A reading of the painstakingly detailed 2,292-page Examiner’s Report on the downfall of Lehman Bros. largely exonerates the investment bank’s management and its board of directors, asserting in part that the business judgment rule exists to ensure that directors and officers may pursue risky strategies that seem to promise great profit.” While much of what Lehman did will continue to be debate, the Examiner “does not find that any mistake by management…constituted gross negligence or intentional deception.”
The Southern District of New York bankruptcy court more than a year ago appointed Anton R. Valukas, chairman of the Chicago-based law firm Jenner & Block, to investigate what led to Lehman’s collapse and determine whether creditors could bring claims against Lehman’s estate or former officers.
In the report, filed with the bankruptcy court last Thursday, the Examiner writes that “business failure is an ever-present risk…If the mere fact that a strategy turned out poorly is in itself sufficient to create an inference that the directors who approved it breached their fiduciary duties, the business judgment rule will have been denuded of much of its utility.”
Valukas and a team of lawyers and auditors described what caused Lehman’s failure as a loss of confidence, liquidity, and ultimately, poor business judgment. “When the run on Lehman began in September 2008, Lehman lacked the liquidity to survive. Thus, Lehman’s collapse can be traced in part to Lehman management’s adoption of a countercyclical growth strategy in 2006 and 2007. Although management turned out to be wrong in their business judgments, the evidence does not establish that management’s actions and decisions were so reckless and irrational as to give rise to a colorable claim of breach of fiduciary duty.”
Moreover, the Examiner found “no evidence that managers knowingly made false statements to the board,” but did find “a number of instances in which management did not provide information to the board.
“In hindsight, various board members stated that it would have been helpful to have had more information. For example, some directors said that if the risk limit breaches were sufficiently large and long-lasting; if management’s liquidity concerns were more than a single incursion, if the exclusions from the stress testing were sufficiently significant, they would have wanted to know about these facts.
“On the other hand, the board did not explicitly direct management to provide it with this information, and there is no evidence that the board asked questions that management did not answer, or answered inaccurately. Moreover…management was not required by any regulatory authority or by Delaware common law to provide such detailed information to the board of directors.”
The Examiner’s report found that Lehman, like most Delaware corporations, “immunized its directors from claims of breaching the duty of care” by stipulating in its certificate of incorporation the following:
“A director shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided that this sentence shall not eliminate or limit the liability of a director (i) for any breach of his duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of [the Delaware General Corporation Law], or (iv) for any transaction from which the director derives an improper personal benefit.”
A PDF of the full report can be found by clicking HERE.