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By Caroline Humer and Jonathan Stempel
July 27, 2011 6:21 PM EDT
Top former executives of Lehman Brothers Holdings Inc
The decision, in a case brought three months before Lehman went bankrupt, will allow the lawsuit against former Chief Executive Richard Fuld and four top lieutenants to move forward. The investors were also allowed to press ahead with claims against former Lehman auditor Ernst & Young, as well as against former directors and underwriters.
The lawsuit, led by five retirement funds, seeks class-action status on behalf of other funds, companies and individuals who bought some of the more than $31 billion of equity and debt that Lehman sold under a variety of offerings beginning in 2006,
"This is a complicated situation, but the real significance is that some of the most crucial claims of the plaintiffs survived a motion to dismiss," said James Cox, a professor at Duke University School of Law.
U.S. District Judge Lewis Kaplan in Manhattan dismissed some claims, but he said the investors sufficiently alleged that Lehman materially misled them about its accounting and its ability to manage risk ahead of the September 15, 2008, bankruptcy.
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"It is entirely plausible" that the "misleading picture" Lehman portrayed about its financial condition inflated its stock price and resulted in investor losses, Kaplan wrote.
The decision comes amid other investigations into Lehman's collapse, although there have been no U.S. prosecutions against top officials over the bankruptcy. In December 2010, the New York attorney general sued Ernst & Young, saying the auditor stood by as Lehman painted a false picture of its health.
Ernst & Young said in an emailed statement that it was pleased that Kaplan's ruling dismissed most claims against it.
"We strongly believe that we will ultimately prevail on the remaining claim. As we have said consistently, we stand behind our work on the Lehman audit and our opinion that Lehman's financial statements were fairly stated in accordance with U.S. GAAP (generally accepted accounting principles), applying the rules that existed at the time," it said.
Lawyers for Fuld, the former directors, most of the underwriters and the investors did not immediately respond to requests for comments.
The office of New York Attorney General Eric Schneiderman was also not immediately available to comment. Lehman's bankruptcy estate is not named in the investors' lawsuit.
EXAMINER'S FINDINGS VALIDATED
Lehman filed for bankruptcy with $639 billion of assets, and its collapse was a principal trigger of the 2008 global financial crisis. Barclays Plc
Exhaustive details of Lehman's pre-bankruptcy accounting practices were revealed in March 2010, in a report by court-appointed examiner Anton Valukas.
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