Ethics Within Lehman Brothers

Can Being Unethical Also Be Fraudulent

A Review of Lehman Brothers Bankruptcy

Karen D. Koeppen

White Collar, Just 528

Ethics Within Lehman Brothers

Dr. Roy Janisch

October 30, 2012

Abstract

September 15, 2012 marks the fourth year anniversary of

Lehman Brothers announcement to file chapter 11 bankruptcy. The

New York State Labor Board then reported N.Y. lost 5% of its

workforce with Lehman’s decline and their lay-off of 26,000

employees. The company collapsed with $613 billion of debt of

which $160 billion was in unsecured bonds held by investors. The

details of Lehman’s failures have been unfolding over the past

four years through a variety of sources. This paper will look at

the internal factors uncovered in addition to any other exposed

insights. Focus on key figureheads affiliated with Lehman,

directing some attention to professional nepotism and corporate

malfeasance. Also will recount what proved beneficial to the

158-year-old company that survived a civil war, the great

depression, and two world wars. After obtaining an understanding

of the company’s questionable accounting method, along with

executive decisions concerning CEO turnovers, this paper will

Ethics Within Lehman Brothers

attempt to substantiate how any revealed unethical, intentional

wrongdoings validates fraud as the business prospered and the

greed of some had grown. Also, confirm that the Securities

Exchange Committee (SEC) is culpable of negligence in ensuring

protection for the American people and enforcing the Dodd Frank

Act. The Washington Post reports the SEC is finding Lehman

Brothers innocent of any financial fraud as well as any criminal

wrongdoing, and will probably not recommend any enforcement

action against the firm after their extensive three and a half

year probe.

Can Being Unethical Also Be Fraudulent?

A Review of Lehman Brothers Bankruptcy

From the 2007 crisis that cost the U.S. economy at least

12.8 trillion dollars in GDP (Independent Watchdog Better

Markets), billions more for investors in loss of wealth, a loss

Ethics Within Lehman Brothers

of 8 million jobs, and yet not one Wall Street executive has had

criminal charges brought against them. The SEC, who does not

have prosecutorial powers, is permitting these top managers to go

unaccountable for their actions by not enacting any civil

penalties or recommending any enforceable action. SEC staff

lawyer __________ claims any employee of the SEC will not

recommend criminal charges be brought against their possible

future employers where they can earn substantially more. John

Coffee, a professor at Columbia Law School in New York and a

prominent expert on securities law and white-collar crime seems

to agree. “It’s either because it is very hard to prove complex

criminal cases in the financial world or because they were under

pressure not to bring such cases, or simply because no one committed

fraud,” Coffee said. “I think that last explanation is a little

too simple.”

The generally accepted accounting principles (GAAP)

definition of financial statement fraud is “the deliberate

misrepresentation of the financial condition of an enterprise

accomplished through the intentional misstatement or omission of

amounts or disclosures in the financial statements in order to

Ethics Within Lehman Brothers

deceive financial statement users.” Fraudulent financial

statements affect shareholders, lenders, creditors, and

employees; such as the estimated 26,000 employees of Lehman

Brothers, ( ) and the creditors who may get six cents on the

dollar.. ( )

The old ways when a firm handshake meant a solid contract,

honoring the client to bank relationship, and retiring with your

dignity, is quickly disappearing along with a corporate history

icon.

Corporate culture is more important than the ability,

talent, and resources of any one individual employee. Great

corporate cultures transform people into better individuals who

produce, innovate, build, and grow a company... <revised

www.Joshua Kennon.com>

Are there past implications as to the ‘Tone at the Top’ that

reveal the attitudes of constituents?

This paper revisits the history of Lehman Brothers as to see what

ethical standards where established and then to pinpoint when the

firms ethical behavior became blurred descending it into to

fraudulent behavior.

Foundation

Ethics Within Lehman Brothers

One hundred fifty-eight years earlier, the original Lehman

Brothers settled in Montgomery, Alabama from Germany. Henry

became a proprietor of a small store he named

‘H. Lehman’. Three years later Emanuel Lehman joined Henry and

they renamed the business ‘Lehman & Bro’. After another three

years, their little bother Mayer arrived, again renaming the

store to ‘Lehman Brothers’ (hereisthecity.com-A Brief History).

These actions display family shared business values. The success

of their merchandising business stemmed from their willingness to

accept raw cotton in lieu of payment for items bought by

customers putting the Lehman Brothers in the business of buying

and selling became immersed in the business of cotton trade.

This earned them the name “King Cotton”. Henry at age 33 died

from yellow fever in 1855. (hbs.edu-Lehman Brothers Collection)

The company name, Lehman Brothers, became well known.

Emanuel relocated to New York City in 1858 for the start up of

the first branch, which led to the two bothers success as they

contributed to the growth of the United States over the next

forty years. Surviving the civil war, Lehman Brothers decide to

maintain a brief partnership with cotton merchant John Durr

creating the Lehman, Durr & Co. to help rebuild Alabama due to

the war. The states government designated Lehman Brothers a

fiscal agent to help sell bonds during a time when the South’s

credit rating was anything but good. This also encompassed

providing advisory service for state debts, interest payments and

any other obligation.

