The former officers and directors of Lehman Brothers will pay San Mateo County $5.2 million to settle a lawsuit filed after the Wall Street firm’s bankruptcy leeched more than $155 million from the local investment pool five years ago.
The settlement with San Mateo County and seven other plaintiffs is a total of $9.75 million of which the county will receive 69.5 percent minus its legal fee to attorney Joe Cotchett, said County Manager John Maltbie.
“I was pleased. So many people and so many lives were hurt in this thing. This is just a small although inadequate way to recoup some of it,” Maltbie said.
After Lehman collapsed, the county was told it would be lucky to get a dime on the dollar in bankruptcy. Instead, Maltbie said by waiting the county “did better than we thought.”
A specific amount of bankruptcy funds was not available but Maltbie said it, coupled with the recent legal settlement and a possible settlement in a still-pending suit against Lehman’s auditors, could well put the county in the 40 percent to 60 percent recovery range.
The plaintiffs’ percentages in the suit against the Lehman executives were determined by the amount of the total loss by each city or agency.
The agreement is signed and should be formalized in coming weeks.
The money will go back into the county’s investment pool and its participants which include cities, school districts and special districts. Treasurer Sandie Arnott will pencil out which districts and agencies receive what amount, said County Counsel John Beiers.
Maltbie said the county turned down a $1 million settlement from insurance a few years back.
The settlement is a great deal for the county and its taxpayers, Beiers said.
“Under the circumstances, we are thrilled with the outcome,” Beiers said.
The county’s suit against Lehman’s auditors, Ernst and Young LLP continues.
Unlike bankruptcy proceedings, the suit went after the personal assets of specific executives like former CEO Richard Fuld that Lehman’s clients, like the county, held responsible for its downfall.
The suits claimed Lehman executives knowingly misled investors leading up to its bankruptcy and used accounting gimmicks to keep entities from selling before the entire firm collapsed in September 2008. One gimmick is the so-called Repo 105 transactions, which are repurchase agreements that allow short-term loans to appear as sales.
The suit called the Lehman case “the worst example of the fraud committed by modern-day robber barons of Wall Street, who targeted public entities to finance their risky practices and then paid themselves millions of dollars in compensation while their companies deteriorated.”
The settlement comes a little more than five years after the Sept. 15, 2008, collapse of Lehman led to the loss from the county’s 1,050 different investment pool accounts. Lehman’s failure also led to 12 school districts unsuccessfully suing the county for $20 million plus interest because they believed former treasurer-tax collector Lee Buffington should have pulled pool funds before it was too late.
The county has since revamped its investment policy.
Under Arnott, the county reduced the percentage of the investment fund that can be invested in any one instrument to 5 percent, shorted maturities on investments from 15 to 7 years and hired an outside investment advisor to provide more oversight. Arnott said the policy is reviewed and potentially changed annually and are audited both internally and externally each year.
“The last thing I want is a repeat of Lehman,” Arnott wrote in an email to the Daily Journal. “I believe the steps we have taken, and continue to take, with regard to constantly reviewing and improving our investment practices and policy with oversight by a committee and an external manager are certainly key to assisting me to safeguard our taxpayer dollars.”
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