Misery Index

As I posted back on Oct. 8, Lehman was being investigated by at least three U.S. attorney offices to see whether Lehman Brothers Holdings, Inc. (LEHMQ), misled investors before its bankruptcy filing.  Those three were the U.S. Attorney's Office in New York's Southern District, New York's Eastern District and in New Jersey.

According to Bloomberg, Lehman bankruptcy lawyer Harvey Miller stated yesterday in a Manhattan federal court that "we are facing three grand jury investigations."    At the time Miller declined comment on whether Fuld was among those subpoenaed.

Today, Reuters and the New York Post is reporting that prosecutors have subpoenaed a dozen executives of Lehman Brothers Holdings Inc including CEO Dick Fuld, in connecting with three grand jury probes investigating the fall of Lehman Brothers.  Sources say the nature of the investigation is whether Lehman executives knowingly made false statements about the health of Lehman before its collapse.  More specifically, Lehman's role in the $330 billion auction rate securities market and possible crimes associated with the New York-based bank's $6 billion June stock issue, according to a person familiar with the case.

Additionally Bloomberg is reporting that investigators have subpoenaed Ernst& Young LLP, Lehman's auditor; U.K.-based Barclays Plc, which bought Lehman's North American brokerage; and the New Jersey Division of Investment, which runs a pension fund that lost $115.6 million on a $180 million investment in the June stock sale, according to people familiar with the case.  It's not clear whether these subpoenas are part of the 12 noted by Miller.

Yusill Scribner, a spokeswoman for U.S. Attorney Michael Garcia in Manhattan, declined comment on who the subpoenas are for.  Garcia, along with Brooklyn U.S. Attorney Benton Campbell, and Newark New Jersey U.S. Attorney Christopher Christie, have increased their resources for possible prosecutions associated with the credit crisis and subsequent bank failures.

Christie, the New Jersey attorney, has subpoenaed documents to determine whether Lehman failed to fully disclose its eroding financial condition at the time of the $6 billion stock offering, according to people familiar with the matter.

Campbell, the Brooklyn attorney, has opened inquiries into whether Lehman executives misled investors about the firm's financial health and whether Zurich-based UBS AG lied to investors about securities backed by subprime mortgages, according to a person familiar with the case.   UBS AG is the European bank with the biggest losses from the global credit crisis.  In a post I made on October 16, the Swiss Federal Banking Commission announced a rescue package for UBS agreeing to put $5.23 billion into UBS.  UBS had been forced to write down tens of billions on bad subprime contracts.

Also subpoenaed by federal prosecutors are Putnam Investments LLC, the Boston-based mutual fund firm that oversees about $163 billion and bought Lehman bonds and shares; New York-based fund manager BlackRock Inc., a Lehman creditor; and C.V. Starr & Co., which is run by ex-AIG CEO Maurice Greenberg, according to the same people familiar with the matter.

MISPLACED MONEY

While prosecutors were looking through Lehman's books, they found the U.S. unit of Lehman owes the European unit of Lehman $2 billion to $3 billion and the European unit owes the U.S. unit more than $8 billion, according to Reuters.  Oddly enough there is a disputed claim from the administrator of Lehman's European unit that $8 billion was transferred from Lehman Brothers European unit to the U.S. unit on the eve of Lehman's bankruptcy filing.

Many of the transactions were credit derivative transactions.  Alvarez & Marsal, a restructuring firm, is unwinding 1.5 million derivative transactions involving about 8,000 counterparties, according to Reuters.  The firm is still trying to locate data related to those trades.  The task is so complex that the restructuring firm is requesting the number of employees be increased from 100 to 400.

U.S. CLASS ACTION LAWSUIT

The Securities Law Firm of Klayman & Toskes has filed several class action lawsuits for customers who purchased Lehman Brothers Preferred Stock, Series J.  The firms included are Citigroup Global Markets, Inc; Banc of America Securities, LLC; Wachovia Capital Markets, LLC; Merrill Lynch, UBS Securities and Morgan Stanley.

According to the Complaint, the Prospectus for the Lehman Preferred Stock J contains material misstatements and omissions.  Specifically, it is alleged that the representations made in Lehman's Prospectus were materially false and misleading because at the time of the Offering, Lehman was already laboring under several negative factors that were not properly disclosed in the Prospectus, including the failure to set aside adequate allowances to cover Lehman's steadily increasing portfolio of underperforming subprime related product, and to adequately write-down residential and commercial mortgage and real estate assets.

