Fraud is something tricky, or deceptive. The case involving Lehman’s Brothers is a good example of financial fraudulent reporting, where there was manipulation of financial statements to gain a desired outcome. This act resulted from Lehman Brothers Holdings Inc. issuing a variety of offerings of debit and equity securities caused by contributing materials that were comprised of false statements and disqualified material information (A Brief Summary of the Lehman Brothers Equity/Debt Class Action Litigation, n.d.). This permitted Lehman to raise more than 31 billion dollars through offerings to be held in the accompanying and complaint appendices (Alvarez, 2009). The offering materials comprised of untrue statements and excluded true materials, other things included:
Repo 105: Lehman used hidden resale and repurchase transactions called the Repo 105 to eliminate the billions dollars from its balance sheet (A Brief Summary of the Lehman Brothers Equity/Debt Class Action Litigation, n.d.). This was done quarterly when the firm was expected to provide reports within ten days. These dealings did not have any financial substance (Alvarez, 2009). As Lehman represented, it used normal Repo agreements and documented these repos as short-term funding. Lehman did not reveal that he involved in Repo 105 dealings for ten of billions in dollars in properties and documented them as if the fundamental possessions were permanently removed and sold from the books, to repurchase these assets a few days following the end of every quarter.
This hidden practice had the effect of temporarily and unnaturally reducing the net leverage ratio of Lehman after every quarter, this acted as a significant guide to analysts of securities, investors, and credit agencies (A Brief Summary of the Lehman Brothers Equity/Debt Class Action Litigation, n.d.). This made Lehman’s statements misleading and false, especially concerning financial condition and leverage.
Risk Management
Lehman continuously promoted his complicated risk management system. Lehman regularly increased the limits as he created illiquid resources.
Credit Risk Concentration
It is necessary that an organization employ suitable bookkeeping guidelines to give significant attention to risks associated with bank credit. However, Lehman did not reveal the data in relation to its concentration of real estates and mortgage related resources. This did not pave way for investors to carry out a significant evaluation on these dangerous assets (A Brief Summary of the Lehman Brothers Equity/Debt Class Action Litigation, n.d.).
Lehman Brothers failed because of some reasons. To begin with, there was an increase in his inability to distribute and scrutinize the source of subprime mortgage throughout the crisis because he used personal balance sheet to obtain assets for long-term investment. These investments were focused in three areas: private equity, commercial real estate, and leveraged loans.
As examiner appointed by the court in Lehman’s bankruptcy proceedings, Anton Valukas gave evidence before the house on monetary services. The public was not informed that there were loopholes in the liquidity pool that had been reported, and it was not informed that the risk controls of Lehman were unnoticed, or that there was artificial deflation of the reported leverage numbers. Lehman’s trading of billions of shares was a misinformation. Facts about the monetary condition of Lehman and illiquid resources become visible in events and announcements that were concluded by the filing of bankruptcy of Lehman on September 15, 2008.
Lead plaintiffs filed a class action complaint for violation of federal securities laws. This was done on April 23, 2010. The securities act of 1933 states that on behalf of all entities and persons who bought the Lehman securities found in appendices A and B and to the protest who suffered damage. The complaint declares claims against Lehman officers like Richard S. Fuld, Jr who was the chair of the board and the former CEO, various underwriters for Lehman equity and debt offerings and several members of the Lehman’s BOD. This was against Young LLP and Ernst who were auditors to Lehman.
