Lehman Victim of Deal Scam, Shorts

Investment bank Lehman Brothers has been doing its best to avoid the fate of Bear Stearns. Earlier this week it successfully floated $4 billion in convertible preferred shares and then secured a $2.5 billion credit facility from a 40-bank syndicate. Of course the Federal Reserve helped out when it made the unprecedented move of opening its discount window to investment banks.

Lehman isn't out of the woods yet, however. The firm is still battling persistent short-sellers who smelled blood and descended on the company in droves and, allegedly, fed the rumor mill that Lehman was the next Bear Stearns. Such rumors can be a self-fulfilling prophesy for a cash-strapped bank.

The shorts played so nasty that Lehman CFO Erin Callan went on CNBC and complained to Maria Bartiromo that the Securities and Exchange Commission needed to investigate abusive tactics of short sellers. Perhaps the best revenge was that once the firm secured additional funding the stock rallied, shaking out many of the shorts in a classic squeeze.

Then came the news that could give the shorts another reason to stick around. Yesterday, Lehman announced a law suit against a well-regarded Japanese trading firm, Marubeni Corp., that the bank says backed a firm in which Lehman had made a $350-million investment that turned out to be a sham.

It's not so much the $350 million--although the bank can hardly afford any losses at this stage--but the deal raises questions about leadership at a time when management is already under a microscope.

Lehman made a $350-million loan in a Japanese biotech company, thinking the venture was backed by Marubeni. When the debt payments failed to materialize, Lehman investigated and found out the deal was a sophisticated scam. Documents were forged and rogue traders posed as employees of the medical borrower.

Clearly, it's a fiasco that Lehman can ill-afford at this stage in its recovery process. For one, it could keep the short-sellers circling. For another, $350 million is $350 million.