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Report accuses Lehman of exploiting loophole

Former Lehman Brothers directors and their UK advisers could face a fresh blitz of civil and criminal charges following the publication on Friday of the explosive report into the collapse of the Wall Street bank which claimed it “misrepresented” its financial position.

According to US legal experts, the former Lehman boss, Dick Fuld, and other directors could be pursued by the Securities and Exchange Commission, the US watchdog, for civil charges of securities fraud. Other government enforcement agencies could also bring criminal charges.

The 2,200-page report by Anton Valukas, appointed by a New York bankruptcy court, established that Lehman exploited a loophole between US and UK law which allowed it to keep $50bn (£33bn) of debt off its balance sheet, thus providing a better picture of its health.

Mr Valukas described the use of the mechanism — a Repo 105 — as an “accounting gimmick” which led to a “material misrepresentation” to investors about the true state of its finances.

Civil charges are almost certain to be pursued by the SEC if the financial statements were false and directors could be prosecuted under the 2002 Sarbanes-Oxley Act which requires the chief executive and the chief financial officer to certify that the financial statements comply with all applicable statutes and rules.

One US lawyer said that provided Mr Fuld and Lehman's three chief financial officers during 2007 and 2008 knew of the effect of the Repo 105 transactions, criminal charges could also be brought.

The report also concludes there is credible evidence of professional malpractice against UK accountants Ernst & Young which advised Lehman's London subsidiary which carried out the Repo 105 transactions. These were based on an “opinion letter” from Linklaters, the law firm, which signed off on the deals claiming that they were sales and not financing arrangements. The report does not suggest Linklaters acted illegally. Both E&Y and Linklaters have denied wrongdoing.