Washington State Attorney General’s Office recovers $31.3 million in Lehman Bonds losses

The Washington State Attorney General’s Office (AGO) recovered $31 million for the State Investment Board (WSIB) in a settlement announced today related to the 2008 collapse of Lehman Brothers, Inc.—the largest corporate bankruptcy in history. Before declaring bankruptcy, Lehman Brothers was the fourth largest investment bank in the U.S.

The lawsuit, filed in May 2009, alleged Lehman failed to disclose material facts in connection with the various securities it sold to Washington, including the true value and risky nature of its mortgage-related assets.

The lawsuit also claimed that Lehman's financial statements failed to comply with applicable accounting standards. Specifically, Lehman engaged in a practice known as “Repo 105,” whereby they transferred billions of dollars of assets each quarter and accounted for them as sales of assets as opposed to financings. This accounting maneuver gave the illusion Lehman was more financially stable than it was.

WSIB purchased Lehman bonds between 2006 and mid-2008.  When Lehman declared bankruptcy, WSIB liquidated its holdings and recorded losses of more than $92 million on these bonds.

This settlement recovered roughly one-third of the WSIB’s losses from former Lehman executives and directors, underwriters for several Lehman offerings, and Ernst and Young LLP, Lehman’s outside auditor. Therecovered funds will be returned to an account which the board invests.

“This settlement is a substantial victory for the state of Washington and the beneficiaries of the funds managed by the WSIB,” said Investment Board Executive Director Theresa Whitmarsh.  “The settlement enables the WSIB to put the money back to work for our beneficiaries and other stakeholders.”

“The Attorney General’s Office will hold powerful interests accountable when they don’t play by the rules,” said Attorney General Bob Ferguson. “The recovery of $31 million, despite Lehman’s dramatic collapse, helps Washington’s bottom line and returns money to the state retirement plans.”

Originally filed in Thurston County Superior Court, the case was ultimately transferred to the federal court in the Southern District of New York in Manhattan.  The lawsuit was handled by the AGO and the law firm of Robbins Geller Rudman & Dowd LLP, which served as a special assistant attorney general pursuant to a contract with the Attorney General’s Office.


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