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Linklaters put on alert over Lehman help

LEGAL regulation body, the Solicitors Regulation Authority (SRA) is currently deciding whether to further investigate commercial law firm Linklaters in connection to advice it gave to stricken bank Lehman Brothers.

A US court appointed report into the failings of the American bank found that Linklaters had advised Lehman Brothers on an off-balance sheet transaction called “Repo 105” that allegedly made the bank appear financially healthier than it was.

A statement from the SRA said: “We are aware of the report and we are currently reading it. After we will decide whether or not any regulatory action should be taken.”

The 2,200 page report by Anton Valukas, chairman of US firm Jenner & Block, was released on Friday and said that Linklaters had been contacted by Lehman Brothers on the Repo 105 transactions after it failed to find an appropriate US counsel.

The report said: “Lehmans conducted its Repo 105 programme under the aegis of an opinion letter the Linklaters law firm in London wrote for Lehman Brothers In Europe, Lehman’s European broker-dealer in London, under English law.”

The Repo 105 trades, addressed as an “accounting gimmick”, were allegedly hidden from investors, regulators and rating agencies, according to the report.

Although Valukas does not identify whether or not Linklaters acted unethically or illegally, market sources suggest that the law firm could see a raft of class action suits from angered investors and counterparties as a result.

Linklaters said: “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 have reviewed the opinions and are not aware of any facts or circumstances which would justify any criticism.”

THE VALUKAS REPORT | MAIN FINDINGS:

l Balance Sheet Manipulation
Repo 105 transactions helped Lehman Brothers to move $50bn (£32.8bn) off its balance sheet at the end of the first and second quarters of 2008, the report says.

l Balance Sheet
Valukas claims in the report that the Repo 105 trades helped the bank to reduce its leverage and balance sheet at the height of the banking crisis, avoiding costly rating downgrades. However he says this misled investors.

l Senior Officials
The report says there is credible evidence to link former Lehman chief executive Dick Fuld and three chief financial officers to a breach of their fiduciary duties.

l Ernst & Young
Valukas alleges Lehman auditors Ernst & Young did not meet professional standards after the accountancy firm reviewed the bank’s value of Repo 105 transactions.

l Repo 105
Lehmans introduced Repo 105 in 2001