In re Lehman Bros. Sec. & Erisa Litig.

799 F.Supp.2d 258

In re LEHMAN BROTHERS SECURITIES AND ERISA LITIGATION.This document applies to:In re Lehman Brothers Equity/Debt Securities Litigation, 08 Civ. 5523(LAK).

No. 09 MC 2017(LAK).

United States District Court, S.D. New York.

July 27, 2011.

Max W. Berger, Steven B. Singer, Boaz A. Weinstein, David R. Stickney, Elizabeth P. Lin, Jon F. Worm, Bernstein Litowitz Berger & Grossman LLP, David Kessler, John A. Kehoe, Benjamin J. Hinerfeld, John J. Gross, Richard A. Russo, Jr., Nichole Browning, Barroway Topaz Kessler Meltzer & Check, LLP, Co–Lead Counsel for Plaintiffs.

Patricia M. Hynes, Todd Fishman, Allen & Overy LLP, Attorneys for Defendant Richard S. Fuld, Jr.

David R. Boyd, Jonathan P. Krisbergh, Boise, Schiller & Flexner LLP, Attorneys for Defendant Incapital LLC.Audrey Strauss, Israel David, Fried Frank Harris Shriver & Jacobson LLP, Attorneys for Defendant Joseph M. Gregory.Mark P. Ressler, Michael Hanin, Kasowitz Benson Torres & Friedman LLP, Attorneys for Defendant HVB Capital Markets, Inc.Michael J. Chepiga, Mary Elizabeth McGarry, Erika Burk, Bryce A. Pashler, Simpson Thacher & Bartlett LLP, Attorneys for Defendants Christopher M. O'Meara and Joseph M. Gregory.Mitchell A. Lowenthal, Meredith E. Kotler, Victor L. Hou, Cleary Gottlieb Steen & Hamilton LLP, Attorneys for All Underwriter Defendants Except HVB Capital Markets, Inc. and Incapital LLC.Marshall R. King, Oliver M. Olanoff, Julie I. Smith, Gibson, Dunn & Crutcher LLP, Attorneys for Defendant UBS Financial Services, Inc.Kelly M. Hnatt, Willkie Farr & Gallagher LLP, Attorneys for Defendant Ian Lowitt.Robert J. Cleary, Dietrich L. Snell, Mark E. Davidson, Seth D. Fier, Proskauer Rose LLP, Attorneys for Defendant Erin Callan.Andrew J. Levander, Kathleen N. Massey, Adam J. Wasserman, Dechert LLP, Attorneys for Defendants Michael L. Ainslie, John F. Akers, Roger S. Berlind, Thomas H. Cruikshank, Marsha Johnson Evans, Sir Christopher Gent, Roland A. Hernandez, Henry Kaufman, and John D. Macomber.Miles N. Ruthberg, Jamie L. Wine, Kevin H. Metz, Peter A. Wald, Latham & Watkins LLP, Attorneys for Defendant Ernst & Young LLP.

OPINION

LEWIS A. KAPLAN, District Judge.

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¦Table of Contents¦
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Facts                                                                   265

 Parties                                                             265

 Plaintiffs                                                     265
         Defendants                                                     265
         Relevant Non–Party                                           266

 Prior Proceedings                                                   266
    The TAC                                                             267
    Repo 105                                                            268
    Allegedly Misleading Statements                                     269

 Net Leverage Ratio                                             269
         “Securities Sold Under Agreements to Repurchase ”          270
         Risk Approach                                                  270
         Liquidity                                                      271
         Accounting Practices                                           271

Discussion                                                              272

I. Legal Standard                                                    272
II. Standing                                                          273
III. Exchange Act Claims                                               274

 A. The Standard                                                   274
    B. Individual Defendants                                          275

 1. Existence of materially false and misleading statements or omissions   275

 a. Repo 105 and net leverage                             276

 (1) SFAS 140                                          277
                 (2) Compliance with GAAP                              279
                 (3) Treating Repo 105 transactions as sales           281
                 (4) Failure to disclose Repo 105 transactions         282

 b. Risk management policies                              283

 (1) Exceeding risk limits                             284
                 (2) Adequacy of mitigants                             285
                 (3) Stress tests                                      285
                 (4) Value–at–Risk                                 286

 c. Liquidity                                             287
             d. Concentrations of credit risk                         290

