlbksb>.
“Lehman Brothers: In depth news, commentary and analysis from the Financial Times.” World business, finance, and political news from the Financial Times – FT.com. N.p., n.d. Web. 3 Apr. 2011. <http://www.ft.com/lehman>.
MERCED, MICHAEL J. DE LA. “The Origins of Lehman’s ‘Repo 105’ – NYTimes.com.” Mergers, Acquisitions, Venture Capital, Hedge Funds – DealBook – NYTimes.com. N.p., n.d. Web. 3 Apr. 2011. <http://dealbook.nytimes.com/2010/03/12/the-british-origins-of-lehmans-accounting-gimmick/>.
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