Ethics Within Lehman Brothers

Moving the center of operations to NY, the Lehman men became

involved in the founding of the NY stock exchange, Emanuel sat

on the Board of Governors, both became members of the Coffee

Exchange, and in 1899 underwrote their first public offering, the

preferred and common stock of the International Steam Pump

Company on setting the Industrial Revolution. The company had

achieved a reputation of trust established through the ethical

behavior of the Lehman family. Professional nepotism was the

foundation of this company making company policy “non-family

members will not make partner” (-A Brief History), protecting the

values of the firm. Philip Lehman, son of Emanuel, became a

partner in the family-owned firm in 1887 and was the firm's

managing partner from 1901 to 1925. (Wikipedia) Starting in

1906, Phillip collaborated with Goldman, Sachs on and over the

next twenty years issuing near one hundred new underwrites for

companies to go to market. Sears, Roebuck and Company, F.W.

Woolworth Company, May Department Stores Company, Gimbel

Brothers, Inc., R.H. Macy & Company, The Studebaker Corporation,

The B.F. Goodrich Co., Endicott Johnson Corporation, DuMont (the

first television manufacturer), and RCA to name a few of the

bigger companies. During this time Phillip Lehman retired in

1925, and the grandson of Emanuel, Robert “Bobbie” Lehman became

senior partner the same year. In 1929, the firm incorporated to

the Lehman Corporation under Robert’s direction became its own

investment company offering investment advisory services. He took

Ethics Within Lehman Brothers

over the bank when Lehman Brothers was a one-office firm needing to

expand by allowing non-family members to make partner.

Robert Lehman understood times where changing and the firm

needed a slight shift to grow. So far the history of Lehman has

been about building the foundation of the company and

contributing to the growth of America. Now the shift involves

getting additional investor capital while keeping voting control

while inviting non-family members to become partners. The right

partners could expand the company's opportunities for example

offering John M. Hancock a position becoming the first non-Lehman

to make partner. Hancock was well known for his service with the

Navy and his exposure to President Roosevelt aside from his

skills for reorganization. Times had made Roberts tenure about

competition, to have enough business savvy to align the firm with

outside forces. He is quoted as saying “he bet on people”.()

His philosophy about business “centered on his belief that

consumption, not production” led to wealth. ()This philosophy had

Bobbie maneuver the company to back companies of consumption.

Juan Trippe, known for building Pan American World Airways

industry was a person of interest to Robert. Another person who

offered opportunity he sold an interest in Lehman Brothers, John

D. Hertz who had sold his Yellow Cab and The Hertz Corporation

for a fortune. Lehman put together start-up financing for

Paramount Pictures and John D. Hertz provided Lehman’s’

connection to Paramount's board.

Ethics Within Lehman Brothers

Robert’s corporate culture was still about growth, company

financial growth by financing companies that sided with his

philosophy. During 1962 brought the introduction of the

“fearsome four” association involving Merrill Lynch, Blyth and

Company, Lehman, and the Salomon brothers. The foursome

challenged major underwriters. (Lehman Brothers Records, HBS)

The Salomon Brothers have not been Wall Street's most ethical

company to be associated with. William Solomon was named managing

partner in 1963 after finally gaining control back from Rudolf

Smutny who subjugated the firm to questionable business tactics

which led to Randolph leaving. Williams rein was even more wreck

less than Randolph’s with a “no-guts-no-glory approach” as

journalist Paul Hoffman reported, “William once boasted, ‘We'll

bid for almost anything, and we take many baths”’ (retrieved-

http://www. History of Salomon Inc_ –FundingUniverse.mht)

Robert Lehman had done well for the corporation placing

Lehman among the top four investment banks in 1967. He also

became a legend on Wall Street as Lehman brothers created a new

method of financing named the ‘private placement’, which is the

standard, used today. “Bobbie” also was the first to expand an

investment firm to Paris, France to accommodate the international

needs of clients making him very rich. He was senior partner for

forty-four years and passed away in 1969 knowing Lehman lacked a

descendant from the family to take his place.

For one hundred-twenty-five years, there had always been a

Lehman in charge. Not only was there a void left, but who could

Ethics Within Lehman Brothers

fill this void, see this company through the hard times as did

the previous Lehman’s with the civil war and depression.

Professional nepotism is over in addition to the standards,

values, and ethics of this family. Information for years 1970-72

appear non-existent except possibly in boxes at Harvard Business

School where the Lehman financial records are kept.

When a firm brings in an outsider such as Pete Peterson to

be CEO of Lehman in 1973, because the people of the organization

have already proved they were not capable of weathering difficult

economic environment of the early1970’s, there are bound to be

some unhappy people. This is Lehman’s pivotal moment. Was the

demise of the firm inevitable from this point on?

Pete Peterson served as CEO from 1973-1984, brought in as

the fixer for Lehman Peterson’s first media announced move was

the firm’s purchase of Abraham & Co. in 1975, then in1977 Lehman

Brothers merged with Kuhn, Loeb & Co., which, was a struggling

company that had been founded in 1867 and recognized for its

financing railways, Western Union, Westinghouse and many more

growth companies. () Unlike Robert Lehman, Kuhn & Loeb refused

to become aggressive to stay competitive. The company’s ethics

preferred the well-mannered ways of the past which made for a

difficult fit as it lost its independence to Lehman being renamed

Lehman Brothers, Kuhn, Loeb Inc., the country's fourth-largest

investment bank, behind Salomon Brothers, Goldman Sachs and First

Boston. ()

Put in piece about mergers

Ethics Within Lehman Brothers

When a firm brings in an outsider such as Pete Peterson

to be CEO of Lehman in 1973 because the people of the

organization have already proven they were not capable of

weathering the difficult economic environment of the early1970’s,

there are bound to be some unhappy people. Then Peterson

purchases a firm, merges with another, and now has 77 partners.

