Third Amended Complaint - Lehman Brothers Securities Litigation

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continued to grow its leveraged loans, commercial real estate and principal investment business,culminating with the acquisition of the Archstone REIT in May 2007, the largest transaction inLehman’s history.74. In its SEC filings during the Class Period, Lehman repeatedly assured investors thatit had appropriate risk management policies in place and, significantly, that Lehman monitored andenforced strict adherence to those policies. Lehman stated that it “monitor[ed] and enforce[ed]adherence to [its] risk policies” (included in the 2007 10-K and 1Q08 10-Q) and that“[m]anagement’s Finance Committee oversees compliance with policies and limits” (included in the2Q07 10-Q, 3Q07 10-Q, 2007 10-K, and 1Q08 10-Q). Lehman also stated that “[w]e . . . ensurethat appropriate risk mitigants are in place” (included in the 2Q07 10-Q and 3Q07 10-Q), and that“[d]ecisions on approving transactions . . . take into account . . . importantly, the impact anyparticular transaction under consideration would have on our overall risk appetite” (included in the2Q07 10-Q and 3Q07 10-Q). These statements were materially false and misleading becauseLehman’s risk management framework and risk mitigants, including its risk appetite limits, wereroutinely overruled, disregarded and violated throughout the Class Period.75. Lehman’s “risk appetite” was a measure that aggregated market risk, credit risk andevent risk faced by Lehman. According to Lehman’s risk management policies, the firm‐wide riskappetite limit was supposed to be the “hardest” of all Lehman’s risk limits such that a breach of thislimit required a determination by the Risk Committee – comprised of the Executive Committee(which included Defendants Fuld, Gregory, Callan and Lowitt), the Chief Risk Officer, and theChief Financial Officer – of the proper action to take. In reality, however, risk appetite was treatedas a “soft” limit that was routinely exceeded during the Class Period. As the Examiner testified toCongress, “Lehman was in breach of its established risk appetite limits on a persistent basis duringthe second half of 2007.” All of the Insider Defendants served on the Risk Committee at varyingtimes during the Class Period.-22-
76. Indeed, in order to engage in riskier transactions, Lehman raised its risk appetitelimit four times between December 2006 and December 2007, from $2.3 to $3.3 billion, then to$3.5 billion, then to $4.0 billion, and then regularly exceeded even these increased limits byhundreds of millions of dollars. Furthermore, between May and August 2007, Lehman excluded its$2.3 billion bridge equity position in Archstone (as well as other large bridge equity positions) fromits risk appetite usage calculations which, if included, would have caused Lehman to further exceedits risk limits. In May 2007, when Lehman committed to Archstone, “[i]t was clear,” according tothe Examiner, “that the Archstone transaction would put Lehman over its then existing risk limits,but the deal was committed anyway.” Lehman exceeded its risk appetite limit by $41 million inJuly 2007 and $62 million in August 2007, and after the Archstone and other bridge equity positionswere added, Lehman exceeded its risk appetite limits by $608 million in September 2007, $670million in October 2007, $508 million in November 2007, $562 million in December 2007, $708million in January 2008, and $578 million in February 2008. As the Examiner found, Lehman’sdisregard for this “hard” limit facilitated a dramatic expansion of the firm’s risk profile between2006 and 2007.77. Lehman also had “concentration limits,” which were designed to ensure that theCompany did not take too much risk in a single, undiversified business or area. However, Lehmanroutinely and consistently disregarded the concentration limits with respect to its leveraged loan andcommercial real estate business, including by failing to enforce the Company’s “single transactionlimits,” which were meant to ensure that its investments were properly limited and diversified bybusiness line and by counterparty. The single transaction limit was composed of two limits: (1) alimit applicable to the notional amount of the expected leveraged loan (i.e., the total value of aleveraged position’s assets); and (2) a limit applicable to the amount that Lehman was at risk oflosing on the leveraged loan. The Examiner testified that, in late 2006, Lehman decided “todisregard the single transaction limit.” By July 2007, Lehman had committed to approximately 30deals that exceeded its $250 million loss threshold, and five deals that violated the notional limit of-23-
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 22 and 23: financial condition and operations
Page 24 and 25: were temporarily removed from Lehma
Page 27 and 28: purpose to the transactions. Indeed
Page 29: management policies and systems ena
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
Page 73 and 74: 198. The 2Q08 10-Q reported that th
Page 75 and 76: cover lending positions. Jane Buyer
Page 77 and 78: upon their conversation, McDade und
Page 79 and 80: (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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