A summary of Lee’s May 18, 2008 letter is actually footnoted in the report on Lehman’s bankruptcy by Alex Valukas, the chairman of U.S. law firm Jenner & Block LLP who was tasked by the Bankruptcy Court of the Southern District of New York to examine the bank’s demise. Reading the actual document, though, gives a more complete picture of what transpired at Lehman as Lee saw it.

 

To my mind, what is equally interesting is how Lee’s actions illuminate the various options available to potential whistleblowers everywhere. Lee was fired a few days after writing the letter. According to the Wall Street Journal, he considered filing a complaint for age discrimination – he is now 56 – but ended up with a severance agreement that, says his lawyer, prevented him from going to court or filing a whistleblower complaint under the Sarbanes-Oxley Act. 

 

I’m not making a moral judgement on the personal decisions that were made in this case. Could things have gone differently had Lee not negotiated a severance agreement and filed a whistleblower’s complaint instead? I’m not sure. It may be that the problems Lee flagged within Lehman combined with the toxic external environment of sub-prime and derivatives losses would have brought the bank to bankruptcy regardless of what Lee decided to do.

 

What appears to have happened is that a hard-headed personal choice was made and someone walked off with what I assume was a substantial severance package. (According to the Guardian newspaper, Lehman collapsed before Lee received the full amount of the severance.) Lehman then managed to hang on for several more months until the house of cards finally fell apart in September 2008.

 

Suggestions have been made that Lee had seen the writing on the wall for himself professionally early on. Quoting his lawyer, Erwin Shustak, the Wall Street Journal said that Lee had been demoted two months before writing his letter. The reasons for the demotion have not been made clear, but Shustak wrote in a letter to a member of Lehman’s general counsel staff that a company-wide decision appears to have been made “to replace more senior, higher paid employees, such as Mr. Lee . . . with younger, less experienced and less expensive employees.”

 

According to Shustak, says the Journal, Lee had raised the issues contained in his May 18 letter to Martin Kelly, Lehman’s global controller, several months earlier. (Kelly, who now works for  Barclays, declined to comment.) He finally decided to write a formal letter with his attorney’s help.  

 

In that letter addressed to Kelly as controller, Gerard Reilly as head of capital markets product control, Erin Callan as CFO and Christopher O’Meara as chief risk officer, Lee said he was compelled to bring to their attention “conduct and actions on the part of the Firm that I consider to possibly constitute unethical or unlawful conduct.”

 

Lee made six allegations. The first was that he believed Lehman’s books and records “contain approximately five (5) billion dollars of net assets in excess of what is managed on the last day of the month.” Second, Lee said Lehman had “tens of billions of dollars of unsubstantiated balances, which may or may not be ‘bad’ or non-performing assets or real liabilities.” Third, the bank has “tens of billions of dollars of inventory that it probably cannot buy or sell in any recognized market, at the currently recorded current market values.”

 

Fourth, Lee said that he did not believe that Lehman had “invested sufficiently in the required and reasonably necessary financial systems and personnel to cope with [its] increased balance sheet.” Fifth, he singled out the finance functions and department in Mumbai, India, as not having “sufficient knowledgeable management in place” and warned of a “very real possibility of a potential misstatement of material facts being efficiently distributed by that office.”

 

Finally, said Lee, “certain senior level internal audit personnel do not have the professional expertise to properly exercise the audit functions they are entrusted to manage, all of which have become increasingly complex as [Lehman Brothers] as undergone rapid growth in the international marketplace.”