This is Lehman’s pivotal moment. Was the demise of the firm

inevitable from this point on? The next five years were some of

the most profitable of its’ time, Peterson is titled a “brilliant

strategist” (), but one might say in hindsight what Lehman’s

needed was a psychologist. The past eight years without a Lehman

in charge gave time for employees to push through hidden agendas.

Personalities also emerged that showed them wanting to even the

score between traders and bankers.

The following is based on an exert by Ken Auletta, The Fall

Of Lehman Brothers: The Men, The Money, The Merger. Auletta had

the opportunity to interview the executives of Lehman as well as

others.

As Peterson was saving Lehman from its first bankruptcy

possibility

Ethics Within Lehman Brothers

Peterson led the firm from significant operating losses to five consecutive years of record profits with a return on equity amongthe highest in the investment-banking industry.

By the early 1980s, hostilities between the firm's investment bankers and traders (who were driving most of the firm's profits)prompted Peterson to promote Lewis Glucksman, the firm's President, COO and former trader, to be his co-CEO in May 1983. Glucksman introduced a number of changes that had the effect of increasing tensions, which when coupled with Glucksman’s management style and a downturn in the markets, resulted in a power struggle that ousted Peterson and left Glucksman as the sole CEO.[28]

Upset bankers who had soured over the power struggle, left the company. Steve Schwarzman, chairman of the firm's M&A committee, recalled in a February 2003 interview with Private Equity International that "Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional." The company suffered under the disintegration, and Glucksman was pressured into selling the firm.

Glucksman had a distinguished career on Wall Street. He joined the staff of privately held Lehman Brothers in 1963, a firm with a 130-year history. After rising from head of sales and trading at Lehman to co-CEO, Glucksman, described then as "gruff and tough" beat Pete Peterson, a former United States Secretary of Commerce for control of the then-closely held firm in 1983, a battle documented in the 1986 book Greed and Glory on Wall Streetby Ken Auletta.

Ethics Within Lehman Brothers

Shortly after Glucksman took control, however, the firm experienced a sharp drop in profits. That resulted in a forced sale by Lehman's partners to American Express in 1984. American Express paid $380 million for the firm.

Glucksman joined Primerica Financial Services after Citigroup Inc. founder Sanford Weill acquired the company in 1988.

He also served as Commissioner of the Port Authority of New York and New Jersey.

Merger with American Express (1984–1994)

Shearson Lehman/American Express Logo

Main article: Shearson Lehman Hutton

Shearson/American Express, an American Express-owned securities company focused on brokerage rather than investment banking, acquired Lehman in 1984, for $360 million. On May 11, the combined firms became Shearson Lehman/American Express.[28] In

Ethics Within Lehman Brothers

1988, Shearson Lehman/American Express and E.F. Hutton & Co. merged as Shearson Lehman Hutton Inc. [29]

From 1983 to 1990, Peter A. Cohen was CEO and Chairman of Shearson Lehman Brothers,[30] where he led the one billion dollar purchase of E.F. Hutton to form Shearson Lehman Hutton.[31] Duringthis period, Shearson Lehman was aggressive in building its leveraged finance business in the model of rival Drexel Burnham Lambert. In 1989, Shearson backed F. Ross Johnson's management team in its attempted management buyout of RJR Nabisco but were ultimately outbid by private equity firm Kohlberg Kravis Roberts,who was backed by Drexel.

In the years following Schiff's death in 1920, the firm was led

by Otto Kahn and Felix Warburg, men who had already solidified their

roles as Schiff's able successors. However, the firm's fortunes began

to fade following World War II, when it failed to keep pace with a

rapidly changing investment banking industry, where Kuhn, Loeb's old-

world, genteel ways, did not seem to fit; the days of the gentleman-

banker had passed. The firm lost its independence in 1977 when it

merged with Lehman Brothers, to create Lehman Brothers, Kuhn, Loeb

Inc. The combined firm was itself acquired in 1984 by American

Express, forming Shearson Lehman/American Express and with that, the

Kuhn, Loeb name was lost forever. Kuhn Loeb is considered to be one of

the last Gentlemen Investment houses.

Ethics Within Lehman Brothers

Kuhn, Loeb's world of gentlemen bankers was gradually being replaced by a more aggressive, transaction-oriented Wall Street, with underwriters entering the trenches and selling securities directly to the public, territory Kuhn, Loeb stubbornly refused to enter. When asked how many people worked at Kuhn, Loeb, one partner famously quipped, "about half". Such was life at Kuhn, Loeb, resting on its laurels, while Wall Street passed it by.

In 1977, facing a capital crisis, the firm succumbed and merged with Lehman Brothers, to form Lehman Brothers, Kuhn, Loeb Inc. Internationally, the merged firms were known as Kuhn Loeb Lehman Brothers Inc., in recognition of the fact that Kuhn Loeb's international reputation was superior to that of Lehman's.

The merger did not, however, prove to be the panacea to what ailed Kuhn, Loeb. Indeed, as detailed more closely in the Lehman Brothers history, a period of bitter internal strife ended in 1984 when the firm sold itself to Shearson/American Express, itself the product of a recent merger between American Express and Sandy Weill's, Shearson Loeb Rhoades. The combined firms thendropped the Kuhn, Loeb name and became known as Shearson Lehman/American Express, ending Kuhn, Loeb's almost 120 years on Wall Street.

