Company
Background:
Lehman Brothers Holdings Inc. was a firm specialized in the provision of global
financial services. It was founded in Montgomery, Alabama, in the United States
of America. The company had headquarters in New York City, New York,in the U.S. It ceased operations in 2008. The founders were:
Henry Lehman, Emmanuel Lehman and Mayer Lehman.
What
Happened? Lehman Brothers hid over $50 billion in loans disguised
as sales. They allegedly sold toxic assets[1]
to Cayman Island Banks with the understanding that they would eventually be
rebought.
How
they were caught: Their bankruptcy led to the discovery of
the fraud. They filed for bankruptcy in 2008, which is the largest bankruptcy
ever recorded. Their case was larger than that of Enron, Washington Mutual,
WorldCom and GM combined. On September 15, 2008, Lehman brothers filed for
Chapter 11 bankruptcy protection (Montgomery, n.d.) .
Their
bankruptcy filing came in as a blow to the financial industry as it was the
largest bankruptcy case in United States history and it also came after
repeated assurances were given by chief executives who said finances were
healthy, leverage manageable and liquidity levels high.
Main
Players: The main players of the Lehman Brothers scandal were
the CEO; Richard S. Fuld and Lehman executives. Their auditor; Ernst &
Young also had a key role to play in the fraud. They manipulated their books by
using an accounting trick called ‘Repo 105’.
‘Repo
105’ is an accounting trick in which a company classifies a short-term loan as
a sale and subsequently uses the cash proceeds from said sale to reduce its
liabilities (Investopedia.com, n.d.) . ‘Repo 105’ was a
materially misleading report which temporarily moved $50 billion assets at the
end of every quarter.
Ernst
& Young, one of the Big Four auditing firms, has agreed to pay a $10
million to New York state to settle a lawsuit for overlooking accounting
gimmicks by Lehman Brothers, the defunct Wall Street bank (Chatterjee,
2015) .
As
a result of the failure of Lehman Brothers, 26,000 people went redundant/lost
employment and millions of investors lost all of their money.
Credit
extension ought to be as equally socialized as dependence on credit is. As
such, it is necessary that the public sector takes control of credit extension.
Lehman Brothers’ bankruptcy exposes big global private banking as unaffordable
and anachronistic (Wolff, 2011) .
Irony/Fun
in the Scandal: In 2007, Lehman Brothers was ranked the #1
‘Most Admired Securities Firm’ by Fortune Magazine (The 10 Worst
Corporate Accounting Scandals of All Time, n.d.) .
Works Cited
Chatterjee, P. (2015, April 16). Ernst & Young Pays
$10 Million To Settle Lehman Brothers Audit Failure Lawsuit. Retrieved
January 25, 2016, from CorpWatch Blog:
http://www.corpwatch.org/article.php?id=16019
Investopedia.com. (n.d.). Repo 105. Retrieved January
25, 2015, from investopedia.com:
http://www.investopedia.com/terms/r/repo-105.asp
Montgomery, A. (n.d.). The Dearth of Ethics and the Death
of Lehman Brothers. Retrieved January 25, 2015, from
sevenpillarsinstitute.org:
http://sevenpillarsinstitute.org/case-studies/the-dearth-of-ethics-and-the-death-of-lehman-brothers
The 10 Worst Corporate Accounting Scandals of All Time. (n.d.). Retrieved January 25, 2015, from
accounting-degree.org: http://www.accounting-degree.org/scandals/
Wolff, R. (2011, December 12). Lehman Brothers:
financially and morally bankrupt. Retrieved January 25, 2015, from
theguardian.com: http://www.theguardian.com/commentisfree/cifamerica/2011/dec/12/lehman-brothers-bankrupt
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