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While Hughson, who was responsible for distribution of bridge equity and debt
positions held in Lehman’s Commercial Book and was ultimately content with the level
of write‐downs taken in the third quarter of 2008, those responsible for marking and
price testing Lehman’s PTG book were not.
911 Examiner’s Interview of David O’Reilly, Oct. 26, 2009, at p. 2 (expletive deleted). Hughson confirmed
that this exchange occurred. Examiner’s Interview of Paul A. Hughson, Oct. 28, 2009, at p. 8.
912 Examiner’s Interview of Paul A. Hughson, Oct. 28, 2009, at p. 8.
Historically, Lehman had used a method it referred to as “Cap * 105” to value the
collateral underlying PTG debt and equity positions.913 This method simply multiplied
the capitalization of the development by 105% to determine the collateral value.914
While this method was deemed a conservative approach when real estate values were
increasing, Lehman recognized that in the down‐market of late 2007 and 2008 it could
produce overstated collateral values.915 Accordingly, Lehman had worked with its
primary asset manager, TriMont, to implement a new valuation model, known as an
internal rate of return (“IRR”) model, to value PTG collateral.916 The process was
managed by Anthony Barsanti and Aristides Koutouvides, Asset Managers in
Lehman’s PTG group.917 The IRR model was introduced on a rolling basis and by the
third quarter of 2008 a substantial part of Lehman’s PTG book was valued using an IRR
model.918 The switch to the IRR model resulted in lower estimates of collateral values
than the old Cap * 105 method, and, as a consequence, indicated that material write‐
downs were appropriate for a significant number of PTG assets.
913 Examiner’s Interview of Anthony J. Barsanti, Oct. 15, 2009, at pp. 12‐13; Examiner’s Interview of
Jonathan Cohen, Jan. 11, 2010, at p. 4.
914 Examiner’s Interview of Jonathan Cohen, Jan. 11, 2010, at p. 4.
915 Id.; Lehman, Valuation & Control Report ‐ Fixed Income Division (Feb. 2008), at p. 27 [LBEX‐BARFID
0000058] (“Current valuation methodology for land and development projects is based on cap * 105%,
which was a conservative or prudent approach is an up‐market. Given current market conditions, this
approach may not be appropriate.”).
916 Examiner’s Interview of Anthony J. Barsanti, Oct. 15, 2009, at p. 13.
According to Barsanti, during the third quarter of 2008, he wanted to take $700
million in write‐downs on PTG positions.919 However, Barsanti stated that Kenneth
Cohen directed that no more than $500 million of write‐downs could be taken on the
PTG portfolio during that quarter.920 Kenneth Cohen, during his interview with the
Examiner, did not recall any such exchange.921
The same $500 million limit on PTG write‐downs was also recalled by Jonathan
Cohen, who remembered it as one part of a $1.585 billion limit on GREG write‐downs
generally. Jonathan Cohen stated that during a meeting with Kenneth Cohen in
Kenneth Cohenʹs office a few days before the end of the third quarter, Kenneth Cohen
told him that there was a limit of $1.585 billion for GREG’s third quarter
loss.922 Jonathan Cohen stated that Kenneth Cohen explained that this would result in a
limit of $500 million in write‐downs on PTG assets.923 During the meeting, Jonathan
Cohen pointed out to Kenneth Cohen that certain write‐downs had not been considered
in Kenneth Cohenʹs analysis. These additional write‐downs included $28 million in
Asia, ʺrun rateʺ GREG P&L of $20 million, and Coeur Defense and IMD Archstone
921 Examiner’s Interview of Kenneth Cohen, Oct. 20, 2009, at p. 11. The incident described by Barsanti is
somewhat corroborated by Walsh. Barsanti’s proposed write‐down was one part of the “late breaking
news” during the third quarter that Walsh described. Walsh stated that when Barsanti informed him that
GREG’s initial estimate of $1 billion in write‐downs should have been increased by $700 million, this
caused McDade and Lowitt to become upset about getting information so late in the quarter. Examiner’s
Interview of Mark A. Walsh, Oct. 21, 2009, at p. 14.
