San Mateo Sues Lehman Executives, Auditor

SAN FRANCISCO - San Mateo County, Calif., which lost $155 million after Lehman Brothers Holdings Inc. filed for bankruptcy in September, filed a lawsuit last week targeting the failed firm's executives and auditor.

County officials say the San Mateo County investment pool held $155 million of Lehman floating-rate notes and corporate bonds when the firm filed for bankruptcy Sept. 15.

The $2.6 billion pool has about 600 participants, including the county, school districts, and special districts, according to an open letter from County Manager John Maltbie.

The county's share of the loss is about $30 million, including $9 million from the general fund, Maltbie said.

The loss is not expected to be debilitating - indeed, Standard & Poor's upgraded the county's credit rating to AAA from AA-plus in October, despite the Lehman debacle.

But that's not to say there are no victims, one of the county supervisors, Mark Church, said in the statement announcing the lawsuit.

"This isn't some sort of paper loss that is simply written off a ledger book," he said. "This hurts our school children, our roads, our necessary services."

The lawsuit was filed in San Francisco Superior Court, with the county retaining as lead counsel Cotchett, Pitre & McCarthy, the same firm that has signed up several California municipalities, including Los Angeles, San Francisco, and Oakland, to file lawsuits against the bond insurance industry.

The firm Corey, Luzaich, Pliska, deGhetaldi & Nastari is also representing the county.

The lawsuit names 11 individual Lehman Brothers executives as defendants, led by chief executive officer Richard Fuld, plus Lehman's auditing firm Ernst & Young LLP.

"The defendants focused their efforts on trying to save their company and their jobs with little or no regard to how their egregious actions harmed those who in good faith invested in Lehman Brothers," San Mateo County counsel Michael Murphy said in a statement.

The suit charges that the defendants defrauded the county "by concealing Lehman's increasingly dangerous exposure from its low-grade mortgage portfolio and its refusal to properly value its assets."

The county is also trying to recover its funds through the bankruptcy process. The investment pool hired Nixon Peabody LLP to represent it in the ongoing bankruptcy proceedings, according to a letter from County Treasurer Lee Buffington to stakeholders that was posted on his office's Web site.

The county is sharing representation and related litigation costs with Monterey County, where Treasurer Lou Solton has reported that its investment portfolio took $30 million in losses on Lehman Brothers and Washington Mutual securities.

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