September 26, 2008 / 5:02 AM / 11 years ago

Investor in Lehman preferred stock sues for fraud

NEW YORK (Reuters) - An asset manager has sued a group of Wall Street firms that underwrote a $1.9 billion Lehman Brothers Holdings Inc LEHMQ.PK preferred stock offering in February, accusing them of misleading investors about Lehman’s financial health.

Lehman itself was not named as a defendant in the lawsuit because it is in bankruptcy protection, though Chairman and Chief Executive Richard Fuld and several other Lehman directors were named as individual defendants. Lehman filed for Chapter 11 bankruptcy on Sept. 15.

The lawsuit, filed on Wednesday in U.S. District Court in Manhattan by institutional investors Fogel Capital Management, contends that investors who bought the preferred stock were misled about the risks of investing in Lehman. The suit seeks class-action status.

Defendants include subsidiaries of Bank of America Corp (BAC.N), Citigroup Inc (C.N), Merrill Lynch & Co Inc MER.N and several other firms that underwrote the offering, the lawsuit said. Representatives of Bank of America, Citi and Merrill declined to comment.

A Lehman spokesman said that the firm believed the lawsuit was without merit and “we will defend against it vigorously.”

The Lehman Preferred Series “J” stock offering, issued on Feb. 5, was worth $1.9 billion, with nearly 76 million shares sold at $25 each, according to the lawsuit. It said the underwriters got about $59 million in fees.

The stock has tumbled from a high of $25.55 to only 10 cents now, the lawsuit said. Gregory Nespole, a lawyer for Fogel Capital, said his client had lost hundreds of thousands of dollars on its investment.

The lawsuit contends that the prospectus issued ahead of the offering was false and misleading because it did not reveal Lehman’s significant exposure to the subprime mortgage market, and also did not disclose that Lehman was in desperate need of capital because of deteriorating market conditions and rapidly falling values of its assets.

Reporting by Martha Graybow; editing by John Wallace, Bernard Orr

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