Ethics Within Lehman Brothers

Whistleblower

Matthew worked at Lehman Brothers Holdings Inc. for over 14

years. A senior VP, he oversaw the firm’s global balance sheet of

consolidated activities. Six months before the bankruptcy

announcement, employee Matthew Lee followed protocol in

addressing concerns of irregular accounting practices at Lehman

in a letter to___________, CFO Erin Callan and Chief Risk Officer

Christopher O’Meara. This led to Ernest & Young (E&Y) being asked

to investigate in which they concluded,” No reason to be

concerned”. A recount of the investigation was passed on to the

Board of Directors (BOD). A very valuable piece of information

was excluded in E&Y’s report, “Repo 105”, which was Matthew’s

primary concern.

In addition to claiming misleading statements were made to

the public and regulators, Matthew believed “tens of billions of

dollars in inventory” would be impossible to buy/sell at

currently recorded current market value. He warned these

accounting irregularities were misleading to investors.

Shortly after the letter was sent and E&Y asked to

investigate, Lee was fired.

Ethics Within Lehman Brothers

The Players

Fuld CEO

Lawrence McDonald, a former Lehman vice president

Late 1990 Former CFO Brad Hintz

Lawerence McCarthy was the head of distressed bond trading

at Lehman

McDade.

Ethics Within Lehman Brothers

Ethics Within Lehman Brothers

The firm, in the days before it filed for bankruptcy, sought board

approval to pay three departing executives more than $20 million,

according to Waxman. Congressional hearings?

Even as Mr. Fuld was pleading ... for a federal rescue, Lehman

continued to squander millions on executive compensation," Waxman

said.

.. Fuld added that he has yet to stop thinking about the demise of thefirm that he headed for the past 15 years and worked for since 1969

Ethics Within Lehman Brothers

Dick Fuld delivered these words to Congress:

“I wake up every single night thinking, ‘What could I have done differently? What could I have said? What should I have done.’ And I have searched myself every single night. And I come back tothis: at the time I made those decisions, I made those decisions with the information that I had. I can look right at you and say,this is a pain that will stay with me for the rest of my life…” .( ) The consensus of those watching and listening felt Fuld was

insufficiently sorry for his role in the ending of Lehman

Brothers. In the testimony, he blamed a series of developments

for Lehman's downfall, short selling, false rumors, credit agency

downgrades and loss of confidence by clients and counterparties.

(Reuters)

Lawrence McDonald, a former Lehman vice president of distressed

debt and convertible securities trading believed Dick Fuld to be

arrogant and irresponsible.”The truth is, qualified people warned

him several times and he wouldn't listen," (Reuters interview)

Others claim that while Lehman’s was under Fuld’s direction, it

was him who certainly helped to create the conditions for its

demise. Late 1990 Former CFO Brad Hintz concurs, "It was a series

of small steps -- rising leverage, retention of risky positions,

Ethics Within Lehman Brothers

delay of raising capital and reliance on 'hot money' for

financing -- that one by one took Lehman to the end”.

Lawrence McCarthy tells Reuters in an interview (2010) how he had

to quit working at Lehman after he gave several warnings to Fuld

about how the real estate market couldn’t endure much longer and

it “was on borrowed time. Lehman was becoming too leveraged”.

McCarthy was the head of distressed bond trading at Lehman.

"Other than six or seven people, no one really knew him. It was

like he was in his own world on the 31st floor," McCarthy said of

Fuld. "He was never in touch with the troops. In my four years

there, he never came down to the trading floor. Not once." When

Lehman's risk committee said "hit the brake pedal, he was hitting

the accelerator.” Reuters conveyed all this to Fuld and got this

reply "What, do people think I'm an idiot, that suddenly I woke

up two months before and suddenly things were a problem? No. No,

the signs were there," he said.

Ethics Within Lehman Brothers

Examiners Report:

EXAMINERS REPORT more than 2,200 pages.

Valukas, of New York law firm Jenner & Block, was appointed in January 2009 by the U.S. Bankruptcy Court for the Southern District of New York to examine the causes of Lehman's failure.

Failings by Lehman Brothers executives and its auditor led to thebank collapse

Valukas blamed Lehman executives for exacerbating the firm's problems, The executives' conduct "ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation," he said.

Lehman "repeatedly exceeded its own internal risk limits and controls," and a wide range of bad calls by its management led tothe bank's failure, says the report, authored by examiner Anton Valukas.

The report said former Chief Executive Richard Fuld was "at leastgrossly negligent in causing Lehman to file misleading periodic reports."

The report accused Lehman of not disclosing its use of Repo 105, let alone its "significant magnitude," to government regulators, rating agencies, investors or its board of directors.

The examiner's report included e-mails from Lehman's global financial controller confirming that "the only purpose or motive for [Repo 105] transactions was reduction in the balance sheet," adding that "there was no substance to the transactions."

INSERT EMAIL

Ethics Within Lehman Brothers

report "sufficient evidence" that Fuld knew about the use of Repo 105 before signing off on quarterly financial reports that made no mention of it.

