LITIGATION SUMMARY JUDGMENT
First State Blues
LEHMAN EXAMINER’S REPORT: THERE’S SOMETHING ROTTEN IN DELAWARE.
By Susan Beck
MORE ONLINE
Susan Beck’s
“Summary Judgment”
appears regularly at
litigationdaily.com
ITS BLue ANd GOLd
license plate proclaims delaware
to be “The First State,” but a
more up-to-date slogan might be
“The First Corporate enabler.”
I found myself thinking about
delaware’s lax standards for cor-
porate behavior earlier this year
as I paged through Anton Valu-
kas’s exhaustive report on the
demise of Lehman Brothers. In
the report, the court-appointed
bankruptcy examiner and Jenner
& Block chairman skillfully lays
out the foolhardy path that Leh-
man traveled before skidding into
well-deserved bankruptcy.
Most of the media attention
that greeted the report’s release
focused on Valukas’s account of Le-
hman’s nefarious-sounding Repo
105 transactions, which allowed
the investment bank to shift $50
billion on and off its balance sheet
every quarter, thus fooling ratings
agencies and regulators about the
dire state of its finances. Notably,
Valukas concludes that because
Lehman executives did not dis-
close these transactions to the
company’s board and the Securi-
ties and exchange Commission,
the Lehman estate has “color-
able claims” for breach of fidu-
ciary duty against former CeO
Richard Fuld and former CFOs
Chris O’Meara, erin Callan, and
Ian Lowitt, as well as a claim for
professional malpractice against
accounting firm ernst & Young.
ALEX WILLIAMSON
The examiner describes a parade
of corporate horrors—decisions
ranging from inane to decep-
tive—as he chronicles Lehman’s
self-destruction. And yet most of
the mistakes, he concludes, leave
the estate without a remedy un-
der delaware law.
Here’s just a partial catalogue
of Valukas’s findings:
Lehman’s senior management
disregarded the company’s own
risk-management guidelines, in-
tentionally and repeatedly brush-
ing aside the advice of its risk
managers. Not actionable.
Lehman management contin-
ued to tell its board, the rating
agencies, and regulators that Leh-
man was prudently managing risk
through its risk-management sys-
tem, even though it was not. Not
actionable.
Management hid from the
board vital information about the
company’s ballooning level of risk.
Not actionable.
In each case, Valukas explains,
these decisions, however rotten,
fall under the protection of dela-
ware’s hallowed business judg-
ment rule.
It’s no mystery why corporate
America loves delaware. The
state’s courts are extravagantly
tolerant of corporate miscon-
duct. directors—and officers, it
appears—are protected by dela-
ware’s business judgment rule
unless their actions are so outra-
geously bad that they rise to the
level of “gross negligence.”
(Valukas notes that the business
judgment rule has rarely been ap-
plied to corporate officers, as op-
posed to directors. But he points
to a recent delaware Supreme
SPRING 2010 | 19
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