State recovers $31 million lost in Lehman Brothers bankruptcy

Staff writerJanuary 30, 2014 

When Lehman Brothers Inc. collapsed in 2008, the Washington State Investment Board  lost $92 million.

In 2009, the state sued.

On Thursday, the State Attorney General’s Office announced that it had recovered $31 million.

Before declaring bankruptcy, Lehman Brothers was the fourth largest investment bank in the U.S. The lawsuit  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,” according to a release from the Attorney General.

The lawsuit also claimed that Lehman's financial statements failed to comply with applicable accounting standards. Specifically, the release said, 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 board’s losses from former Lehman executives and directors, underwriters for several Lehman offerings, and Ernst and Young LLP, Lehman’s outside auditor. The recovered 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.”

According to its website, the WSIB “manages investments for 17 retirement plans for public employees, teachers, school employees, law enforcement officers, firefighters and judges. This also includes the Deferred Compensation Program to supplement other retirement benefits.” The board also manages investments for 16 public funds that support or benefit industrial insurance, colleges and universities, and developmental disability programs. The board currently has $94.6 billion under management.

 

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