Lehman Brothers Holding Inc. Case 02/22/2008
According to the complaint, as a direct result of the market learning of defendant’s misrepresentations and omissions, the price of Lehman Brothers shares declined and plaintiff and the class suffered a loss on their investments in Lehman Brothers.
During the Class Period, Lehman Brothers was an active participant and heavily invested in the mortgage-backed securities markets.
By July 17, 2007, news of further deterioration in the mortgage-backed securities market and rumors concerning Lehman Brothers’ mortgage related losses reached a critical stage. That day, Bear Stearns, a competing investment bank, announced that its “Structured Enhanced Leverage Fund,” due to heavy losses in its mortgage-related investments, would be returning no money to its investors, and that a second failed mortgage securities-based hedge fund would be able to return only a small portion of its clients’ funds.
This news sent shockwaves through the market, and led investors to suspect that Lehman Brothers was also concealing mortgage related losses on its balance sheet. On July 18, 2007, this speculation forced Lehman Brothers to reassure the market: a Company spokeswoman, Kerrie Cohen, said “[t]he rumors related to subprime [mortgage] exposure are unfounded.”
Despite the Company’s assurances, on July 30, 2007 an article published by Market Watch noted on that day that Standard & Poor’s Equity Group downgraded Lehman Brothers, to hold from buy, “citing the brokerage’s exposure to leverage in its fixed-income business, widening credit spreads and slower mortgage origination and securitization volume for mortgages.”
This news shocked the market, causing Lehman Brothers’ share price to drop over the next four trading days, to close on August 3, 2007, at $55.78 per share, a 14.56 percent drop from its closing price before the news of the Standard & Poor’s downgrade.