922 Examiner’s Interview of Jonathan Cohen, Jan. 11, 2010, at p. 7.
write‐downs of $19 million.924 Jonathan Cohen also stated that during this meeting, Jim
Blakemore, a Managing Director in the London office, called and wanted to take an
additional $10 to $15 million of write‐downs on certain assets and was told by Kenneth
Cohen that he could not do so.925
Additionally, Jonathan Cohen told the Examiner that at one point during this
meeting OʹMeara joined by phone. According to Jonathan Cohen, the three discussed
additional write‐downs and Jonathan Cohen was told that ʺthe number is the
Jonathan Cohen stated that during this meeting he and Kenneth Cohen
performed calculations and he took notes on the Q3 Writedown Summary.927 In the top
right‐hand corner of the Q3 Writedown Summary (as sent by Kenneth Cohen), the
document shows a column of figures summed to 1,585, the same number Jonathan
Cohen stated was the limit imposed on GREG’s third quarter write‐downs.928 The net
926 Id. at p. 8.
927 See Lehman, Q3 Writedown Summary [LBHI_SEC07940_2258765]. During their meeting, Jonathan
Cohen added additional handwritten notations to this document. Examiner’s Interview of Jonathan
Cohen, Jan. 11, 2010, at p. 7.
928 Examiner’s Interview of Jonathan Cohen, Jan. 11, 2010, at p. 7. The document also shows that the
addition of two write‐ups to the 1,585 figure, one of “15” related to Europe and another of “9” attributed
to “Santa Monica,” brought the total net write‐down on the document to $1.561 billion. Lehman, Q3
Writedown Summary, at p. 23 [LBHI_SEC07940_2258765].
loss actually determined by GREG for the quarter was $1.585 billion.929 In addition, the
bottom of the first page of the document also shows “500” as the number assigned to
PTG for third quarter write‐downs, consistent with the $500 million limit on write‐
downs that both Jonathan Cohen and Barsanti described on PTG assets. The net write‐
down taken on PTG assets for the third quarter was $504 million.930
The Examiner has found no evidence suggesting that the Q3 Writedown
Summary, which was circulated on August 25, 2008, was drafted in bad faith. Kenneth
Cohen, who drafted this document, was likely unaware at the time of the significantly
larger than expected write‐down of PTG assets suggested by the recent switch to IRR
models.931 Jonathan Cohen told the Examiner that he did not discuss the additional $200
million PTG write‐down he thought was appropriate with anyone more senior than
929 Lehman, Global Real Estate 2008 Net Mark Downs, at p. 1 [LBEX‐AM 346991]. However, as noted
above, Lehman did not finalize its financial statements for the third quarter of 2008 and did not file a
Form 10‐Q prior to the bankruptcy.
930 The calculation of this net write‐down includes net write‐downs of $8 million on a category Lehman
labeled “CA Land & Condos ‐ Troxler,” $145 million on “CA Land & Condos ‐ Other,” and $350 million
on “Land and Condos (US excluding CA).” Lehman, Global Real Estate 2008 Mark Downs, at p. 1 [LBEX‐
AM 346991]. The PTG gross write‐down for the quarter was $555 million, with a write‐up of $51 million,
for a net write‐down of $504 million. Id. at pp. 2‐4. The Examiner’s financial advisor has observed that a
summary of write‐downs in E&Y’s workpapers suggests $503 million for PTG positions, but attributes
this difference to rounding. See Lehman, 3Q Real Estate Gross and Net MTM Cash Bonds Spreadsheet
(Aug. 29, 2008) [EY‐SEC‐LBHI‐MC‐GAMX‐08‐045830].
931 It should be noted that Kenneth Cohen stated that he heard sometime early in August that some
within GREG thought that $700 million in PTG write‐downs were appropriate, but that by the end of the
quarter, when the conversation with Jonathan Cohen and O’Meara occurred, he thought that only $500
million in write‐downs were being suggested. Examiner’s Interview of Kenneth Cohen, January 21, 2010,
at p. 4.
himself other than Reilly.932 Accordingly, it is the Examiner’s view that this document
represented a good faith effort to estimate write‐downs as of August 25, 2008.
Jonathan Cohen stated that he had never before heard of a predetermined limit
on write‐downs.933 However, even though he knew that such a limit would mean that
there were appropriate write‐downs that would not be taken, Jonathan Cohen stated
that he did not question it with Kenneth Cohen or O’Meara.934 He thought that he likely
just said ʺOKʺ in return.935 When asked why he did not raise the issue during this
discussion with Kenneth Cohen and O’Meara, Jonathan Cohen explained that “when
someone like Chris is telling me ‘that is the number,’ I’m not going to bring up
When asked whether he was surprised at the limit he understood to be set,
Jonathan Cohen stated that he was not because of an analysis he had done for Reilly in
late July.937 He explained that Reilly told him that he was trying to get a sense of what
positions they had to take a write‐down on and where they still had options. Jonathan
Cohen stated that Reilly asked him to determine how GREG write‐downs would be
allocated under different scenarios for global GREG write‐downs.938 Cohen said that at
