Even the Most Sophisticated Investors can be Defrauded


Immediately before its bankruptcy in 2008, Lehman Brothers conjured up a way to pick up extra cash that apparently not even the experts at JPMorgan figured out until it was too late. Bob Ivry alerted the public to the scam in an article in Bloomberg Markets magazine after an extensive investigation by Bloomberg News uncovered the following details of exactly what happened.

Lehman set up a company called Fenway Capital to serve as a receptacle for a number of their questionable real estate holdings. Hudson Castle Group, a financial services company that was a leading provider of debt financing solutions to the global financial institutions sector, signed on as a sponsor to the company. Fenway proceeded to issue commercial paper rated P-1/A-1 by S & P and Moody’s.

Commercial paper is a short-term debt instrument issued by a corporation that generally matures within 270 days. It is usually not backed by any collateral thus only firms with high-quality debt ratings can find buyers. Best of all commercial paper does not have to be registered with the Securities and Exchange Commission.

Lehman bought $3 billion of the commercial paper issued by Fenway Capital and then used it as collateral that was accepted by JP Morgan in Morgan’s role as clearing bank right before Lehman’s bankruptcy on September 15, 2008. Meanwhile the $3 billion in cash was transferred back into Lehman. So Lehman Brothers essentially sold heavily depreciated real estate for a non-taxable $3 billion. Lehman insiders called the worthless commercial paper “goat poo”. Of course, JPMorgan is suing.

Sadly, the Dodd-Frank Act, legislation designed to tighten regulations, doesn’t address this type of transaction.

Page Perry, is an Atlanta-based law firm with over 125 years of collective experience representing investors in securities-related litigation and arbitration. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their investment problems. For further information, please contact us.