In 2006, Lehman Brothers Holdings Inc. issued $30 billion in debt and equity securities under offering documents (ODs) that incorporated by reference Lehman’s SEC filings. The plaintiffs – pension funds, companies and individuals – alleged that they had suffered losses attributable to material misrepresentations and omissions in Lehman’s financial statements, which were included in the SEC filings. They sued Lehman’s directors, officers, auditors and underwriters; the defendants moved to dismiss the claim.

Kaplan DJ found that some of the claims would not fly, but was prepared to allow the claims that the ODs contained false statements about the effect of certain repo transactions on the company’s finances, the fact that its risk-management practices were ‘strong’, and the extent of stress-testing and concentration of credit risk. A reasonable inference could be drawn that Lehman’s directors and officers knew or were reckless in not knowing that a misleading picture of things had been painted (but why, oh, why must US lawyers use the Latin adverb scienter as a noun?); these defendants’ exercise of due diligence was not clearly established. Certain of the claims against the auditors were viable. The plaintiffs had shown, with respect to the claims that could proceed, that at least an ascertainable part of their losses were ‘attributable to the allegedly false picture of relative security’ at Lehman.

In re Lehman Brothers Securities and ERISA Litigation (SDNY, 27 July 2011) [Link available here].