Fulds attorney, Hynes, "throughout his career faithfully and diligently worked in the interests of Lehman and its stakeholders

statements from former Chief Operating Officer Bart McDade, who said he discussed the use of Repo 105 with Fuld. Fuld denied, inan interview with the examiner, any recollection of the conversations with McDade.

Fuld's lawyer, Patricia Hynes of Allen & Overy LLP, company's use of Repo 105.

"Mr. Fuld did not know what these transactions were -- he didn't structure or negotiate them, nor was he aware of their accountingtreatment," said Hynes, in a statement.

Repo 105

report criticizes Lehman's failure to disclose its use of "Repo 105" to make its books look better. Lehman used this device to strip some $50 billion of undesirable assets from its balance sheet at the end of the first and second quarters of 2008, instead of selling those assets at a loss

Accounting rules permitted Lehman to treat this transaction as sales instead of financings, "so that the assets could be removedfrom the balance sheet," according to the report.

The auditor Ernst & Young was aware of the use of Repo 105, but it did not challenge or question it, according to the report. The letter from the whistleblower Mattews confirms there awareness and is the reason an investigation was initiated

INSERT SOMETHING TO VERIFY MORE KNOWLEDGE OF 105

Perkins, in a statement, noted that his Ernst & Young conducted its last audit of Lehman for the fiscal year ended Nov. 30, 2007,more than nine months before the Chapter 11 filing.

Ethics Within Lehman Brothers

TAKE LOOK AT 10 K AND AUDIT REPORT

"Our opinion indicated that Lehman's financial statements for that year were fairly presented in accordance with generally accepted accounting principles [GAAP] and we remain of that view," he said.

QOUTE GAAP

Ethics Within Lehman Brothers

SEC CONCLUSION

POETIC POEM ABOUT LEHMAN

Ethics Within Lehman Brothers

Fuld blames ‘crisis of confidence’by Aaron Smith, CNNMoney.com staff writerLast Updated: October 6, 2008: 6:22 PM EThttp://money.cnn.com/2008/10/06/news/companies/lehman_hearing/index.htm?

postversion=2008100618

Naked short selling differs from regular short selling in that the

investor doesn't actually borrow the shares being shorted, making it

easier to drive prices lower.

Last month, the Securities and Exchange Commission moved to ban the

practice, which has been blamed for some of recent wild market swings.

The SEC also recently issued a temporary ban on short selling all

financial stocks. (2008)

But no mention of any action against “Repo 105”

Ethics Within Lehman Brothers

Ethics Within Lehman Brothers

The Letter

Mr. Martin Kelly, ControllerMr. Gerard Reilly, Head of Capital Markets Product ControlMs. Erin Callan, Chief Financial OfficerMr. Christopher O’Meara, Chief Risk OfficerLehman Brothers Holdings, Inc. and subsidiaries745 7th AvenueNew York, N.Y. 10019

Gentlemen and Madam:

I have been employed by Lehman Brothers Holdings, Inc. and subsidiaries (the “Firm”) since May 1994, currently in the position of Senior Vice President in charge of the Firm’s consolidated and unconsolidated balance sheets of over one thousand legal entities worldwide. During my tenure with the FirmI have been a loyal and dedicated employee and always have acted in the Firm’s best interests.

I have become aware of certain conduct and practices, however, that I feel compelled to bring to your attention, as required by the Firm’s Code of Ethics, as Amended February 17, 2004 (the “Code”) and which requires me, as a Firm employee, to bring to the attention of management conduct and actions on the part of the Firm that I consider to possibly constitute unethical or unlawful conduct. I therefore bring the following to your attention, as required by the Code, “to help maintain a culture of honesty and accountability”. (Code, first paragraph).

Ethics Within Lehman Brothers

The second to last section of the Code is captioned “FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE DISCLOSURE”. That section provides, in relevant part, as follows:

“It is crucial that all books of account, financial statements and records of the Firm reflect the underlying transactions and any disposition of assets in a full, fair, accurate and timely manner. All employees…must endeavor to ensure that information indocuments that Lehman Brothers files with or submits to the SEC, or otherwise disclosed to the public, is presented in a full, fair, accurate, timely and understandable manner. Additionally, each individual involved in the preparation of the Firm’s financial statements must prepare those statements in accordance with Generally Accepted Accounting Principles, consistently applied, and any other applicable accounting standards and rules so that the financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of the Firm.

Furthermore, it is critically important that financial statementsand related disclosures be free of material errors. Employees anddirectors are prohibited from knowingly making or causing others to make a materially misleading, incomplete or false statement toan accountant or an attorney in connection with an audit or any filing with any governmental or regulatory entity. In that connection, no individual, or any person acting under his or her direction, shall directly or indirectly take any action to coerce, manipulate, mislead or fraudulently influence any of the Firm’s internal auditors or independent auditors if he or she knows (or should know) that his or her actions, if successful, could result in rendering the Firm’s financial statements materially misleading”

In the course of performing my duties for the Firm, I have reasonto believe that certain conduct on the part of senior management of the Firm may be in violation of the Code. The following is a summary of the conduct I believe may violate the Code and which Ifeel compelled, by the terms of the Code, to bring to your attention.