The Complaint further alleges that the Defendants could have, and should have, discovered the misstatements and omissions in Lehman's Prospectus prior to filing with the SEC and distribution tot he investing public.  As a result of inadequate due diligence investigation on the part of Defendants, the underwrites failed to discover the misstatements and omission in Lehman's Prospectus on the Preferred Stock J.

For more information visit Klayman and Toskes Lehman page.

SINGAPORE

Singapore's central bank according to a Forbes article, said Friday its investigating allegations of misconduct by commercial bank officials in connection with the sale of about 640 million Singapore dollars ($432 million) of bonds linked to Lehman Bros.

"MAS [Monetary Authority of Singapore] confirms that we have been conducting formal inquiries into allegations of breaches of the law, inadequate or poor sales practices by their representatives," Managing Director Heng Swee Keat said during a news conference in Singapore.

The country's central bank will focus on cases of mis-selling products to "vulnerable" customers, meaning the elderly and those who are not well-educated, Keat additionally stated.  MAS has said that about 10,000 people in Singapore invested in products linked to Lehman Brothers and other institutions hit by a crisis in the US.  The Singapore investors, a large portion of them retirees who stand to lose their life savings, have said they were told they were buying into a product with low risk.  Investors interviewed by AFP said they felt "cheated" and "betrayed" because the banks did not fully inform them of the risks when they were offered the financial products.

According to an AFP article, the investments include "Lehman Minibonds" and "Merrill Lynch Jubilee Notes".  There were also those who invested in "high notes" with Singapore's DBS Bank and Morgan Stanley "pinnacle notes."

According to Reuters, these investors stand to lose over S$500 million ($339 million) in total, according to data provided by the MAS, which said it will make an announcement on action when its investigation is complete.

MAS has added that while it can impose fines and suspend the licenses of financial institutions found to be in breach of its rules, it does not have the power to order banks to compensate investors.

In a rare protest in Singapore, hundreds of investors gathered at a park on Saturday to express their anguish at potential losses from the structured notes that many say were sold to them by banks as safe investments.

Picture Source:  AFP, Irate investors in Singapore.

HONG KONG

In an AP article, two banks on Friday, who weren't identified, were referred for possible sanctions in Hong Kong as part of an investigation into misleading sales tactics in connection with Lehman Brothers investment whose values are in doubt, authorities said.  More than 40,000 Hong Kongers had bought Lehman-related investment products through banks, with the total outstanding value of the products estimated at HK$20.2 billion ($2.6 billion), according to the Hong Kong Monetary Authority.

The Hong Kong Monetary Authority sent securities regulators 24 cases involving allegations of misconduct and "mis-selling" against the lenders, the agency said in a statement.

Also in Hong Kong, thousands who bought Lehman-related products have staged street protests and pressured lawmakers in an effort to protect their investments.

"They were misleading investors on the risk.  They said the minibonds were highly stable," said W.H. Chiu, a 66-year-old retiree according to Reuters.  Chiu said he purchased about US$20,000 worth of minibonds from a branch of the Hong Kong subsidiary of Industrial and Commercial Bank of China (ICBC).  He said he was still fighting to get information on the fate of his investment and feared it would end up as "rubbish."

"The government should step in.  If the government don't pay, they should force the bank to pay," said Marty Chou, the managing director of an import firm in the same Reuters article.  He said he'd invested US$1 million in Lehman-linked products.

Also in the Reuters article, Yau stated that Lehman stated to her father, "They told him 'It's very safe.  It's just right for you.  I just found out that it's a credit-linked derivative," she said.  "He never thought he would suffer any loss."  "Right now, I don't know how long they will have to postpone their retirement.  It's very sad," she said.  "It's a very emotional event for them.  They just don't trust banks anymore."  She said her elderly father had lost US$250,000.

Regulators could impose fines and revoke the banks' license, among other penalties.

Bloomberg and the Washington Post has just published an article that states Hong Kong banks will buy back soured investment products guaranteed by Lehman Brothers Holdings Inc, after investors accused them of misrepresenting the risks involved in the securities.  The Hong Kong Association of Banks, which includes HSBC Holdings Inc. and BOC Hong Kong Ltd, agreed to a government plan to buy back at market prices so-called minibonds that were sold to the public and guaranteed by Lehman.  The banks are working on a formula for the buybacks.

Picture Source: 
  - Washington Post.  Lehman investors  protest in Hong Kong.
  - Reuters.  Investors bought financial products relating to Lehman Brothers march to the government headquarters in Hong Kong.

ADDITIONAL SOURCES:

• CNN Money
• Trading Markets
• Bloomberg
• Singapore News
• Trading Markets
• Reuters via The Boston Globe