In a 66-page decision dated Oct. 15, Judge Lewis A. Kaplan of the U.S. District Court Southern District of New York dismissed some claims, but proceeded with allegations of misconduct against Lehman's London-based accounting firm Ernst & Young and against Lehman executives, including the chairman and chief executive officer, the chief financial officer, the president and chief operating officer, and five former directors.
Among the agencies who shared in the loss of $155 million from the San Mateo County investment pool are the Sequoia Union High School District, which lost about $6.5 million, and four local K-8 school districts: the Menlo Park City district, which lost nearly $4 million; the Las Lomitas district, almost $400,000; the Portola Valley district, nearly $150,000; and the Woodside district, nearly $100,000.
Some funds have already been paid back. With Lehman now liquidated, the county has recovered $15.2 million — about 10 percent of the losses — from asset distribution payments in April and October 2012, County Counsel John Beiers told the Almanac. The county expects to recover at least 22 percent in coming years, and "we're still hopeful it'll be somewhere between 25 percent and 30 percent of the total loss," Mr. Beiers said.
Recovered funds are apportioned according to the size of an agency's investment in 2008, he said.
Attorneys from both sides applauded Judge Kaplan's decision.
"This is a tremendous victory. Our public entity clients are extremely pleased with the results," said plaintiffs' attorney Mark C. Molumphy of the Burlingame law firm Cotchett Pitre & McCarthy in a statement.
"We are pleased that [the] court has concurred in our analysis in largely dismissing the claims against our clients," said defense attorney Adam J. Wasserman of the international law firm Dechert LLP. "We look forward to obtaining dismissal of the remaining claims."
A unique case
In the lawsuit now unfolding in federal court, San Mateo County is one of eight plaintiffs seeking an award of damages. The county is seeking the full amount of loss: $155 million. "That's what we're asking for. That's the extent of our damages," Mr. Beiers said. Also plaintiffs: the cities of Auburn, Burbank and San Buenaventura; Monterey County; two special districts; and an insurance company.
Lehman's financial statements and offering documents, the plaintiffs allege, materially understated the company's net leverage, overstated the value of its real estate assets, failed to adequately disclose its liquidity, were misleading about its risk management practices, failed to properly disclose its concentrations of risk, and misrepresented conformity with generally accepted accounting principles.
The lawsuit is unique, Mr. Beier said. "I'm not aware of many other lawsuits that are naming as defendants the officers and directors of a Wall Street company." But isn't one advantage of incorporating to protect individuals in the corporation from liability? "Individuals can still be liable if there's evidence of fraud, for example, which is what we're seeking here," Mr. Beiers said.
In the ruling, Judge Kaplan considers the arguments in which the individual executives assert that they are not liable for actions of employees under their supervision. Calling it a "peculiar contention," the judge adds that "the kindest thing to be said about this argument is that it is entirely unsupported by the language of the statute or any persuasive authority. Equally unfounded is their contention that only (supervisors) who have signed a relevant Registration Statement may be held liable."
As for Ernst & Young, the judge asserted that the firm issued "false and misleading" audit reports on Lehman's financial health. "The auditor certified that Lehman's financial reporting was in accordance with generally accepted accounting principles, even though (the auditor) was or should have been aware that this was not true, because it in turn was aware of various accounting devices and financial mechanisms that Lehman was using to portray its condition as better than it actually was."