Ethics Within Lehman Brothers

1. Senior Firm management manages its balance sheet assets on a daily basis. On the last day of each month, the books and recordsof the Firm contain approximately five (5) billion dollars of netassets in excess of what is managed on the last day of the month.I believe this pattern indicates that the Firm’s senior management is not in sufficient control of its assets to be able to establish that its financial statements are presented to the public and governmental agencies in a “full, fair accurate and timely manner”. In my opinion, respectfully submitted, I believe the result is that at the end of each month, there could be approximately five (5) billion dollars of assets subject to a potential write-off. I believe it will take a significant investment of personnel and better control systems to adequately identify and quantify these discrepancies but, at the minimum, I believe the manner in which the Firm is reporting these assets ispotentially misleading to the public and various governmental agencies. If so, I believe the Firm may be in violation of the Code.

2. The Firm has an established practice of substantiating each balance sheet account for each of its worldwide legal entities ona quarterly basis. While substantiation is somewhat subjective, it appears to me that the Code as well as Generally Accepted Accounting Principles require the Firm to support the net dollar amount in an account balance in a meaningful way supporting the Firm’s stated policy of “full, fair, accurate and timely manner” valuation. The Firm has tens of billions of dollars of unsubstantiated balances, which may or may not be “bad” or non-performing assets or real liabilities. In any event, the Firm’s senior management may not be in a position to know whether all ofthese accounts are, in fact, described in a “full, fair, accurateand timely” manner, as required by the Code. I believe the Firm needs to make an additional investment in personnel and systems to adequately address this fundamental flaw.

3. The Firm has tens of billions of dollar of inventory that it probably cannot buy or sell in any recognized market, at the currently recorded current market values, particularly when dealing in assets of this nature in the volume and size as the

Ethics Within Lehman Brothers

positions the Firm holds. I do not believe the manner in which the Firm values that inventory is fully realistic or reasonable, and ignores the concentration in these assets and their volume size given the current state of the market’s overall liquidity.

4. I do not believe the Firm has invested sufficiently in the required and reasonably necessary financial systems and personnelto cope with this increased balance sheet, specifically in light of the increased number of accounts, dollar equivalent balances and global entities, which have been created by or absorbed within the Firm as a result of the Firm’s rapid growth since the Firm became a publicly traded company in 1994.

5. Based upon my experience and the years I have worked for the Firm, I do not believe there is sufficient knowledgeable management in place in the Mumbai, India Finance functions and department. There is a very real possibility of a potential misstatement of material facts being efficiently distributed by that office.

6. Finally, based upon my personal observations over the past years, certain senior level internal audit personnel do not have the professional expertise to properly exercise the audit functions they are entrusted to manage, all of which have become increasingly complex as the Firm has undergone rapid growth in the international marketplace.

I provide these observations to you with the knowledge that all of us at the Firm are entrusted to observe and respect the Code. I would be happy to discuss any details regarding the foregoing with senior management but I felt compelled, both morally and legally, to bring these issues to your attention. These are, indeed, turbulent times in the economic world and demand, more than ever, our adherence and respect of the Code so that the Firmmay continue to enjoy the investing public’s trust and confidencein us.

Very truly yours,

MATTHEW LEE

Ethics Within Lehman Brothers

cc: Erwin J. Shustak, Esq.

Ethics Within Lehman Brothers

76Lessons for Internal Auditors From the Lehman Brothers Saga

the thought that Lehman might have been in technical compliance with US GAAP, but failed to provide a “fair presentation” of the company’s results and financial condition – and that EY accepted Lehman’s accounting. The examiner suggests that technical compliance with US GAAP is insufficient, and that EY should have required disclosure of the accounting, its extent, and the effect on the balance sheet.

Asked whether, as part of its responsibility to ensure Lehman’s financial statements were not materially misstated, Ernst & Youngshould have considered the possibility that strict technical adherence to SFAS 140 or any other specific accounting rule couldnonetheless lead to a material  misstatement in Lehman’s publiclySchlich refrained from comment”   

On page 964:  

Even if Lehman’s use of Repo 105 transactions technically complied with SFAS 140, financial statements may be materially misleading even when they do not violate GAAP. The Second Circuithas explained that “GAAP itself recognizes that technical compliance with particular GAAP rules may lead to misleading financial statements, and imposes an overall requirement that thestatements as a whole accurately reflect the financial status of the company.”  GAAP’s ultimate goals of fairness and accuracy in reporting require more than mere technical compliance.” The court explained that “when viewed as a whole,” GAAP has no “loopholes” because its purpose, shared by the securities laws, is “to increase investor confidence by ensuring transparency and accuracy in financial reporting.” Technical compliance with specific accounting rules does not automatically lead to fairly presented financial statements. “Fair presentation is the touchstone for determining the adequacy of disclosure in financial statements. While adherence to generally accepted accounting principles is a tool to help achieve that end, it is not necessarily a guarantee of

Ethics Within Lehman Brothers

fairness.” Moreover, registrants are “required to provide whatever additional information would be necessary to make the statements in their financial reports fair and accurate, and not misleading.”   

I believe there are several important questions and issues for discussion for internal auditors:

1. Are there any accounting practices that are intended only for “window-dressing” rather than business purposes? Have they been fully disclosed to the audit committee or board ofdirectors? Do they affect the ‘fair presentation’ of the organization's results and financial condition? Do they affect any valuation or other assessment of the organizationby investors and other stakeholders? Are they adequately disclosed in public filings?

2. Does the audit committee or board of directors have an adequate process for assessing the quality of the external auditors? Do they have information on the experience and technical knowledge of the partners, managers, and senior staff? Do they receive objective feedback from management and internal audit?

