Lehman exploited Linklaters opinion to tidy up balance sheet

A report into the collapse of Lehman Brothers has found that the failed investment bank exploited its relationship with Linklaters to green light an accounting practice that kept billions of dollars off its balance sheet.

Although there is no suggestion that Linklaters acted either illegally or unethically, the report by Jenner & Block chairman Anton Valukas claims that Lehman turned to the magic circle firm after it was unable to get sign off from US lawyers on the transactions, known as Repo 105.

The Repo 105 mechanism used a loophole in US accountancy regulations to make repurchasing agreements appear as permanent sales rather than temporary transactions. This in turn enabled Lehman to lower its balance sheet leverage.

The deals needed to be ratified by an opinion letter before they could be classed as true sales, but Lehman’s US legal adviser, understood to be Weil Gotshal & Manges partner Harvey Miller, could not sign off the letter.

Instead, the bank turned to its European adviser in the form of Linklaters to get sign off on the Repo 105 transactions originating from its EU entity Lehman Brothers International Europe (LBIE).

Valukas asserts that the Linklaters letter was addressed solely to LBIE and related only to transactions taking place under English law.

The letter reads: “This opinion is limited to English law as applied by the English courts and is given on the basis that it will be governed by and construed in accordance with English law.”

It continues: “For the purpose of this opinion we have assumed that… there are no provisions of foreign law which would affect this opinion.”

Although the opinion letter was used to approve Repo 105 transactions undertaken by the UK-based LBIE, the report claims that some of these transactions used securities owned by and originating from US-based Lehman entities.

David Barwise, a City based structured finance partner at White & Case, said that he believed Linklaters “acted as any UK firm would have”.

He added: “Repos work like secured loans. Firms are asked to opine on whether they are actually secured loans or a sales transaction. But the requirements for a true sale are not the same in the US as they are in the UK.”

A spokesperson at Linklaters said: “The US examiner’s report into the failure of Lehman Brothers includes references to English Law opinions which Linklaters gave in relation to a number of Lehman transactions.

“The examiner – who did not contact the firm during his investigations – does not criticise those opinions or say or suggest that they were wrong or improper.  We’ve reviewed the opinions and are not aware of any facts or circumstances which would justify any criticism.”