Third Amended Complaint - Lehman Brothers Securities Litigation

and other boom markets, focused on land development projects, and included a higher proportion ofequity investments.97. Until 2007, Lehman primarily valued its PTG assets using a method called“Cap * 105” that calculated the current capitalization of the property multiplied by 105%, with theadditional 5% representing the presumed appreciation of the collateral. This method overvaluescollateral significantly when real estate prices are in decline – as was occurring by mid 2007.98. In 2007, Lehman began to implement a different method (“IRR”) to take the place ofthe Cap * 105 method. The implementation was significantly delayed, however, and the Cap * 105method was still used to value at least a third of Lehman’s PTG assets in 2Q08. Moreover, Lehmanused a yield for its IRR method that did not correspond to market-based interest rates. To reflectfair value, the discount rate should have reflected the yield an investor would require to purchasethe property. However, to the contrary, Anthony Barsanti, who was responsible for determiningPTG to market adjustments, acknowledged to the Examiner that Lehman was “probably notmarking to yield” but more on “gut feeling” about the position. Moreover, Aristides Koutouvides,who reported to Barsanti, confirmed that the PTG business desk valuations did not reflect what abuyer would pay on the open market in 2Q08, contrary to FAS 157. Jonathan Cohen, the LehmanSenior Vice President responsible for overseeing valuation of assets in GREG, also said that in the2Q08 the PTG portfolio was generally not marked to prices at which the assets could be sold.99. Because neither of the methods Lehman used to value PTG assets employed marketbasedassumptions to reflect fair value, the statements concerning Lehman’s fair valuemeasurements in the Offering Materials were materially false and misleading when made.100. Additionally, a review by the Examiner of certain PTG positions valued using theCap * 105 method at the end of 2Q08 – positions making up approximately 36% of Lehman’s entirePTG portfolio by value – showed that the value of the collateral underlying these positions declinedby 20% when transitioned to new valuation methods in July 2008. Further, when the Examinerreviewed 105 positions that specifically switched from Cap * 105 to IRR models, the results-31-