3. Is the level of non-audit services (i.e., services not directly required to the mandated audit opinion) a potentialimpairment to the objectivity of the external auditors and their willingness to raise issues with the audit committee or board of directors?

4. Does the organization engage the external audit firm to assist or lead investigations? In the Lehman case, there arequestions as to whether EY should have been asked to investigate the whistleblower’s assertions of inappropriate accounting. While some say these were forbidden internal audit services, for me the issue is whether they could have looked objectively at accounting policies and practices the audit partners had apparently accepted as compliant with US GAAP (SFAS 140).

SFAS 156: Accounting for Servicing of Financial Assets

This excerpt taken from the BCS 6-K filed Sep 14, 2007.

Ethics Within Lehman Brothers

SFAS 156: Accounting for Servicing of Financial Assets Statement of Financial Accounting Standards No 156 (SFAS 156) was issued in March 2006. SFAS 156 amends SFAS 140 to require that all separately recognisedservicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS 156 permits an entity to choose the subsequent measurement of separately recognised servicing assets and servicing liabilities using either the amortisation method or the fair value method.

SFAS 156 also permits, at its initial adoption, a one-time reclassification ofavailable-for-sale securities to trading securities by entities with recognised servicing rights, without impacting the treatment of other available-for-sale securities under SFAS 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilitiesthat a servicer elects to subsequently measure at fair value.

The statement is effective as of the beginning of the first fiscal year beginning after 15th September 2006. Adoption did not have a material impact on the Groups results of operations or financial condition as determined underUS GAAP for the half year ended http://www.wikinvest.com/stock/Barclays_%28BCS%29/Sfas%20156%20Accounting%20Servicing

%20Financial%20Assets

77Not only banks but a host of corporate failures could be blamedon the failure of auditors to spot rule breaches, excessively risky decisions or criminal behaviour.

Currently, an auditor can be sued for all losses when a company collapses, even if they were judged to be only partly to blame. The Big Four put forward a compromise solution, to limit an auditor's liability to the proportion of their client's loss theyare considered responsible for. Under this proposal, shareholderscould over-rule the arrangement with the auditors with a vote at an annual general meeting.

Tory MP Michael Fallon, who is deputy chairman of the influentialtreasury select committee, said he expected a report by the Financial Reporting Council (FRC), which is responsible for promoting confidence in corporate reporting and governance, to come up with reforms of the audit profession in the light of the banking crisis.

Ethics Within Lehman Brothers

The FRC is due to publish its delayed report in the summer after spending more than two years consulting industry figures and the profession on changes to the role played by auditors.

The Institute of Chartered Accountants in England & Wales (ICAEW), the body that regulates the Big Four, among others, is also due to report on proposals to toughen the regime for auditors.

Robert Hodgkinson, an executive director at the ICAEW, said he was concerned that auditors had largely followed the approach agreed with investors and regulators but still failed to signal problems at companies that collapsed. The institute has already published a governance code for audit firms.

Fallon said the select committee was concerned at the transparency of audits of UK banks after the collapse of NorthernRock and the near demise of RBS and Lloyds Banking Group.

Vince Cable said the committee's investigation of Northern Rock showed that auditors should be banned from accepting any consultancy work.

"It is crystal clear that bank auditors should not take fees for other work because it will inevitably create conflicts of interest. But that is just a starting point to cleaning up the whole profession," he said.

A failure of the auditory nerves

The centuries-old system of auditing has long been criticised as too cosy and is once again under scrutiny for failing to spot problems at Lehmans.

Auditors going into a big bank will be led by an experienced partner from one of the Big Four accountancy firms: KPMG, Ernst &Young, Deloitte or PricewaterhouseCoopers.

The team will be made up mostly of trainee and junior accountantswho will check the financial statements made by the holding

Ethics Within Lehman Brothers

company and its subsidiaries. They will take samples of transactions to satisfy themselves that staff are following accounting and reporting rules. They are also supposed to liaise with internal auditors, who are in effect in-house whistleblowers. However, auditors in times past have accepted transactions chosen by the company, and ignored the warnings of internal auditors.

Auditors are employed by investors to oversee the company and check its results represent a "true and fair" view of its finances. But the audit report is presented to the directors and any rows over potential financial discrepancies or misgivings about corporate practices are kept behind closed doors. If disagreement spirals out of control, auditors may refuse to sign off the accounts. The principles-based auditing in the UK is supposed to get round the box-ticking treatment of accounts in the US, which is deemed rigid and merely establishing that figures meet legal/regulatory rules. Yet investors in Lehman found that stricter US accounting rules prevented the sale and buyback schemes that disguised $50bn of its liabilities, while UKrules allowed them.

EY

Their “Letter to Audit Committee Members” , issued privately right after the publication of the Lehman Bankruptcy

The New York Attorney General’s (NYAG) complaint against EY makesthe correct distinction between an “audit” and a “review” but doesn’t excuse EY for burying their heads in the sand for the sake of millions in fees.

As Lehman’s auditor, E&Y signed off on each of Lehman’s annual disclosures, certifying their compliance with GAAP. Each Form 10-K included a “Report of Independent Registered Public Accounting Firm” signed by E&Y, representing:

Ethics Within Lehman Brothers

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company….in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements takenas a whole, presents fairly, in all material respects the information set forth therein.

