Third Amended Complaint - Lehman Brothers Securities Litigation

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financial condition and operations of Lehman as of November 30, 2007; and (2) E&Y conducted itsaudit of Lehman’s FY07 financial results in accordance with GAAS (the “2007 Audit Report”).E&Y consented to the inclusion of its 2007 Audit Report in Lehman’s 2007 Form 10-K, andconsented to the incorporation of the 2007 Audit Report by reference in registration statements,including Lehman’s May 30, 2006 S-3 Shelf Registration Statement (No. 333−134553), and posteffective amendments. These statements in E&Y’s 2007 Audit Report were false and misleadingbecause, contrary to E&Y’s representation, Lehman’s FY07 financial results were not prepared inaccordance with GAAP because the Company’s net leverage was understated through the use ofRepo 105 transactions, and E&Y’s audit of Lehman’s FY07 financial results was not performed inaccordance with GAAS.41. As further discussed in 61-69, the failure to disclose Lehman’s use and accountingtreatment of Repo 105 transactions in its financial statements and related footnotes incorporated intothe Offering Materials violated numerous GAAP provisions and SEC regulations. This materialomission caused Lehman’s financial reports to present an unrealistic and unreliable picture of theCompany’s business realities by misrepresenting its net leverage and liquidity, in violation of, interalia, Accounting Release 173 (“[I]t is important that the overall impression created by the financialstatements be consistent with the business realities of the company’s financial position andoperations”) and FASCON 1 (specifically 32, 34 & 42) and FASCON 2 (specifically 15, 33,Figure 1, 58, 79-80, 91-97, 160).42. Moreover, the SEC requires that certain information be disclosed in the MD&Asection of periodic reports. Specifically, Item 303 of SEC Regulation S-K states that the registrant’sMD&A section of its SEC filings should provide users of financial statements with relevantinformation in assessing the registrant’s financial condition and results of operations, includingtrends and uncertainties that would cause reported financial information to not be indicative of itsfuture financial condition or future operating results. By omitting any mention of Repo 105, theOffering Materials violated Item 303’s disclosure requirements. Nowhere did the Offering-14-
Materials report, inter alia, the material effect Repo 105 transactions had on the Company’s balancesheet, net leverage, liquidity and capital resources, and their nature or business purpose.43. In addition to the false and misleading statements referenced above at 26-40,which appear in the Forms 10-Q and 10-K filed by Lehman during the Class Period and which wereincorporated by reference into the Offerings Materials issued in connection with the challengedOfferings, additional false and misleading statements regarding Repo 105 are set forth below inchronological order.a. Additional Material MisstatementsAnd Omissions Relating To Repo 10544. 2Q07: On July 10, 2007, Lehman filed with the SEC its quarterly report on Form10-Q for the quarter ended May 31, 2007 (“2Q07 10-Q”) (which largely repeated information in itsJune 12, 2007 Form 8-K) signed by O’Meara.45. The 2Q07 10-Q reported that Lehman’s net leverage ratio was 15.4, which wasmaterially false and misleading because it failed to take into account $31.943 billion in Repo 105assets that were temporarily removed from Lehman’s financial statements. Had the assets that weresubject to the Repo 105 transactions been included, Lehman’s net leverage ratio would have been16.9, representing an increase 15 times greater than Lehman’s own materiality threshold of a changein net leverage of 0.1.46. In addition, the 2Q07 10-Q reported $137.948 billion in securities sold underagreements to repurchase. This statement was materially false and misleading because it excludedalmost $32 billion in Repo 105 assets that Lehman had temporarily removed from its balance sheet,which Lehman had agreed to repurchase days after the end of the quarter.47. 3Q07: On October 10, 2007, Lehman filed with the SEC its quarterly report onForm 10-Q for the quarter ended August 31, 2007 (“3Q07 10-Q”) (which largely repeatedinformation in its September 18, 2007 Form 8-K), signed by O’Meara.48. The 3Q07 10-Q reported that Lehman’s net leverage ratio was 16.1, which wasmaterially misleading because it failed to take into account $36.407 billion in Repo 105 assets that-15-
Page 2 and 3: TABLE OF CONTENTSI. NATURE OF ACTIO
Page 4 and 5: COUNT VI Violations Of Section 20A
Page 6 and 7: CEO:CFO:CLO:CMBS:Commercial Portfol
Page 8 and 9: SFAS 133:SFAS 140:SFAS 157:Financia
Page 10 and 11: disclose that (i) it simultaneously
Page 12 and 13: C. Defendants8. At all relevant tim
Page 14 and 15: can only be ascertained through app
Page 16 and 17: A. The Offering Materials Were Mate
Page 18 and 19: 105 transactions, “[c]onsequently
Page 20 and 21: Table 3 - Repo 105 Transactions and
Page 24 and 25: were temporarily removed from Lehma
Page 27 and 28: purpose to the transactions. Indeed
Page 29 and 30: management policies and systems ena
Page 31 and 32: 76. Indeed, in order to engage in r
Page 33 and 34: Lehman’s stress tests “meaningl
Page 35 and 36: 3. The Offering Materials Contained
Page 37 and 38: with regard to Level 3 inputs, SFAS
Page 39 and 40: and other boom markets, focused on
Page 41 and 42: specifically carved out “all [of
Page 43 and 44: Lehman had already committed to fin
Page 45 and 46: derivative component of the investm
Page 47 and 48: generally accepted accounting princ
Page 49 and 50: 119. After Lehman’s bankruptcy, i
Page 51 and 52: misleading. The Securities Act Defe
Page 53 and 54: 138. Plaintiffs and other members o
Page 55 and 56: A. Repo 105 Transactions1. Lehman U
Page 57 and 58: our governments businesses around t
Page 59 and 60: 154. As the Examiner stated with re
Page 61 and 62: 162. The Insider Defendants knew an
Page 63 and 64: 169. Rather than disclose to the in
Page 65 and 66: setting of risk limits.” These st
Page 67 and 68: exceeded its risk appetite limits b
Page 69 and 70: most part that are in-the-money”
Page 71 and 72: y the Company on June 9, Callan sta
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198. The 2Q08 10-Q reported that th
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cover lending positions. Jane Buyer
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upon their conversation, McDade und
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(e) Lehman was motivated to manage
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c. On July 20, 2007, Nagioff emaile
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sell assets, and that the distresse
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accordance with the standards of th
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E&Y’s contemporaneous notes demon
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obligations when auditing and revie
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240. AU §§ 336 and 9336 address a
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A delinquencies and loss expectatio
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on behalf of Plaintiffs and other m
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involvement in the day-to-day opera
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(b)(c)(d)(e)(f)Awarding Plaintiffs
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APPENDIX ACOMMON STOCK/PREFERRED ST
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APPENDIX AISSUE DATEApril 4, 2008(t
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APPENDIX AISSUE DATEAugust 1, 2007A
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APPENDIX AISSUE DATEDecember 21,200
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APPENDIX AISSUE DATEFebruary 27,200
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APPENDIX AISSUE DATEMay 9, 2008May
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APPENDIX B
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APPENDIX BISSUE DATESECURITY(CUSIP)
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APPENDIX C1. CW1, an underwriter in
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7. CW7 and CW8, investigators in Au
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Third Amended Complaint - Lehman Brothers Securities Litigation

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