Lehman execs look to settle investors' lawsuit

NEW YORK Thu Aug 25, 2011 5:11pm EDT

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NEW YORK (Reuters) - Former Lehman Brothers Holdings Inc LEHMQ.PK officials, including one-time Chief Executive Richard Fuld, asked a bankruptcy judge to release $90 million in insurance funds so they can settle a fraud lawsuit brought by investors in the bankrupt investment bank.

In papers filed Wednesday in the U.S. bankruptcy court in Manhattan, Fuld and 13 other current and former directors asked Judge James Peck to modify bankruptcy rules to give them access to insurance policies to finance a settlement.

The lawsuit, which sought class-action status, was filed on behalf of investors in some of the more than $31 billion of equity and debt that Lehman sold starting in 2006.

The investors accused Lehman of painting a misleadingly rosy picture of the company's health in its financial statements and securities offerings.

U.S. District Judge Lewis Kaplan in Manhattan federal court is handling the lawsuit, which is being led by five retirement funds.

Before Kaplan can consider any settlement, Peck must first allow the release of the insurance funds, which are otherwise off-limits as part of the automatic stay provisions of the U.S. Bankruptcy Code, court papers show.

On July 27, Kaplan dismissed some of the investors' claims but allowed them to pursue claims that Lehman materially misled them about its accounting and ability to manage risk prior to its bankruptcy on September 15, 2008, the largest in U.S. history.

The lead plaintiffs include two California pension funds, the Alameda County Employees' Retirement Association and the Operating Engineers Local 3 Trust Fund, as well as public retirement funds in Guam, Northern Ireland and Edinburgh, Scotland.

Judge Peck has released insurance funds nine times in the past to pay for settlements, defense costs and legal judgments, according to Wednesday's filing.

The funds would come from liability policies worth $250 million in total, issued by such companies as ACE Bermuda Insurance Ltd, Liberty Mutual Insurance Co LBRTLI.UL and Arch Insurance Co, according to the filing.

Lehman filed for bankruptcy with $639 billion of assets, and its collapse was a principal trigger of the 2008 global financial crisis.

The settlement comes amid other investigations into Lehman's collapse, although there have been no U.S. prosecutions of top company officials.

In December 2010, then-New York Attorney General Andrew Cuomo sued Lehman's former auditor, Ernst & Young.

Lehman's bankruptcy is In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555. The shareholder lawsuit is In re: Lehman Brothers Equity/Debt Securities Litigation, U.S. District Court, Southern District of New York, No. 08-5523.

(Editing by Steve Orlofsky)