Cooperation and Coordination With the Government and Parties

¶The Examiner received extraordinary cooperation, both from parties and non‐ parties, without which the completion of this Report would have taken far more time. Although the Debtors' professionals and personnel were and are extremely busy with the day‐to‐day requirements of Lehman's liquidation, they remained responsive to almost daily requests for information from the Examiner and his professionals. Many parties, such as the Debtors, provided documents to the Examiner on an expedited basis without taking the time for privilege review, subject to clawback agreements.

¶Shortly after his appointment, the Examiner met with and established a regular line of contact with the SIPA Trustee to share documents, interview summaries and other information to avoid duplication of effort. The Examiner met with the SEC and three United States Attorney Offices (New Jersey, Eastern District of New York, Southern District of New York) to establish protocols for clearing proposed interviews so as not to interfere with any ongoing investigations. And the Examiner met with interested parties to obtain their guidance and thoughts.

¶Throughout the course of the investigation, the Examiner conducted regular, weekly calls with the SEC and U.S. Attorneys to update them on developments and to describe significant documents and the results of interviews. The Examiner has likewise made documents and the results of interviews available to the SIPA Trustee.

The Report now continues with the detail.

¶UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

¶‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ x

¶: In re : Chapter 11 Case No. : LEHMAN BROTHERS HOLDINGS INC., : 08‐13555 (JMP) et al., :

: (Jointly Administered) Debtors. :

¶‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ x

REPORT OF EXAMINER ANTON R. VALUKAS

¶Section III.A.1: Risk

TABLE OF CONTENTS III. Examiner's Conclusions — 43
A. Why Did Lehman Fail? Are There Colorable Causes of Action That Arise From Its Financial Condition and Failure? — 43
1. Business and Risk Management — 43
a) Executive Summary — 43
(1) The Examiner Does Not Find Colorable Claims That Lehman's Senior Officers Breached Their Fiduciary Duty of Care by Failing to Observe Lehman's Risk Management Policies and Procedures — 47
(2) The Examiner Does Not Find Colorable Claims That Lehman's Senior Officers Breached Their Fiduciary Duty to Inform the Board of Directors Concerning the Level of Risk Lehman Had Assumed — 52
(3) The Examiner Does Not Find Colorable Claims That Lehman's Directors Breached Their Fiduciary Duty by Failing to Monitor Lehman's Risk‐Taking Activities — 54
b) Facts — 58
(1) From Moving to Storage: Lehman Expands Its Principal Investments — 58
(a) Lehman's Changed Business Strategy — 59
(b) The Increased Risk From Lehman's Changed Business Strategy — 62
(c) Application of Risk Controls to Changed Business Strategy — 65
(i) Stress Testing Exclusions — 66
(ii) Risk Appetite Limit Increase For Fiscal 2007 — 70
(iii) Decision Not To Enforce Single Transaction Limit — 73
(d) The Board's Approval of Lehman's Growth Strategy — 76
(2) Lehman Doubles Down: Lehman Continues Its Growth Strategy Despite the Onset of the Subprime Crisis — 78
(a) Lehman's Residential Mortgage Business — 82
(i) Lehman Decides to Curtail Subprime Originations but Continue to Pursue "Alt‐A" Originations — 82
(ii) The March 20, 2007 Board Meeting — 90

(b) The Explosion in Lehman's Leveraged Loan Business — 95
(i) Relaxation of Risk Controls to Accommodate Growth of Lehman's Leveraged Loans Business — 97
(c) Internal Opposition to Growth of Leveraged Loans Business — 100
(d) Growth of Lehman's Commercial Real Estate Business at The Start of the Subprime Crisis — 103
(i) Relaxation of Risk Controls to Accommodate Growth of Lehman's Commercial Real Estate Business — 105
(ii) Internal Opposition to Growth of Commercial Real Estate Business — 107
(iii) Archstone — 108
a. Lehman's Commitment — 108
b. Risk Management of Lehman's Archstone Commitment — 112
(e) Nagioff's Replacement of Gelband as Head of FID — 114
(f) The Board of Directors' Awareness of Lehman's Increasing Risk Profile — 116
(3) Early Warnings: Risk Limit Overages, Funding Concerns, and the Deepening Subprime Crisis — 117
(a) Nagioff and Kirk Try to Limit Lehman's High Yield Business — 119
(b) July‐August 2007 Concerns Regarding Lehman's Ability to Fund Its Commitments — 123
(c) Lehman Delays the Archstone Closing — 128
(d) Lehman Increases the Risk Appetite Limit to Accommodate the Additional Risk Attributable to the Archstone Transaction — 131
(e) Cash Capital Concerns — 134
(f) Lehman's Termination of Its Residential Mortgage Originations — 138
(g) September, October, and November 2007 Meetings of Board of Directors — 139
(i) Risk Appetite Disclosures — 139
(ii) Leveraged Loan Disclosures — 144

(iii) Leverage Ratios and Balance Sheet Disclosures — 147
(iv) Liquidity and Capital Disclosures — 148
(4) Late Reactions: Lehman Slowly Exits Its Illiquid Real Estate Investments — 150
(a) Fiscal 2008 Risk Appetite Limit Increase — 152
(b) January 2008 Meeting of Board of Directors — 154
(c) Executive Turnover — 156
(d) Commercial Real Estate Sell‐Off: Too Little, Too Late — 157
(e) Lehman's Compensation Practices — 161
c) Analysis — 163
(1) The Examiner Does Not Find Colorable Claims That Lehman's Senior Officers Breached Their Fiduciary Duty of Care by Failing to Observe Lehman's Risk Management Policies and Procedures — 164
(a) Legal Standard — 164
(b) Background — 166
(i) Countercyclical Growth Strategy with Respect to Residential Mortgage Origination — 171
(ii) Lehman's Concentration of Risk in Its Commercial Real Estate Business — 172
(iii) Concentrated Investments in Leveraged Loans — 175
(iv) Firm‐Wide Risk Appetite Excesses — 179
(v) Firm‐Wide Balance Sheet Limits — 181
(vi) Stress Testing — 181
(vii) Summary: Officers' Duty of Care — 182
(2) The Examiner Does Not Find Colorable Claims That Lehman's Senior Officers Breached Their Fiduciary Duty to Inform the Board of Directors Concerning the Level of Risk Lehman Had Assumed — 183
(3) The Examiner Does Not Find Colorable Claims That Lehman's Directors Breached Their Fiduciary Duty by Failing to Monitor Lehman's Risk‐Taking Activities — 188
(a) Lehman's Directors are Protected From Duty of Care Liability by the Exculpatory Clause and the Business Judgment Rule — 188

(b) Lehman's Directors Did Not Violate Their Duty of Loyalty — 190
(c) Lehman's Directors Did Not Violate Their Duty to Monitor — 191
(i) Application of Caremark to Risk Oversight: In re Citigroup Inc — 191
(ii) Application of Caremark and Citigroup to Lehman's Directors — 193

¶III. EXAMINER'S CONCLUSIONS

Cooperation and Coordination With the Government and Parties

Why Did Lehman Fail? Are There Colorable Causes of Action That Arise From Its Financial Condition and Failure?