Notice to Lehman Brothers Structured Note Holders Purchased via UBS

Zamansky & Associates Issues Notice to Lehman Brothers Structured Note Holders Purchased via UBS

Recent months have brought a flurry of activity for investors who purchased Lehman structured notes, particularly through UBS. Each of the developments may have an impact on the legal rights of those investors.

First, in June, UBS suffered its largest loss before a FINRA arbitration panel, the investor recovering over $2 million as a result of UBS’s misconduct. This award follows a string of arbitration cases awarding compensation for Lehman note losses.

Next, a federal judge in New York ruled in a UBS - Lehman note class action case that the offering documents that described Lehman’s so-called “principal protection” notes were false and misleading. UBS has always defended itself by arguing that even if its sales practices were faulty, its customers received adequate risk disclosure in these materials. That defense is now gone.

And finally, it appears that the bankruptcy proceeding is moving toward a resolution for creditors, including structured note holders. The court overseeing the unwinding of Lehman has approved a plan that would pay creditors-including holders of structured products-about 20 cents on the dollar. The bankruptcy court’s ruling paves the way for a creditors’ vote this Fall, so a partial payout may finally be in sight.

In light of these important developments, it now appears that Lehman note holders who were sold their notes by UBS should take action. First, they should consider whether they want to “opt out” of the class action and seek justice on an individual basis. And second, they should carefully track the bankruptcy proceedings to see what the amount of their partial recovery will be.

Zamansky & Associates won the first case-and has now won the largest case-against UBS regarding Lehman structured products, and represents dozens of additional UBS customers who are working to hold UBS responsible for its misconduct.

For advice on how to “opt out” of the class action and pursue a case by filing a FINRA arbitration, please call us at 212-742-1414 or fill out the contact form below.

Double Dealing: How UBS Profited From Lehman’s Accounting Duplicity

One of the recurring themes of my blog posts is that it’s nearly impossible to orchestrate financial wrongdoing of significant magnitude without the complicity of major financial institutions. Banks and brokerage firms almost invariably put their financial interests ahead of their clients, and any investor who believes otherwise should take the time to read this complaint by Massachusetts Secretary William Galvin alleging fraud in connection with Merrill Lynch’s sale of auction rate securities.  While Galvin’s complaint relates to Merrill, the countless allegations about how that firm failed its customers are pretty typical of how Wall Street treats its clients.

The Lehman bankruptcy examiner’s report made public last week further documents how Wall Street firms are quick to aid and abet wrongdoing.  To dress up its balance sheet, Lehman engaged in a myriad of “Repo 105″ transactions, a financial legerdemain that allowed the company to raise cash by parking assets at rival overseas firms and booking the sham swaps as “sales.”   This accounting hocus pocus, while not permissible under U.S. rules, was deemed kosher in the UK providing that Lehman orchestrated repo transactions through its London-based subsidiary and with non-U.S. banks. The examiner’s report makes clear that the foreign banks that facilitated Lehman’s sham sales were very much aware of the firm’s “desperation” to create the illusion that it had significantly shed assets and reduced its leverage.  For those not well versed in accounting, allow me to explain in simpler but cruder terms about what transpired: About a half dozen foreign banks played an active role in helping Lehman put some heavy duty lipstick on a pig.

One of Lehman’s most active beauticians was UBS.  UBS reportedly transacted approximately $10 billion in Repo 105 deals with Lehman, likely garnering the firm tens of millions of dollars in interest payments relating to the sham sales.  But UBS had another reason to help Lehman deceive investors about its flailing financial health. During the period Lehman was orchestrating its “Repo 105″ transactions, UBS’s retail brokers were aggressively peddling to their customers a product deceptively known as Lehman Brothers “100 Percent Principal Protected Notes.”  Although UBS marketed these notes to investors as being “risk free,” they were in fact extremely risky unsecured IOUs whose repayment was entirely dependent on Lehman’s financial solvency.  UBS paid its brokers high commissions to sell the risky Lehman notes to unsuspecting investors, which explains why the sales force successfully unloaded more than $1 billion of the paper. When Lehman collapsed, its notes instantly became nearly worthless.

