The Curious Case of Lehman's Whistleblower

A week after the release of a report on Lehman Brothers’ 2008 bankruptcy, another piece of the puzzle has fallen into place. The Wall Street Journal has unearthed a letter written by Matthew Lee, a senior vice president in charge of the bank’s global balance sheet and legal entity accounting.

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.
Litany of Complaints
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.”
‘Victim of Retaliation’
Lee’s letter was cited as a key piece of evidence in Valukas’s voluminous report in the determination that Ernst & Young, as Lehman’s external auditor, had been professionally negligent. The auditors had read Lee’s letter, but did not alert the board’s audit committee about it when they met, said Valukas. Ernst & Young interviewed Lee about a month later, when he had already been terminated from his job. In a statement, says the Wall Street Journal, Ernst & Young said that Lehman’s management had determined that the “allegations were unfounded.”
Why didn’t Lee file a whistleblower’s report under Sarbanes Oxley? It appears that he was hoping for a settlement with Lehman. In his letter to the bank, Shustak said that his client was considering an age discrimination suit against Lehman. “Mr. Lee believes he has been the victim of retaliation for bringing what he believed, in good faith, to have been ethical and securities law violations by Lehman to Lehman’s management’s attention,” the lawyer wrote.
Curiously, instead of threatening to sue Lehman as a “victim of retaliation,” Shustak indicated that Lee was considering an age discrimination suit. “At the same time,” the lawyer wrote, “Mr. Lee would prefer to resolve his dispute with Lehman amicably.” A settlement was indeed reached – that’s the previously mentioned severance agreement that precluded Lee from filing a lawsuit or a whistleblower complaint. In effect, both parties got what they wanted.
Whistleblower Lessons
It is not clear to me whether Lee has any legal liability under Sarbanes-Oxley. As I understand it, the law requires the CEO and CFO to certify that the company’s financial statements comply with the standards and regulations issued by the appropriate U.S. authorities and that the company has adequate internal controls in place. As the executive officer in charge of global balance sheet and legal entity accounting, Lee had presumably signed off internally to the correctness of Lehman’s accounting, which is partly the basis, I assume, for the certification by the CEO and CFO.
But Lee’s 2008 letter makes clear that he believes Lehman’s accounting and internal controls have serious shortcomings. If his lawyer’s account is true, he had also raised the issue with his supervisor before he wrote it. Whether all these will inoculate him from legal liability, if indeed he is exposed to such liability, is still to be determined. But Lee can at least plausibly say that he had done all that he could do.
Some may say that he could have done more by going public. This is, of course, easy for outside observers to say. There are many professional and personal reasons that must be taken into account before going that route. Even Sherron Watkins, the celebrated Enron “whistleblower,” did not actually go public – she wrote an internal email warning of misstatements in the company’s financial statements, a message that came to public attention five months after she sent it, when the Enron scandal had already come to light.
It is true that we now have Sarbanes-Oxley to theoretically protect whistleblowers. Section 301 of Sarbanes-Oxley requires U.S. listed companies to establish a whistleblower’s system that protects the anonymity of internal complainants. Section 806 of the same Act imposes civil liability on public companies that retaliate against employees who files a whistleblower’s report. Still, the decision to actually blow the whistle on company wrongdoing is a personal one that rests with each individual employee.         
For would-be whistleblowers, there is at least one important takeaway from Matthew Lee’s decision-making, and that is to lawyer up. A good attorney, as Erwin Shustak apparently is, can lay out all the legal options and implications for one’s contemplated action. It is well and good to do one’s civic duty by exposing wrongdoing at one’s company. But you must also make sure to protect yourself, your job and your family against the negative effects of being a good Samaritan.
About the Author
Cesar Bacani is senior consulting editor at CFO Innovation.    



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