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Resisting Corporate Corruption, 3rd Edition by Stephen V. Arbogast

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Case 10Lehman Brothers Repo 105

“I have become aware of certain conduct and practices … which requires me, as a Firm employee, to bring to the attention of management conduct and actions on the part of the Firm that I consider to possibly constitute unethical or unlawful Conduct.”1

MATTHEW LEE PAUSED TO LOOK AT HIS COMPUTER SCREEN. His draft letter contained some polite but very strong language. The text told the top Lehman Brothers financial officers that there were major problems with the Firm’s controls and financial statements. If Lee was right, senior management faced serious legal troubles. It was mid-May 2008. Lee was a Senior Vice President in charge of Lehman’s consolidated balance sheet reporting, and he had a long list of concerns. His draft letter cited six accounting and reporting problems. Yet it didn’t discuss the most vexing issue. That issue was Lehman’s use of an accounting technicality, “Repo 105,” to remove almost $50 billion in assets from the Firm’s quarterly reports.

For a moment, Lee considered adding a Repo 105 discussion to his letter (Attachment 1). Then he decided against doing so. The purpose of the letter was to get management’s attention. If it succeeded, there would be an investigation. Lee would then get an opportunity to be specific about Repo 105.

Part of Lee’s caution was rooted in the fact that Lehman was in trouble. Lehman’s balance sheet was bloated with hard to market assets. Many were subprime mortgage securities. Lehman had also purchased ...

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