March 17, 2009 / 7:30 PM / 11 years ago

NJ sues Lehman execs for fraud to recoup state funds

NEW YORK (Reuters) - The state of New Jersey on Tuesday sued Lehman Brothers LEHMQ.PK executives and directors for “fraud and misrepresentation,” Gov. Jon Corzine said, seeking to recover the $118 million lost by state pension funds.

New Jersey Governor Jon Corzine delivers his opening remarks at a luncheon hosted by Harvard University's John F. Kennedy School of Government in New York February 19, 2009. REUTERS/Chip East

New Jersey’s Division of Investment bought $182 million of Lehman securities in April and June 2008. The move attracted widespread attention since it was unusual for a U.S. state pension fund to use the same strategy as sovereign wealth funds, hedge funds and private equity groups.

Lehman filed for bankruptcy on September 15, 2008, after failing to win a federal bailout. This left “shareholders with virtually worthless stock,” said the Democratic governor who is running for another term.

The bankruptcy means the state cannot now sue the company, but New Jersey said it sued nine top executives, including former Chairman Richard Fuld, and nine board members, including John Akers and Henry Kaufman. Lehman paid each board member $325,000 to $397,000 in fiscal 2007, the statement said,

Corzine, a Democrat and former Goldman Sachs (GS.N) co-chairman, said in a statement the state also sued Lehman Brothers’ longtime accountants, Ernst & Young, for letting the firm “improperly account for and disclose its true financial condition.”

For months, Republicans have faulted Corzine for the state’s loss on its Lehman stake. On Tuesday, state Senator Joseph Pennacchio said the governor should explain why the council overseeing investment policy failed to block the purchase.

Noting three former Lehman officials and the wife of a former Lehman executive serve on the investment council, the Republican state senator said in a statement: “It is not unreasonable to ask why board members, two of whom were working for Lehman at the time of the bank’s collapse, didn’t have more to say about this investment.”

A Lehman spokeswoman declined comment.

“Lehman’s executives kept telling investors its financial position was solid when, in fact, the opposite was true,” New Jersey Attorney General Anne Milgram said, adding that the state bought and held Lehman stock at “artificially inflated prices.”

New Jersey claimed that its pension funds bought preferred and common shares based on Lehman’s financial statements and materials that included misstatements and omissions about the value of the company’s assets, which the state’s Division of Investment “could not have known were false.”

The state added that Lehman had misled it about “the collapsing real estate market and had claimed that Lehman had sufficient liquidity, a strong capital base and superior hedging, risk management and valuation practices.”

The suit against the Lehman officials charges them with violating federal and New Jersey securities laws, “negligent representation, breach of fiduciary duty, fraud, and aiding and abetting,” the state attorney general added.

New Jersey filed the suit, which seeks compensatory and punitive damages, in the state Superior Court in Mercer County.

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