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Seton Hall Law Report Shows Lehman Brothers Bankruptcy Court Examination Amounts to a License to Fail with Other People's Money

Lack of Legal Sanction Now Stands as a Roadmap of Unaccountability for Other Investment Firms

Seton Hall University School of Law’s Center for Policy & Research has issued a report: Lehman Brothers: A License to Fail with Other People’s Money, which examines in-depth the investigation of Lehman Brothers’ business practices undertaken by the U.S. Bankruptcy Court Examiner in the largest bankruptcy ever filed. The Center focused primarily on Lehman’s risk management and asset valuation— two aspects of company worth not readily available or discernible to the investing public— and notes that Lehman’s conscious violation of internal risk limitations as well as its conscious failure to accurately value assets was, alarmingly, found insufficient as a matter of law by the Examiner to trigger legal sanctions against Lehman Brothers or even a reprimand.

“In the face of mounting losses, Lehman doubled down its bets like a CEO at a blackjack table gambling with someone else’s pension money, and backdated risk limits to disguise the truth that its business was collapsing” commented Professor Mark Denbeaux, Director of the Center for Policy & Research. “The truth is, considering the actual value of the assets they were using to gamble, no self-respecting casino would have even taken their bet. Of course it all fell like a house of cards.”

Center Fellow and report co-author, Eric Miller, agreed, noting, “According to a Senior Management member with principal responsibility for asset valuation, they valued assets ‘with a gut feeling’ and, unbelievably, without even ‘thinking about’ whether or not the assets could be sold for the values placed on them. There was also a failure to make appropriate write-downs of realized losses in valuation because of what another Senior Management member charged with valuation ‘unambiguously asserted’ was a clear understanding that Lehman had imposed a ‘cap on such write-downs.’ The end result was not surprising.”

In January 2008, Lehman Brothers, heavily invested in by pension plans such as the California Public Employees’ Retirement System and the New York State Teachers Retirement Plan, traded at a high of over $65 per share. At that time, Lehman reported record numbers of nearly $60 billion in revenue and more than $4 billion in earnings. However, a mere eight months later, Lehman’s stock was trading at under $4 per share, and on September 12, 2008, Lehman filed for Chapter 11 bankruptcy, with losses to investors, both small and large, totaling billions of dollars.

The Bankruptcy Court appointed an Examiner to investigate and report on Lehman’s business affairs, with particular regard to “any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, or to a cause of action available to the estate.” Center Fellow and report co-author, Sean Kennedy noted, “The Examiner’s findings, taken at face value, reveal that the legal system that allowed Lehman’s failure, amounting to billions of dollars of other people’s money, will, without substantive changes to the regulatory framework, permit similar failures in the future.”

Senior Fellow John Gregorek added, “This lack of legal sanction now stands as a roadmap of unaccountability for other investment firms, which, like Lehman and MF Global, believe they can use economic downturns as a business opportunity and amounts to a free pass to make deadly investments with other people’s money.”

Seton Hall University School of Law, New Jersey’s only private law school, and a leading law school in the New York metropolitan area, is dedicated to preparing students for the practice of law through excellence in scholarship and teaching, with a strong focus on clinical education. The Center for Policy and Research enables students to gain practical experience while engaging in research and analysis that promotes respect for the rights of individuals worldwide. The students examine primary sources pertaining to national security law and the practices of the U.S. government, as well as the reliability of forensic evidence for criminal investigations and prosecution. Seton Hall Law is located in Newark, NJ and offers both day and evening degree programs. For more information, visit 

The report, Lehman Brothers: A License to Fail with Other People’s Money, may be found at


Michael Ricciardelli, J.D.
Legal Media Officer
Cell: 908-447-3034
Email: [email protected]

Mark Denbeaux
Professor of Law and Director of the Seton Hall Law Center for Policy & Research
Cell: 201-214-6785
Email: [email protected]

December 08, 2011