932 Examiner’s Interview of Jonathan Cohen, Jan. 22, 2010, at p. 3.
933 Examiner’s Interview of Jonathan Cohen, Jan. 11, 2010, at p. 7.
936 Examiner’s Interview of Jonathan Cohen, Jan. 22, 2010, at p. 3.
937 Examiner’s Interview of Jonathan Cohen, Jan. 11, 2010, at p. 8.
that time he understood that he was being asked ʺif we could only take $X amount in
writedowns, what would it be?ʺ939 Jonathan Cohen stated that this task prepared him
for the idea of predetermined levels of write‐downs. Cohen also stated that during the
conversation in which Reilly asked him to do this, he voiced his opinion that they
should take more write‐downs, but did not ask why the limit was being set or where it
was coming from.940 Cohen explained that his impression was that the directive was
coming from above Reilly.941
The document that Cohen prepared is titled “GREG Potential Markdowns ‐
Q308” and sets forth four different scenarios for total GREG write‐downs in the third
quarter of 2008 and the applicable asset‐level write‐downs under each scenario.942 The
total GREG write‐downs under each scenario are $2.194 billion, $1.531 billion, $1.0
billion, and $750 million. Jonathan Cohen told the Examiner that that the target write‐
down numbers for the last two scenarios were provided by Reilly.943
Jonathan Cohen also stated that the write‐down numbers for specific assets on
this document were ʺmade up numbers,ʺ as he did this analysis very quickly and had to
942 Lehman, GREG Potential Markdowns as of July 23, 2008 (July 2008) [LBEX‐JC 000001]. The additional
handwritten notes on the document were made by Jonathan Cohen. Examiner’s Interview of Jonathan
Cohen, Jan. 11, 2010, at p. 8.
943 Examiner’s Interview of Jonathan Cohen, Jan. 11, 2010, at p. 8.
meet the scenariosʹ targets.944 For instance, he stated that the write‐down number for
Archstone on this document was a ʺcompletely made up number.ʺ945 Jonathan Cohen
explained that there was a lot of juggling to get the numbers to fit the total write‐down
scenarios and that it was hard to get down to these numbers in the last two scenarios.946
Jonathan Cohen told the Examiner that it was his opinion at the time that the proper
write‐downs in the third quarter would have been somewhere between $1.5 billion and
$2.2 billion, which are the write‐downs reflected by the first two scenarios in this
document.947 He also noted that he personally delivered the document to Reilly and
that it was a ʺgood questionʺ whether Reilly asked him not to e‐mail it.948
After his discussion with Kenneth Cohen and O’Meara, Jonathan Cohen worked
to determine how to meet the $500 million write‐down target for PTG assets. He and
Kebede divided the write‐downs into three tiers.949 The first tier was composed
of write‐downs that Lehman would be unable to justify not taking.950 The second and
third tiers were composed of potential write‐downs that Jonathan Cohen determined
were appropriate, but for which Lehman would be able to offer support for a decision
946 Id. Jonathan Cohen stated that Kebede helped him put the document together and they had only an
hour or two in which to produce the document. Id.
947 Id.; Lehman, GREG Potential Markdowns as of July 23, 2008 [LBEX‐JC 000001].
948 Examiner’s Interview of Jonathan Cohen, Jan. 11, 2010, at p. 8.
949 Id. at p. 9.
not to implement.951 The third tier was composed of potential write‐downs that
Jonathan Cohen determined they had the strongest case for not taking.952 However,
Jonathan Cohen stated that he felt that all of the write‐downs in each of the tiers
should have been taken.953 The total amount of the PTG write‐downs Cohen calculated
for all tiers was $714 million, or $214 million over the limit he understood was set for
Ultimately, Jonathan Cohen could not identify any person he believed to be
responsible for imposing a limit for GREG third quarter write‐downs.955 He stated that
he did not think that Kenneth Cohen had the authority to impose such a limit on his
own and that it also could not have been Walsh.956 He speculated that Lowitt, OʹMeara,
Michael Gelband, Global Head of Capital Markets, or Kirk may have had such
Jonathan Cohen and Barsanti were the only witnesses who had direct contact
with Lehman senior management on the subject of possible write‐down caps. But other
witnesses provided the Examiner with relevant evidence. Kebede stated that he found
it difficult to explain why write‐downs were not taken on many assets during the third
954 See Lehman, untitled spreadsheet, at pp. 2‐5 [LBHI_SEC07940_2258765]; Examiner’s Interview of
Jonathan Cohen, Jan. 11, 2010, at p. 8.
