County of San Mateo Reaches $6.5 Million Settlement With Lehman Brothers Auditors Ernst & Young

The County of San Mateo and other California public entities reached a $6.5 million settlement with Lehman Brothers auditors Ernst & Young, successfully concluding its legal efforts to recoup its losses from the 2008 Lehman bankruptcy.

Lehman’s failure spelled a $155 million loss to the County’s Investment Pool which held funds for the County, school districts, special districts, and other public agencies in over 1,050 different accounts.  The County’s Investment Pool ultimately recovered more than $71 million — or 46 percent of losses — through bankruptcy proceedings and litigation against Lehman Brothers’ directors and officers and Lehman’s auditors, Ernst & Young.

Supervisor Carole Groom, president of the Board of Supervisors, said the County is pleased to reach a resolution.

“The County of San Mateo takes very seriously its responsibility to taxpayers and to the agencies, school districts and special districts participating in its investment pool.  This settlement doesn’t fix all the hurt caused by the collapse but it is one way to recoup some part of the loss,” Groom said.

County officials credited the financial recovery to the hard work of the Treasurer’s Office, the law firm of Cotchett, Pitre & McCarthy which represented the County, and the County Counsel’s Office who worked together to develop the County’s legal strategy widely considered novel at the time.

Ultimately, the County’s approach served as a template for other jurisdictions seeking redress.  Unlike bankruptcy proceedings, the County’s litigation targeted the personal assets of specific executives like former CEO Richard Fuld, holding them responsible for the firm’s financial failure.  The suits claimed Lehman executives knowingly misled investors leading up to the Sept. 15, 2008, collapse and used accounting gimmicks to hide its true financial condition.

County Counsel John Beiers said “the County’s legal approach shows that Main Street’s determination and perseverance can be as powerful as Wall Street’s mighty resources.  Since the collapse seven years ago, we held strong in our belief that Wall Street firms like Lehman should be held accountable for using public entities to finance their risky practices and paying themselves millions of dollars in compensation while their companies deteriorated,” Beiers said. “Lehman was not too big to fail and, finally, not too big to avoid responsibility. I’m satisfied that Lehman first, and now its auditor, agreed to close this chapter with those they owe in the County.”

In addition to the now-settled litigation and bankruptcy recovery, the County implemented future protections of its investment policy by creating greater diversity, shortening maturities on investments and hiring an outside investment advisor for greater oversight.