Third Amended Complaint - Lehman Brothers Securities Litigation

Lehman’s stress tests “meaningless,” and “Lehman’s management did not have a regular andsystematic means of analyzing the amount of catastrophic loss that the firm could suffer from thoseincreasingly large and illiquid investments.” In fact, experimental stress tests conducted in 2008indicated that a large proportion of Lehman’s risk lay with real estate and private equity positionsthat had not been included in the stress tests. For example, one stress test showed maximumpotential losses of $9.4 billion, which included $7.4 billion in losses on real estate and privateequity positions excluded from the stress tests. Another stress test showed potential total losses of$13.4 billion, of which $10.9 billion was attributable to the previously excluded real estate andprivate equity positions, and only $2.5 billion to previously included trading positions.81. Lehman’s Offering Materials, by incorporating the 2Q07 10-Q and 3Q07 10-Q, alsorepresented that “[w]e apply analytical procedures overlaid with sound practical judgment and workproactively with business areas before transactions occur to ensure appropriate risk mitigants are inplace.” Contrary to this statement, however, while Lehman’s mortgage-related risks hadsignificantly increased as it accumulated illiquid assets, Lehman failed to ensure that appropriaterisk mitigants were in place. These illiquid assets included residential Alt-A assets that Lehmancould not directly hedge. In addition, Lehman did not increase the magnitude of its “macro hedges”– a technique used to eliminate the risks of a portfolio of assets – on its leveraged loan andcommercial real estate portfolios.82. The statement that Lehman “work[s] proactively with business areas beforetransactions occur to ensure appropriate risk mitigants are in place” was also false and misleadingbecause, unbeknownst to investors, by the start of the Class Period, Lehman had relaxed riskcontrols to accommodate growth of its commercial real estate business, including its bridge equitypositions in the United States, which increased more than ten-fold from $116 million in 2Q06 to$1.33 billion in 2Q07, and then more than doubled to exceed $3 billion by the end of 2Q08.Lehman’s real estate bridge equity deals were particularly risky because declining values of theunderlying real estate prevented Lehman from selling bridge equity positions as planned, such as-25-