Ethics Within Lehman Brothers

WHAT I HAVE OF EXAMINERS REPORT OR WANT TO USE

Ethics Within Lehman Brothers

GOVERNMENT

100 & INTRO Four Years After Lehman Collapse, No Top Wall Street Prosecutionsin Sight03:22 15/09/2012WASHINGTON, September 15 (Carl Schreck for RIA Novosti)http://en.rian.ru/business/20120915/175965611.html

The Securities and Exchange Commission has extracted several settlements from major Wall Street players—including a $550-million settlement from Goldman Sachs over charges that the firm defrauded investors in its subprime mortgage products. Goldman, however, was not required to admit wrongdoing as part of the deal.

The U.S. Department of Justice would not prosecute Goldman because the "burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time.”

The Senate Permanent Subcommittee on Investigations co-chair, Sen. Carl Levin scolded Goldman with, “The integrity of our financial markets and the strength of our economy demand that we make sure that actions such as Goldman Sachs’ and other recently discovered misdeeds by financial institutions are ended”.

President Barack Obama told CBS News in an interview last December that while many of the practices that precipitated the crisis were unpalatable, “some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior onWall Street, wasn't illegal.”…“ that's why we put in place the toughest financial reform package since F.D.R. and the Great Depression,” Obama citing the Dodd-Frank financial reform act he signed into law in 2010.

Compliance Abstract

Ethics Within Lehman Brothers

SEC AFTERMATH 50

The Lehman brokerage went into liquidation September 2008. TheLehman parent, now out of bankruptcy, has paid advisers $60.1 million in fees since completing a liquidation plan March 6, $26.9 million to Alvarez & Marsal LLC for “interim management.”

The U.S. Securities and Exchange Commission want permission to intervene in Lehman Brothers Inc.’s appeal of a $5.5 billion award to Barclays Plc (BARC) from the purchase of the Lehman parent’s.

The SEC has the legal right to participate in all cases involvinga brokerage being liquidated under the Securities Investor Protection Act, the regulator said in a letter to the U.S. Court of Appeals in New York.

The non-operational investment bank continues to sell assets to pay the average creditor roughly 18 cents on the dollar, said it paid an additional $8 million to advisers for services rendered before March 6, total fees for bankruptcy case, $1.73 billion.

The Lehman parent, which is due to make a second payment to creditors of $10.2 billion on Oct. 1, disclosed the fees in an operating report filed in U.S. Bankruptcy Court in Manhattan yesterday. The brokerage, which transferred most of its retail

Ethics Within Lehman Brothers

accounts to Barclays four years ago, hasn’t yet paid hedge funds and other big investors.

The appeal is In re Lehman Brothers Holdings Inc., 12-2328, U.S. Court of Appeals for the Second Circuit (Manhattan).

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

Ethics Within Lehman Brothers

References

Robert Lehman page 2-3 of body http://hereisthecity.com/2011/05/06/wall-street-legends-no-20-robert-

lehman/

75A Francine McKenna, Contributor I cover the accounting industry and accounting issues for investors. Follow (123) 12/28/2010 @ 12:04PM |2,818 views Ernst & Young's Liability For Lehman Larger Than Claimedhttp://www.forbes.com/sites/francinemckenna/2010/12/28/ernst-you

76 Lessons for Internal Auditors From the Lehman Brothers Sagahttp://www.theiia.org/blogs/marks/index.cfm/post/Lessons%20for%20Internal%20Auditors%20From%20the%20Lehman%20Brothers%20Saga

-4This excerpt taken from the BCS 6-K filed Sep 14, 2007.SFAS 156: Accounting for Servicing of Financial Assets http://www.wikinvest.com/stock/Barclays_%28BCS%29/Sfas%20156%20Accounting%20Servicing%20Financial%20Assets

Ethics Within Lehman Brothers

77Auditors' role in Lehmans collapse unites opposition in calls for reformErnst & Young's 'window-dressing' role at Lehman Brothers renews criticism of accountancy professionPhillip Inman ,guardian.co.uk, Monday 15 March 2010 17.11 EDhttp://www.guardian.co.uk/business/2010/mar/15/auditors-role-lehma

51THE DYNAMICS OF CORPORATE RESPONSIBILITYMelissa L. MeltzerA DISSERTATIONinCriminology

50 BLOOMBERG NEWS SEC Seeks to Intervene in Lehman Unit Fight With BarclaysBy Linda Sandler on September 26, 2012 http://www.businessweek.com/news/2012-09-26/sec-seeks-to-intervene-in-lehman-unit-fight-with-barclays

Ethics Within Lehman Brothers

1. Citing a Web Page in APA Styleo 12

Create a reference page to list all of the sources used in the paper. Title this page "References." Do not underline the title of the page or put it in quotes.

o 13Place on the reference page the last name of the author of the web page,followed by a comma and the author's first name. Follow the author's name with a period.

o 14Put in parentheses the date that the web page was posted or edited. If no date is listed, write "n.d." within the parentheses. Place a period after the last parenthesis.

o 15Note the title of the web page. Capitalize the appropriate words in the title. Place a period after the title of the web page.

o 16Place the word "Online" in parentheses. Follow the last parenthesis witha comma.

o 17After the previous comma, note the date on which you retrieved the document. Follow the date with a period.

o 18Place the exact URL in its entirety after the previous period. Do not place a period after the URL.

o 19Cite the web page in the body of the paper by placing (in parentheses) the last name of the author, followed by a comma and the year of publication, after the material you are reprinting from the source.

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