UBS’s sale of the Lehman notes was questionable even before the bankruptcy examiner’s disclosure.  New Hampshire’s securities regulator charged in a filing last June that UBS engaged in “dishonest and unethical” practices selling the Lehman notes, causing New Hampshire investors to lose $2.5 million. The North American Securities Administrators Association (NAASA) has said it was considering convening a task force on the Lehman notes, and it’s my understanding the SEC is also looking into the matter.  I recently won a significant arbitration award on behalf of a client in South Carolina who bought Lehman notes from a UBS broker; it was the first arbitration decision relating to UBS’s sale of Lehman notes, and my office has more than a dozen pending.

Rest assured, UBS is going to have to account for why it continued to aggressively market Lehman notes to retail customers as highly conservative investments while on the institutional side facilitating transactions that were designed to mask Lehman’s troubled financial condition.  Ernst & Young, Lehman’s auditor, also has some “accounting” to do; that firm, as it happens, also is UBS’s auditor.  It will be interesting to learn how UBS booked the assets that Lehman “sold” the firm.

Individual investors owe Lehman bankruptcy examiner Anton Valukas a tremendous debt of gratitude. His report lays out in painstaking detail Wall Street’s fundamentally dishonest ways and makes clear the industry cannot be trusted to regulate itself.  Individual investors also should note that in early 2007, the year Lehman began its financial shenanigans, Charles Schumer and Michael Bloomberg, respectively New York’s senior senator and Mayor, issued this report by McKinsey & Company saying that the U.S. markets were fast losing ground to the UK because they were overly regulated.  As Lehman’s “Repo 105″ transactions were only permissible in the UK and not the US, we obviously shouldn’t be looking to that country for a regulatory model worth emulating.

Ironically, a significant number of investors who bought Lehman notes from UBS reside in the UK.  Fortunately for them, they can file arbitration claims in the US to seek redress.

Lehman’s Accounting Deception

The blistering report by the bankruptcy-court examiner investigating the collapse of Lehman Brothers should make investors blood boil.  The report outlines in painstaking detail how Lehman managed risk by essentially cooking its books with off-balance-sheet accounting shenanigans reminiscent of Enron. That Lehman’s deception took place years after the collapse of Enron makes the dishonesty especially outrageous. Former CEO Dick Fuld reportedly claims that he didn’t know about the deception but ignorance isn’t a defense.  He and the three CFOs named in the report should be held accountable civilly and possibly criminally. Lehman’s auditor Ernst & Young could also be held accountable.

What is especially galling given Lehman’s blatant deception is the public statement the company issued in June 2008 in response to short-seller David Einhorn publicly questioning Lehman’s earnings:

“We will not continue to refute Mr. Einhorn’s allegations and accusations. Mr. Einhorn cherry-picks certain specific items from our quarterly filing and takes them out of context and distorts them to relay a false impression of the firm’s financial condition which suits him because of his short position in our stock. He also makes allegations that have no basis in fact with the same hope of achieving personal gain.”

No basis in fact? Einhorn based his conclusions after meeting with former CFO Erin Callan and determined that she didn’t have a good handle on the company’s numbers.  As best I can tell, Lehman’s deception was far greater than even Einhorn figured out.  Regulators should investigate the chain of command involved with the issuance of this statement and charge all of them. There has to be serious consequences for issuing such a patently false statement.

The examiner’s findings will have a ripple effect and could potentially help bolster securities arbitration cases of retail investors who were sold Lehman “100 Percent Principal Protected Notes.”  As noted earlier, in December I won a significant arbitration award on behalf of a client in South Carolina relating to these securities.

What concerns me is how Lehman’s rivals would fare if Lehman’s bankruptcy court examiner spent a year combing the books of the other major Wall Street firms, particularly those that received TARP money.  It’s painfully obvious that investors can’t rely on the Big Four accounting firms to provide effective oversight.

Keeping Callan and Gregory in the Lehman Tent

It’s standard practice for Wall Street firms to retain executives tied to extensive financial losses and persistent questions about accounting practices, particularly if there is the likelihood of lawsuits. So I note with great interest that that Erin Callan and Joseph Gregory, who today “resigned” respectfully as CFO and COO of Lehman Brothers, will remain at the embattled firm, at least for now. Ms. Callan will rejoin the firm’s investment banking division in an unspecified “senior capacity,” and Mr. Gregory will stay with the company in an “undefined capacity.” Suffice it to say, Callan and Gregory aren’t getting promotions.

It’s doubtful that Lehman is retaining the tarnished executives out of sheer loyalty. More probably, it’s out of concern for the litigation that will no doubt ensue. Company lawyers prefer to have all the major participants responsible for activities leading to litigation in the corporate tent, thereby having some measure of control over the proceedings. Throwing Callan and Gregory to the wolves could put their legal interests at odds with Lehman’s.