955 Examiner’s Interview of Jonathan Cohen, Jan. 11, 2010, at p. 9.
quarter of 2008.958 He also noted that, contrary to what had previously been customary,
he was not involved in the final decision on write‐downs in the second and third
quarters of 2008.959
Rebecca Platt, a product controller responsible for PTG debt positions, also told
the Examiner that she heard of a cap on total write‐downs for the quarter, although she
did not hear of this directly from senior managers and could not recall a specific
number.960 She also stated that, in her view, product controllers Jonathan Cohen and
Kebede did not have sufficient authority to control valuations and that in many
instances they were overruled by the business desk or senior management.961 Platt also
explained that part of her job was explaining the outcome of the price testing process —
that is, why write‐downs suggested by Product Control’s models were not, in some
cases, taken. She stated that as 2008 progressed, she had increasing difficulty coming
up with justifications for not taking write‐downs and that requests for write‐downs
were met with increasing resistance from the business desk and/or senior
management.962 When Platt could not create a rationale for why the write‐down was
not taken, she would consult with Kebede.963 For the August 2008 pricing report, which
set forth the results of the price verification process for the last month in the third
958 Examiner’s Interview of Abebual A. Kebede, Oct. 6, 2009, at p. 5.
960 Examiner’s Interview of Rebecca Platt, Nov. 2, 2009, at p. 10.
quarter, neither Kebede nor Platt could create cogent rationales to explain why certain
positions were not written down.964 Kebede suggested that Platt write “PCG [Product
Control Group] is in discussion with desk regarding this variance” with respect to these
positions.965 Platt stated that, although she thought the PTG debt positions were not
reasonably marked, there was “only so much [we] could do.”966 Referring to the
Product Control Group, she stated that they were, “kind of sadly, the little people.”967
Eli Rabin, the product controller responsible for PTG equity positions, also told
the Examiner that he heard rumors that there was a limit on the amount of write‐downs
that could be taken on PTG positions in the third quarter of 2008.968 He did not know
whether the limit was imposed on just GREG or all of Lehman and did not specify who
set the limit.969
Aristides Koutouvides, who worked on the PTG business desk, stated that the
role played by senior management changed in the third quarter of 2008.970 Specifically,
he remembered that there was more pushback from senior management as to write‐
downs.971 Koutouvides stated that the limit he understood to be in place was allocated
964 Id. at p. 11; Examiner’s Interview of Abebual A. Kebede, Oct. 6, 2009, at p. 6.
965 Lehman, Pricing Report (Aug. 2008), at pp. 19‐24 [LBEX‐BARFID 0000248]; Examiner’s Interview of
Rebecca Platt, Nov. 2, 2009, at pp. 10‐11; Examiner’s Interview of Abebual A. Kebede, Oct. 6, 2009, at pp.
966 Examiner’s Interview of Rebecca Platt, Nov. 2, 2009, at p. 11.
968 Examiner’s Interview of Eli Rabin, Oct. 21, 2009, at p. 12.
970 Examiner’s Interview of Aristedes Koutouvides, Nov. 20, 2009, at p. 16.
across all positions, such that every position that he felt should be written down was,
just not to the extent he deemed appropriate. He recalled one example in which he and
Barsanti wanted $500 million in write‐downs, but were only allowed $450 million.972 He
was also unable to specify where the supposed limit on write‐downs originated.
Koutouvides characterized the dialogue between the heads of the business units and
senior managers as “expectations management” when it came to valuations.973
(4) Examiner’s Findings and Conclusions With Respect to Senior
Management’s Involvement in CRE Valuation
The evidence is in great conflict as to whether senior management actually
attempted to impose artificial limits on write‐downs or whether more junior managers
misperceived management pushback as management interference. The evidence is
murky and based upon speculation as to exactly who among the senior managers
would have engaged in such interference if in fact it occurred. The amount of the write‐
downs not taken because of the possible interference – approximately $200 million in a
quarter in which Lehman would report $3.9 billion of losses – is of questionable
materiality. Furthermore, the actual write‐downs – right or wrong – were never
formally reported. For all of these reasons, the Examiner concludes that the evidence
does not support the existence of colorable claims arising out of write‐downs in the
third quarter of 2008.
d) Examiner’s Analysis of the Valuation of Lehman’s Commercial
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