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Lehman’s Funds of Funds Accounting Under Scrutiny

The Security and Exchange Commission’s investigation into the collapse of Lehman Brothers Holdings is gaining momentum and, specifically, into the accounting practices that the company allegedly used to give the appearance of a robust financial picture.

As reported Sept. 10 by the Wall Street Journal, Lehman’s method of accounting was denounced in March as “misleading” by a court-appointed examiner. The practice, known as Repo 105, allowed Lehman to shift as much as $50 billion in assets off of its balance sheets. In using Repo 105, Lehman was able to give the appearance, albeit a false one, that it had reduced its debt levels.

Meanwhile, Lehman allegedly never told its board, regulators or even investors about Repo 105.

According to the Wall Street Journal article, questionable accounting isn’t Lehman’s only problem. The SEC also is reportedly looking into whether former Lehman executives failed to adequately mark down the value of a real-estate portfolio acquired during the firm’s takeover of apartment developer Archstone-Smith Trust or to disclose the resulting losses to investors.

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