All Too Familiar Circumstances

• BUSINESS
• MARCH 15, 2010

Lehman Whistle-Blower's Fate: Fired

Mr. Lee Raised Red Flags About 'Repo 105' Accounting Device; Let Go for Downsizing, Said Firm

By MICHAEL CORKERY

Lehman Brothers Holdings Inc. ousted a whistle-blower just weeks after he raised red flags about the securities firm's accounting in 2008.

Matthew Lee, a 14-year Lehman veteran, was let go in late June 2008 amid steep losses at the firm as it tried to maneuver through the global financial crisis. Earlier that month, he had raised concerns with Lehman's auditor, Ernst & Young, that the securities firm was temporarily moving $50 billion in assets off its balance sheet.

This accounting strategy helped to mask the risks Lehman was taking amid scrutiny by investors and regulators about the health of Wall Street firms.

More on Lehman

• U.K. Probes Accounting at Lehman
• FCIC Investigates Accounting Maneuver
• Lehman Files Repayment Plan
• News Hub: What Was Lehman Hiding?(03/12/10)
• French Minister Lagarde: Lehman Decision Was Wrong (03/12/10)

Lehman said at the time it let go Mr. Lee, a senior vice president, as part of a broader downsizing at the firm, according to people familiar with the matter. Lehman filed for bankruptcy in September 2008, and its assets were sold off to, among others,Barclays PLC. A Barclays spokesman declined to comment.

Erwin Shustak, Mr. Lee's lawyer in San Diego, asserts that "it was easier to just shut him up and let him go."

Ernst & Young never mentioned Mr. Lee's concerns to Lehman's board, according to a federal bankruptcy-court examiner's report released last week.

In a statement, Ernst & Young said that Lehman's management investigated Mr. Lee's allegations and informed the board that "the allegations were unfounded and there were no material issues identified."

Once an obscure Lehman executive, the 56-year-old Mr. Lee now is at the center of allegations that the high-profile Wall Street firm misled investors by using, among other things, an unusual accounting device known internally as "Repo 105" to park assets temporarily off its balance sheet.

Mr. Lee first raised concerns on May 16, 2008, when he sent a letter to senior Lehman management about his concerns over the firm's valuations of illiquid investments and the quality of its accounting controls.

In June 2008, Lehman's board instructed Ernst & Young to investigate Mr. Lee's allegations. An auditing team interviewed Mr. Lee on June 12, according to the bankruptcy report, at which point he raised the issue of Repo 105, the report says.

Bloomberg News

Lehman Brothers Holdings ousted a whistle-blower just weeks after he raised red flags about the securities firm's accounting in 2008.

Ernst & Young auditor William Schlich told the examiner he didn't recall Mr. Lee ever raising the Repo 105 issue, according to the report.

The report says Hillary Hansen, another auditor, has notes from the meeting with Mr. Lee that include details about the $50 billion Mr. Lee claimed was being moved off the balance sheet at quarter end. Mr. Schlich and Ms. Hansen didn't return phone calls.

Mr. Schlich said he spoke with a Lehman executive, Gerard Reilly, who said he had no knowledge that "Lehman used Repo 105 transactions to move $50 billion in assets off its balance sheet," according to the report. The bankruptcy examiner never had a chance to interview Mr. Reilly. He died in late 2008.

Write to Michael Corkery at michael.corkery@wsj.com