In re Lehman Bros. Securities & Erisa Litigation
131 F. Supp. 3d 241
S.D.N.Y.2015Background
- In September 2008 Lehman Brothers collapsed after extensive use of "Repo 105" transactions that temporarily removed securities from Lehman’s balance sheet to reduce reported net leverage at quarter-ends.
- Plaintiffs (Starr and RHF groups) bought Lehman securities and allege Ernst & Young LLP (EY), Lehman’s auditor, issued misleading GAAP and GAAS audit opinions and failed to disclose or investigate Repo 105 window-dressing.
- Plaintiffs assert Section 11 (Starr), Section 10(b)/Rule 10b-5 (Starr and RHF), and state-law fraud and aiding-and-abetting claims (NY and CA). Discovery closed and EY moved for summary judgment.
- Plaintiffs identify six "red flags" (e.g., quarterly Consolidated Global Balance Sheet Analysis reports showing quarter-end spikes, partner meetings, internal reviews and interviews) said to raise triable issues about EY’s knowledge, audit sufficiency, and scienter.
- The court applied Omnicare’s standard for statements of opinion and found plaintiffs produced sufficient evidence to create genuine disputes on falsity/omission, scienter, and loss causation; but SLUSA barred the state-law claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are EY’s GAAP/GAAS audit opinions false or misleading (statements of opinion) under Omnicare? | Plaintiffs: opinions omitted material facts about Repo 105 and lacked reasonable basis; red flags show opinions misleading. | EY: audit opinions are opinions that disclosed their basis; no falsehood—plaintiffs only show disagreement with judgments. | Court: Denied summary judgment — plaintiffs raised triable issues that opinions could be misleading or lacked reasonable basis under Omnicare. |
| Did plaintiffs prove EY’s scienter for Section 10(b)? | Plaintiffs: accumulation of red flags supports inference EY acted recklessly or knowingly failed to comply with GAAS. | EY: auditor scienter is demanding; alleged conduct is at most negligence, not highly unreasonable or intent to aid fraud. | Court: Denied summary judgment — red flags create a genuine issue of fact as to scienter. |
| Did plaintiffs establish loss causation (materialization of concealed risk)? | Plaintiffs: Repo 105 concealed extent of exposure and liquidity risk; market panic over balance-sheet quality caused Lehman’s collapse, within the zone of risk. | EY: Lehman’s bankruptcy was caused by a run driven by asset-quality/liquidity concerns widely known; Repo 105 was not the proximate cause. | Court: Denied summary judgment — triable issue exists whether concealment contributed to losses; Lentell and Vivendi analogies allow non‑one-to-one causal links. |
| Are plaintiffs’ state-law claims precluded by SLUSA? | Plaintiffs: SLUSA doesn’t apply because many related actions have settled and fewer than 50 plaintiffs now pending; some suits were not "filed in" this court. | EY: SLUSA applies to cover opt-out actions consolidated in MDL; earlier consolidated/Filed class actions satisfy threshold. | Court: Granted summary judgment on state-law claims — SLUSA precluded Starr’s and RHF’s state-law claims (prior consolidated filings and the MDL effect satisfied statute). |
Key Cases Cited
- Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015) (opinion-omission framework for statements of opinion under securities laws)
- Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) (statements of belief may give rise to liability; context matters)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (loss causation and "zone of risk" analysis)
- In re Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d 258 (S.D.N.Y. 2011) (prior MDL opinion describing Repo 105; standard for auditor opinion claims)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for inferring scienter from allegations)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) (distinguishing inflation at purchase from loss causation)