Lehman underwriter settles lawsuit tied to $1.5 billion note offering

By Caroline Salls

Pittsburgh, Nov. 9 - Lehman Brothers Holdings, Inc. underwriter Muriel Siebert & Co., Inc. has settled a class action lawsuit tied to several offerings, including Lehman's $1.5 billion public offering of 6¾% subordinated notes due 2017, according to an 8-K filing with the Securities and Exchange Commission.

Siebert Financial Corp. wholly owned subsidiary Muriel Siebert was named as one of the defendants in a pending lawsuit filed on Feb. 23, 2009 in the U.S. District Court for the Southern District of New York.

In the third amended complaint, a class of public offering notes purchasers and buyers in smaller issuances underwritten by Muriel Siebert and others alleged violations of Section 11 of the Securities Act of 1933, arguing that the relevant offering materials were false and misleading.

Specifically, the plaintiffs alleged that the offering materials contained untrue statements and omitted facts concerning Lehman's financial results and operation, allowing Lehman to raise more than $31 billion through the offerings in question, according to the third amended complaint.

Lawsuit allegations

Allegations raised in the amended complaint included

• Lehman used undisclosed repurchase and resale (repo) transactions to temporarily remove tens of billions of dollars from its balance sheet at the end of financial reporting periods, usually for a period of seven to 10 days, resulting in artificial and temporary reductions of Lehman's net leverage ratio each quarter during the class period;

• Lehman publicly and consistently promoted its robust and sophisticated risk management system, although it regularly disregarded and exceeded its risk limits, or simply raised the limits, as it accumulated illiquid assets;

• Defendants' statements concerning Lehman's liquidity failed to disclose that repo transactions significantly understated Lehman's liquidity risk "as Lehman had tens of billions of dollars in immediate short-term obligations that were unreported," and as the period continued, Lehman's reported liquidity pool included large amounts of encumbered assets;

• Defendants claimed all of Lehman's assets were presented at fair value, but Lehman failed to consider market information when valuing some of its commercial real estate assets, thereby overstating their value; and

• Lehman failed to disclose facts about its concentration of mortgage and real estate-related assets, preventing investors from meaningfully assessing its exposure to these risky assets.

According to the 8-K, Muriel Siebert had purchased $15 million of the 6¾% notes and $462,953 of other securities as underwriter for the offerings.

The court granted in part and denied in part a motion by Muriel Siebert and the other underwriters to dismiss the lawsuit on July 27.

Settlement terms

Under the settlement, the plaintiffs have agreed to resolve all claims against Muriel Siebert in exchange for a $1 million payment by the underwriter.

The settlement is subject to court approval.

New York-based Lehman Brothers Holdings was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 08-13555.

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