Lehman drops Aiful coverage amid legal threat

TOKYO (Reuters) - Lehman Brothers LEH.N said it will drop coverage and scrap reports on Japanese consumer lender Aiful Corp (8515.T) after a strong protest from the firm that the brokerage's latest report was inaccurate.

But the move failed to satisfy Aiful, which said it was still considering legal action against the U.S. brokerage after its report helped Aiful shares dive to their lowest-ever level.

Aiful spokesman Kenichi Hashimoto said the company was not satisfied with Lehman's decision last Friday to end its coverage of Aiful, along with three other non-bank firms, and to withdraw previous reports including ratings and profit forecasts on them.

"We are still talking with Lehman and waiting for their next step," said Hashimoto, adding that the company was expecting Lehman to take more action including an official apology.

"So far, what they have done is just to scrap the previous report ... that's not enough," Hashimoto said.

Aiful has lost one-third of its market value since June 23 when Lehman said in a report that Aiful may have been internally assessed by its main bank Sumitomo Trust and Banking Co 8430.T as a "watch-list" borrower.

After a strong protest from Aiful that mentioned possible legal action, Lehman issued an update to the report on June 26 to revise some items, including one to show that its assertion of Sumitomo Trust's classifying of Aiful as a watch-list borrower was based on Lehman's own deduction and not necessarily correct.

In the updated report, Lehman also eliminated a paragraph that said Aiful was not disclosing non-performing loans data on a consolidated basis.

Asked about possible steps Lehman might take, Lehman spokesman Daniel Boyd declined to comment. Boyd said its analyst Walter Altherr, who wrote the Aiful report, was still working for the brokerage covering other firms.

Aiful, owned 41.2 percent by foreign investors, has seen its shares tumble 35 percent since Lehman's first report on June 23. On August 4 the shares fell as low as 1,020 yen -- the lowest since it went public in July 1997.

On Tuesday, Aiful shares closed up 0.7 percent at 1,046 yen.

Japan's once-mighty consumer finance industry has been hurt by tighter regulation lowering maximum interest rates, and legal rulings that have forced firms to repay previous charges now deemed illegally high.

Aiful said its bad debts increased to 241 billion yen at the end of March from 238 billion yen a year earlier and from 146 billion yen in March 2006.

(Reporting by Mariko Katsumura; Editing by Michael Watson)