Third Amended Complaint - Lehman Brothers Securities Litigation

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portfolio,” including “illiquidity” and “concentration of risk.” By failing to disclose material factsabout Lehman’s concentration of mortgage and real estate related risks, investors could notmeaningfully assess the Company’s exposure to the mortgage and real estate markets and theincreasing riskiness of Lehman’s portfolio of mortgage and real estate assets.106. Alt-A Concentration: Lehman was a leading originator of Alternative A-paper, orAlt-A loans – a type of mortgage that is typically associated with borrowers who purportedly havethe creditworthiness of “prime” quality, but have traits that prevent the loans from qualifying as“prime.” Lehman’s Offering Materials did not even include the term “Alt-A” until Lehman filed its1Q08 Form 10-Q on April 9, 2008 and even that filing was materially misleading. When Lehmanfinally began to identify Alt-A holdings on its balance sheet in its 2Q08 Form 10-Q, Lehmanconsolidated its Alt-A holdings with prime holdings into a single category labeled “Alt-A/Prime,”even though less than 7% ($1 billion of the reported $14.6 billion “Alt-A/Prime” exposure) actuallyconsisted of “prime” loans. By initially omitting Alt-A holdings altogether, and later grouping “Alt-A” with “Prime” mortgage-related assets, the Offering Materials did not adequately discloseLehman’s true exposure to the riskier Alt-A loans that were experiencing rising delinquencies anddefaults throughout the Class Period. Moreover, Lehman did not disclose that it had loosened itslending standards for Alt-A loans such that they were actually more akin to subprime than to prime.As noted in an internal Lehman email on March 17, 2007: “I have pointed out in the past thatAurora’s product is far from Alt-A anymore. The traditional Alt-A program is only 40% of Aurora’sproduction . . . the rest 60% of production has 100% [] financing in lower FICOs with non-fulldocumentation, and/or investment properties.”107. Commercial Real Estate Concentration: From the end of Lehman’s 2006 fiscalyear to the end of its 2007 fiscal year, Lehman increased its global CRE assets by more than 90%,from $28.9 billion to $55.2 billion. However, by the start of the Class Period in July 2007, Lehmanpersonnel had already recognized that the market for placing investments backed by commercialreal estate was “virtually closed” and that the leveraged loan market had shut down. Nevertheless,-34-
Lehman had already committed to financing several large CRE deals that closed in October andNovember 2007, including Archstone. Indeed, the Company’s involvement in Archstone andseveral other real estate bridge equity deals was so enormous that it dwarfed Lehman’s entire preexistingreal estate book. On November 6, 2007, GREG made a presentation to Lehman’sExecutive Committee that recognized the significant risks inherent in the over-concentration of itsglobal commercial real estate portfolio, stating that “under any circumstance an estimated $15billion reduction in global balance sheet is warranted,” and recommended reducing the globalGREG balance sheet from $58 billion to $43.7 billion by March 31, 2008. Notwithstanding thisinstruction, however, by May 31, 2008, GREG’s global commercial real estate portfolio remainedover-concentrated at $49.3 billion. Furthermore, Lehman’s commercial real estate portfolioincluded high risk PTG investments involving property development projects whose value could bematerially affected if the developer failed to perform in accordance with the business plan.Lehman’s PTG portfolio was especially risky because it focused on land development projects,which carried more risk than other property types; was concentrated in California and other boommarkets; and because Lehman took equity stakes in the developments (approximately 30% as offiscal 2007 year-end). The PTG balance sheet grew from $6.1 billion in fiscal 2005 to $6.9 billionin fiscal 2006, and then to $9.6 billion in fiscal 2007. These concentrated risks, however, were notdisclosed. Due to Lehman’s over-concentration of CRE assets, the Company ultimately had to writedown its CRE positions by approximately $4 billion from 1Q08 to 3Q08.108. Leveraged Loan Concentration: Between December 2006 and June 2007, Lehmanparticipated in at least 11 leveraged buyout deals that each exceeded $5 billion; by April 2007,Lehman had a record (approximately 70) high yield contingent commitments; and in June 2007,Lehman’s lending pace by dollar amount had already doubled its 2006 record-setting year for highgrade and high yield combined. These concentrations were so large that Lehman’s high yield bookshowed a risk appetite usage that was almost double the limit for these exposures. When the marketslowed by the second quarter of 2007, Lehman had approximately $36 billion of contingent-35-
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 40: and other boom markets, focused on
Page 41: specifically carved out “all [of
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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