 2. Scienter                                                  292

 a. Motive and opportunity                                             293
          b. Circumstantial evidence of conscious misbehavior or recklessness   294

 (1) Repo 105 Transactions                             294
                 (2) Risk management                                   297
                 (3) Concentrations of credit risk                     297

 C. E & Y                                                          298

 1. Statements regarding GAAS                                 299
         2. Statements regarding GAAP                                 303

 D. Loss Causation                                                 304
    E. The Other Exchange Act Claims                                  307

 1. Section 20(a)                                             307
         2. Section 20A                                               307

IV. Securities Act                                                    308

 A. Timeliness                                                                               308
    B. Statutory standing under Section 12                                                      310
    C. Existence of actionable material misstatements and omissions in the Offering Materials   311

 1. Valuation of commercial real estate                       311
         2. Structured products offering materials and PPNs           313

 D. Section 11 claims against Callan                               315
    E. Affirmative defenses of non-E & Y defendants                   317

 1. Availability of the affirmative defenses on a motion to dismiss   317
       2. Applicability of defenses                                         317

 F. Securities Act claims against E & Y                            318
    G. Section 15 claims                                              319

Conclusion                                                              319

The September 2008 collapse of Lehman Brothers Holdings Inc. (“Lehman”) disrupted the entire economy and greatly affected owners of the company's securities. This case concerns more than $31 billion in Lehman debt and equity securities issued pursuant to a May 30, 2006 shelf registration statement (the “Registration Statement”), a base prospectus of the same date, and various prospectus, product, and pricing supplements (collectively, the “Offering Materials”), which incorporated by reference several of Lehman's SEC filings.

Plaintiffs are pension funds, companies, and individuals, each of which purchased some of these securities. They sue Lehman's former officers, directors, and auditors, as well as underwriters of the securities, under Sections 11, 12, and 15 of the Securities Act of 1933 ¹ (“Securities Act”) and Lehman's former officers and auditors under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 ² (“Exchange Act”) and Rule 10b–5 thereunder.³ The complaint ⁴ alleges that the Offering Materials were false and misleading because they incorporated by reference Lehman's financial statements, which in turn contained misleading statements and omissions concerning Lehman's (1) use of “Repo 105” transactions and their effect on Lehman's reported net leverage, (2) risk management policies, (3) liquidity risk, (4) concentrations of credit risk, and (5) the value of Lehman's commercial real estate holdings. It alleges also that certain of Lehman's former officers made false and misleading oral statements about most of these subjects.

The matter is before the Court on defendants' motions to dismiss the TAC for failure to state a claim upon which relief may be granted.⁵

Facts

PartiesPlaintiffs

Plaintiffs are pension funds, companies, and individuals each of which purchased Lehman common stock or other Lehman securities, including structured products like principal protection notes (“PPNs”), issued pursuant to the Offering Materials. The Court has appointed the Alameda County Employees' Retirement Association (“ACERA”), the Government of Guam Retirement Fund (“GGRF”), the Northern Ireland Local Government Officers' Superannuation Committee (“NILGOSC”), the City of Edinburgh Council as Administering Authority of the Lothian Pension Fund (“Lothian”), and the Operating Engineers Local 3 Trust Fund (“Operating Engineers”) as lead plaintiffs.⁶ They sue both under (1) the Securities Act, purportedly on behalf of all persons who purchased the securities listed in TAC Appendices A and B, and (2) the Exchange Act, allegedly on behalf of all persons who purchased or otherwise acquired Lehman common stock and call options, or who sold put options, between June 12, 2007, and September 15, 2008 (the “Class Period”).

Defendants

There are four categories of defendants in this case.

The Insider Defendants are five of Lehman's former officers: Richard S. Fuld, Jr., Christopher M. O'Meara, Joseph M. Gregory, Erin Callan, and Ian Lowitt. Fuld was Lehman's chairman and chief executive officer at all relevant times. ⁷ O'Meara was its chief financial officer, controller and executive vice president from 2004 until December 1, 2007, when he became global head of risk management.⁸ Gregory was Lehman's president and chief operating officer until June 12, 2008.⁹ Callan served as its chief financial officer and executive vice president from ...