Third Amended Complaint - Lehman Brothers Securities Litigation

disclose that (i) it simultaneously engaged in Repo 105 transactions for tens ofbillions of dollars in assets; (ii) it was recording the Repo 105 transactions as if theunderlying assets had been permanently sold and removed from the books; and (iii) ithad an obligation to repurchase these assets just days after the end of each quarter.This undisclosed practice had the effect of artificially and temporarily reducingLehman’s net leverage ratio each quarter during the Class Period – an importantmetric to securities analysts, credit agencies and investors – rendering Lehman’sstatements concerning net leverage and financial condition materially false andmisleading when made and in violation of GAAP.Risk Management: Lehman publicly and consistently promoted its robust andsophisticated risk management system. In truth, however, Lehman regularlydisregarded and exceeded its risk limits, or simply raised the limits, as Lehmanaccumulated illiquid assets, including the largest in its history – the $5.4 billionArchstone project discussed below.Liquidity: Defendants’ statements concerning Lehman’s liquidity failed to disclosethat Repo 105 transactions had the effect of materially understating Lehman’sliquidity risk as Lehman had tens of billions of dollars in immediate short termobligations that were unreported, and as the Class Period continued, Lehman’sreported liquidity pool included large amounts of encumbered assets.Commercial Real Estate Assets: Defendants represented that all of Lehman’sassets were presented at “fair value.” Lehman, however, failed to consider marketinformation when valuing certain of its commercial real estate assets, therebymaterially overstating their value. Concentration of Credit Risk: GAAP requires disclosure of significantconcentrations of credit risk. Lehman, however, failed to disclose material factsconcerning its concentration of mortgage and real estate related assets, preventinginvestors from meaningfully assessing the Company’s exposure to these risky assets.2. In short, as the Examiner recently testified before the House Committee on FinancialServices, “the public did not know there were holes in the reported liquidity pool, nor did it knowthat Lehman’s risk controls were being ignored, or that reported leverage numbers were artificiallydeflated. Billions of Lehman shares traded on misinformation.”II.JURISDICTION AND VENUE3. This Court has jurisdiction over the subject matter of this action pursuant to Section22 of the Securities Act, 15 U.S.C. § 77v; Section 27 of the Exchange Act, 15 U.S.C. § 78aa; and 28U.S.C. § 1331.-2-