State recovers $31 million lost in Lehman bankruptcy

Staff writerJanuary 31, 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.

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 currently has $94.6 billion under management.

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