Several fraud cases were declared by the complaint under the Securities Exchange Act of 1934 on behalf of all entities and people, apart from the defendants and their affiliates, who bought Lehman call options, ordinary stock, or who sell alternatives between June 12, 2007, and September 15, 2008, and those that were affected (United States District Court, 2008). The grievance declared these claims against some insiders of Lehman like Fuld against Young, LLP and Ernst. A court provided a 106-page order on July 27, 2010 keeping majority of the claims, supporting the main allegations in the grievance (United States District Court, 2008, par. 7). Lead Plaintiffs attained anticipated settlements of 516 Million Dollars
Lead Plaintiffs submitted the agreements to the court on December 2, 2010 to solve some claims declared in the action (United States District Court, Southern District of New York, 2008). He first dealt with a projected settlement to resolve the allegation against director defendants and the individual officer for 90 Billion dollars in hard cash (United States District Court, 2008). Lead Plaintiffs also submitted a proposed settlement to settle allegations alongside some alleged underwriters of Lehman’s contributions for 516,218 000 billion dollars in cash (United States District Court, 2008). These settlements are liable to court approval. In all cases resulting from economic crisis, the combined recovery of 16,218,000 billion Dollars from the proposed resettlements is the third main upturn. These claims are not settled alongside other defendants, the action is in progress with UBS financial services, Inc and Ernst and Young.
On December 15, 2011, Honorable Lewis A. Kaplan commanded that the notices of proposed settlements be delivered to possible members of the settlement. The judge planned for a hearing on April12, 2012 at 4.00 p.m at the United States district court for the southern district of New York. The aim of this hearing will be to decide if the anticipated settlements are reasonable, adequate, and fair. It must also be accepted by the court if the proposed plans are reasonable, fair, and if lead Counsels motion for a reward of attorney’s reimbursement fees of litigation expenses should be approved (Duff, 2009).
Recommendations that would Address the Risks of Similar Frauds in Future
The regulators are supposed to revise the structure of their organization and optimize their staff to achieve their missions. Basing on Lehman incidence, the supervisors and regulators did not identify the weaknesses. There should be laws that regulate the banking activities (Duff, 2009). There is need to create a more stable liquidity environment. The policy makers should promote advancement in exploration of the proposal that would be used in replacing the two banks by the central clearing utility and examine if these utilities would act as an improved watchdog on limiting risks. There is need for reexamining the institutionalization of penalties for settlement failures (Valukas, 2010).
Basing on the factor that lack of liquidity was a contributing factor in the failure of Lehman Brothers, there is need for financial institutions to have a liquidity management plan. This would help a failing financial institution to make critical decisions. Liquidity guidelines have been provided by the Basel committee on banking that will be incorporated in the United States to act as a guideline in identifying adequate liquidity buffers.
There is need for financial institutions to be able to evaluate the risks across jurisdictions, counterparties, and products. The institutions should also catalogue thousands of contracts. Monetary institutions should acquire a detailed crisis management plan that considers multijurisdictional operations (Valukas, 2010). To avoid the risk of such a fraud occurring in future, I recommend that if certain information is significant to a lender or an investor, he should be able to apply the accounting principle of full disclosure while using the financial statements. In this discussion, Lehman did not disclose information of real estates and mortgage related assets that were wrong. Important information should be included in the statement or in the notes of the statement (Duff, 2009).
All transactions should be recorded for legal purposes to enable the company to determine its operations (Valukas, 2010). Such mistakes of fraud can be avoided by ensuring that transactions are correctly recorded. The income statements must be submitted at the end of the financial year.
I recommend the ongoing activities in a business to be recorded within the shortest time possible, e.g., five months or weeks to enable an accountant to determine amount relevant to that period. Accountants should be careful with the income statements because they bring out a true reflection of the financial position of a company (Valukas, 2010). It is alleged that the company continues operating and cannot liquidate. Lehman’s cases of risk management can be avoided in future because his major aim was to accumulate illiquid assets that are against the guiding principles of accounting.
References
A Brief Summary of the Lehman Brothers Equity/Debt Class Action Litigation. (n.d.). Web.
Alvarez , M. (2009). Lehman Brothers Holdings Inc.: The state of the estate. Web.
Duff, P. (2009). Repo 105 security liquidity analysis. Web.
United States District Court, Southern District of New York. (2008). In re Lehman Brothers Equity/Debt Securities Litigation. (08-cv-5523, 09-md-2017 (LAK)). Web.
Valukas, A. (2010). United States bankruptcy court southern district of New York. A Journal of Lehman’s Brothers Holding Inc., 3(9), 1-43.