The irony of Ms. Callan returning to investment banking must also be noted. During her previous tenure there, Lehman took public both Fortress Capital and Och-Ziff and IPOs that certainly didn’t serve investors well. Since their respective public offerings, Fortress lost 56 percent of its value and Och-Ziff some 25 percent of its value. As I noted earlier, Lehman was also responsible for orchestrating Wachovia’s highly questionable takeover of Golden West.

Perhaps Ms. Callan had no involvement with the aforementioned deals. But given her track record as CFO, Ms. Callan’s return to Lehman’s investment banking group somehow doesn’t inspire further confidence in Lehman’s deal making prowess.

Lessons From Lehman

I’m still trying to make sense of Lehman’s disclosure yesterday that it will post a whopping $2.8 billion loss in the second quarter and raise $6 billion in equity by selling shares at a 20% discount to book value, but one lesson is already readily apparent: the best and brightest analysts aren’t working at the major Wall Street brokerage firms.

Lehman’s projected loss amounts to $5.14 a share, a mind-boggling deficit given that Wall Street analysts were expecting a loss of no more than $1.28 a share. Lehman’s planned fund raising will dilute the holdings of existing common shareholders by 30 percent.

As best I can tell, the loss gives some credence to warnings by hedge fund manager David Einhorn, who repeatedly has charged that Lehman hasn’t adequately marked down some of its assets. While it isn’t entirely clear to me that Lehman plans to write down some of the assets whose value Mr. Einhorn has questioned, the hedge fund manager was indeed correct in predicting a massive earnings train wreck. As Mr. Einhorn so elegantly puts it: “(Lehman) just raised $6 billion of capital that they said they didn’t need to replace losses they said they didn’t have.”

Individual Lehman shareholders should be concerned how Mr. Einhorn – who has a short position on Lehman’s stock – knew with such certainty that the company’s asset values would have to be aggressively written down. Admittedly, it’s quite possible that Mr. Einhorn is just way smarter than the Wall Street analysts who cover Lehman’s stock and is better versed on how to read a balance sheet. But Mr. Einhorn’s public statements indicate that he based his analysis on Lehman’s valuation methods, which possibly suggests we are dealing with basic accounting issues.

Lehman previously maintained that Mr. Einhorn’s criticisms had “no basis in fact.” The merits of that defense are increasingly hard to believe.

Lehman’s Investment Banking Prowess

The ways of Wall Street never cease to amaze me.

You might think that a company responsible for orchestrating one of the biggest M&A banking debacles in recent memory, the reputational damage would be quite severe. Think again. In justifying his upgrade of Lehman’s stock, Merrill Lynch analyst Guy Moszkowski cites Lehman’s “very strong global franchises” in various areas, including investment banking.

Investment banking?

Lehman has “bragging” rights for Wachovia’s failed 2006 acquisition of Golden West Financial, a major California thrift and mortgage lender. Analysts estimate that Wachovia could rack up more than $10 billion in losses on Golden West’s $122 billion mortgage portfolio. The botched acquisition is said to have cost Wachovia CEO Ken Thompson his job earlier this week.

Fortunately for Lehman, the brilliant investment banking minds behind M&A deals that go south aren’t called to task. So kudos to Dealbreaker for taking note of Lehman’s additional contribution to Wachovia’s financial woes.

When Companies Doth Complain Too Much

I was taken somewhat aback when I read how Lehman Brothers responded to an inquiry about allegations made by short seller David Einhorn. “We will not continue to refute Mr. Einhorn’s allegations and accusations,” an unnamed spokeswoman told The Wall Street Journal. “Mr. Einhorn cherry-picks certain specific items from our quarterly filing and takes them out of context and distorts them to relay a false impression of the firm’s financial condition which suits him because of his short position in our stock. He also makes allegations that have no basis in fact with the same hope of achieving personal gain.”

It’s understandable that Lehman would vehemently deny Mr. Einhorn’s allegations questioning the firm’s accounting. However, the statement seems a tad personal, particularly since Mr. Einhorn has made no secret of his short position. Lehman’s essential public defense appears to be that Mr. Einhorn’s allegations are wrong simply because he benefits handsomely if they are right.

I’m not going to take sides on this one, as I’m not privy to all the facts. Still, Lehman’s seemingly personal attacks on Mr. Einhorn hardly inspire confidence if history is any indication.

