Third Amended Complaint - Lehman Brothers Securities Litigation

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showed that the marks for these positions were overvalued by $298 million as of July 31, 2008, and$90 million as of August 31, 2008. The Examiner’s analysis of certain positions valued using IRRindicated that the collateral underlying these positions was still overvalued by 15-20%, as the IRRmodels did not use appropriate market-based information. Thus, Lehman’s PTG assets wereovervalued by tens or hundreds of millions of dollars as of 2Q08 and material write-downs wererequired for a significant number of PTG assets.101. Because Lehman’s PTG assets were overvalued, the statements in Lehman’s 6/9/088-K and its 6/16/08 8-K regarding its reported income were false and misleading.c. Additional Facts Showing That Lehman’sCommercial Real Estate Holdings Were Overvalued102. Days before filing for bankruptcy, Lehman tried to sell its commercial real estateassets to various banks. Kenneth D. Lewis, CEO of Bank of America, told the Examiner that its duediligence regarding a potential transaction with Lehman in September 2008 revealed that Lehman’scommercial real estate marks were too high. In particular, Lewis described a massive “$66 billionhole” in Lehman’s valuation of its assets. An October 7, 2008 The Wall Street Journal articlesimilarly reported that the executives from the firms which declined to buy Lehman’s portfolio saidthat they believed Lehman’s commercial portfolio was overvalued by as much as 35%. Further, asreported by The New York Times on October 31, 2008, Treasury Secretary Henry Paulson laterexplained that the absence of a federal bailout of Lehman was due to its impaired assets, stating:“We didn’t have the powers, because by law the Federal Reserve could bailout Lehman with a loanonly if the bank had enough good assets to serve as collateral, which it did not.”103. After Lehman’s bankruptcy, certain of Lehman’s assets were acquired by Barclay’sfor $1.54 billion. Barclay’s acquisition excluded Lehman’s commercial real estate holdingsprecisely because they were overvalued. As Robert E. Diamond, Jr., Barclay’s President, recalled:“Our proposal was to buy everything out of Lehman, but leave the commercial real estate. We didnot feel the valuations [of the commercial real estate] were supportable . . . .” Indeed, Barclay’s-32-
specifically carved out “all [of Lehman’s] Archstone debt and equity positions” from the purchaseagreement.5. The Offering Materials Failed ToDisclose Lehman’s Risk Concentrations104. GAAP requires disclosure of risk concentrations. AICPA Statement of Position(“SOP”) No. 94-6, Disclosure of Certain Significant Risks and Uncertainties (“SOP 94-6”), requiresdisclosures specifically relating to risks and uncertainties that could significantly affect the amountsreported in the financial statements in the near term (i.e., one year), particularly from currentvulnerability as a result of significant concentrations in certain aspects of the entity’s operations.FAS No. 107, Disclosures about Fair Value of Financial Instruments (“FAS 107”), as amended byFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”), requiresdisclosure of significant concentrations of credit risk for financial instruments such as loans. FASBStaff Position (“FSP”) SOP 94-6-1, Terms of Loan Products That May Give Rise to a Concentrationof Credit Risk (“FSP SOP 94-6-1”), addresses disclosure requirements for entities that originate,hold, guarantee, service, or invest in loan products whose terms may give rise to a concentration ofcredit risk.105. Until the filing of its 2Q08 10-Q on July 10, 2008, when Lehman belatedly began toprovide information concerning its commercial mortgage and real estate investment relatedportfolios, the required disclosures relating to significant concentrations of credit risk fromLehman’s mortgage and real estate related assets were omitted. Throughout the Class Period,Lehman’s Offering Materials failed to disclose adequately or meaningfully the Company’s riskconcentrations in, among other things, highly risky Alt-A loans, illiquid commercial real estateassets, and leveraged loan commitments. In addition, the Offering Materials failed to disclose thatLehman had heavy concentrations of illiquid assets, such as residential and commercial real estatewith deteriorating values. These disclosures were especially important because the market formortgage-backed securities and the real estate market had declined. In fact, an internal Lehmanaudit report dated February 26, 2007, advised that Lehman “address the main risks in the Firm’s-33-
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 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 other boom markets, focused on
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
Page 81 and 82: c. On July 20, 2007, Nagioff emaile
Page 83 and 84: sell assets, and that the distresse
Page 85 and 86: accordance with the standards of th
Page 87 and 88: E&Y’s contemporaneous notes demon
Page 89 and 90: obligations when auditing and revie
Page 91 and 92:
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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