NETHERLANDS/BELGIUM - A group of Dutch and Belgian investors is planning to sue ABN Amro and KBC who acted as counterparties in trades with Lehman Brothers and Ernst & Young who audited the bank's accounts.
Investors alleged Lehman Brothers engaged in "potentially irregular trades" with ABN Amro in the Netherlands and KBC in Belgium in order to "disguise its poor financial position".
Accounting firm Ernst & Young could be involved in a lawsuit as well as investors alleged it helped Lehman and its counterparties to carry out the transactions.
Lawyers Adriaan De Gier from De Gier Business Law and Geert Lenssens from SQ will represent investors, which incurred in a total of €10m (US$13.5m) estimated losses. But De Gier told GP he is working to involve pension funds, which "surely had exposure to Lehman Brothers' stocks. This would increase the size of the lawsuit enormously."
De Gier added: "We suspect that those firms ‘helped' Lehman in 2007 and 2008 and the balance sheet of Lehman was polished with so-called repo 105 transactions."
He said the Lehman bankruptcy report compiled in the US by bankruptcy examiner Anton Valukas showed those transactions would give the counterparty highly liquid securities in exchange for cash, and then repay the cash plus interest and get the securities back. In this way the bank's balance sheet could be drastically improved.
But, he added Lehman had to pay much more interest - 5% or more instead of the normal 2% and because it paid that extra interest, Lehman used a different accounting treatment. Those transactions were booked as sales and in this way reduced Lehman's liabilities.
De Gier said: "The repo transactions had covered up the real poor financial position of Lehman to the market. The report by Valukas indicated that a number of European banks including ABN Amro and KBC were involved."
SQ lawyer Geert Lenssens added: "This happened deliberately outside the United States, because it was not permissible here. We consider it to be illegal under Dutch and Belgian law. If so, Lehman investors can claim their damage in these countries. That greatly increases the potential for damages recovery."
Ernst & Young dismissed in a statement any claims that "Lehman's assets or liabilities had been incorrectly valued or accounted for in Lehman's November 30, 2007 financial statements" - which the accounting firm said was the last financial statement by Lehman it audited.
It also said: "The Repo 105 transactions involved the sale by Lehman of high-quality liquid assets (generally government-backed securities), in return for which Lehman received cash. These were not ‘sham transactions' designed to off-load Lehman's ‘bad assets' off Lehman's books."
KBC spokeswoman Viviane Huybrecht said: "In addition to a number of other banks, Valukas' report cites KBC as one of the non-US counterparties of Lehman Brothers in so-called ‘repo-105' transactions. Valukas also clearly states that the banks in question did not break any rules."
She added: "Repo transactions are fairly common operations that are widely used in the financial world. As it has done in the past, KBC continues to perform repo transactions today with a variety of counterparties.
"But KBC never has any knowledge of how a counterparty recognises or books a repo transaction - or any other transaction - in its accounts."
ABN Amro was not immediately able to comment.
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