Back in 2001 a young reporter at Fortune named Bethany McLean began questioning the accounting of a then highly revered Houston-based company called Enron. Jeffrey Skilling, the company’s then chief executive, called her unethical for failing to do more research. And Kenneth Lay, Enron’s former chairman, complained to Fortune’s editor that McLean was relying on information provided by a short seller who wanted to drive down the price of the company’s stock. Turns out, that short seller had good reason to be short on the stock.

Then there were the attacks by L. Dennis Kozlowski when he was the CEO of Tyco International. In response to a report by David Tice questioning Tyco’s accounting, Mr. Kozlowski said he was outraged by the “false and baseless” report. ”There is no risk that investors will wake up one day and find out” that ”there’s something wrong with the way we’ve been recording revenue or the way we’ve been recording margins.” Mr. Tice, too, was also a short seller.

Finally, there was the press release Calpine International issued on August 27, 2004 attacking a report by an independent research firm called Rate Financials questioning Calpine’s accounting. The release said the report was riddled with “flagrant, misleading and inaccurate allegations.” Sixteen months later Calpine filed for bankruptcy.

For the sake of the public markets, I truly hope that Lehman ultimately defies a disturbing trend that suggests a possible inverse relationship between reality and the vehemence of a company’s denials.

Making Sense of David Einhorn vs. Lehman Brothers

One of the sad lessons that most individual investors fail to learn is just how badly the stock market is stacked against them. Yes, there are rules that supposedly ensure a level playing field, but those rules become meaningless when some of the players are decidedly smarter and know how to play the system to their financial advantage. The market uncertainty about Lehman Brothers Holdings affords a textbook example.

Lehman’s stock plummeted earlier this week in the wake of aWall Street Journal story saying the firm is “considering” a common stock offering that would be dilutive to shareholders. The precipitous decline was no doubt welcomed by David Einhorn, a hedge fund manager who is short Lehman’s stock and has been quite vocal in his attacks questioning the transparency of the brokerage firm’s financials. Mr. Einhorn’s repeated public slamming of Lehman Brothers reportedly has contributed to the decline in Lehman’s stock price.

Mr. Einhorn has made some extremely damning allegations about Lehman’s accounting practices. He questions some large, unrealized gains Lehman booked in the first quarter that helped goose up the firm’s earnings. The gains were on illiquid securities for which there are no public markets, which means Lehman’s management can assign values at its own discretion. As if that alone isn’t enough of a red flag, Mr. Einhorn also charges that Lehman has given him conflicting explanations of its valuation process. To boot, Mr. Einhorn says Lehman has not properly disclosed or written down various complex debt securities, including $6.5 billion of CDOs. Lehman vehemently denies Mr. Einhorn’s allegations, saying they have “no basis in fact.”

I’m in no position to evaluate Lehman’s earnings statements, and I have no reason to question them. But I also am not quick to accept that Mr. Einhorn’s allegations have no basis in fact. The short seller’s claim that Lehman has placed an artificially high valuation on illiquid securities is eerily familiar. There were similar allegations that Bear Stearns priced artificially high the illiquid assets in its subprime hedge funds before those investment vehicles collapsed. A recent comment by Sy Jacobs, a hedge-fund manager who correctly predicted the subprime mortgage crisis, also cannot be ignored. “Just because we got saved from what would have happened that Monday if Bear went down doesn’t mean we are saved from all the forces that conspired to get Bear Stearns to the brink in the first place,” Mr. Jacobs told Barrons.

I also note a comment by star banking analyst Meredith Whitney about Lehman CFO Erin Callan in the May 17th issue of the Journal: “(Callan) is going out on a limb to provide more transparency in Lehman’s earnings, business and strategy.” On Monday, Ms. Whitney predicted Lehman would report a second quarter loss after earlier predicting a profit. The sudden about face possibly suggests that Lehman’s transparency wasn’t quite as clear as Ms. Whitney originally believed.

The reality is there is so much market turmoil and uncertainty today that it is no longer possible to accurately value many of the assets the major brokerage firms have on their books. As Standard & Poor’s analyst Diane Hinton has noted, “We’re in a market environment where sometimes perception becomes reality.” At the moment, it appears that a short seller on Lehman’s stock appears to have the upper hand in shaping the company’s market perception.

And that, folks, is the sad state of the public markets in this Country.