Lehman investors gird for legal fight

By Martha Graybow

NEW YORK (Reuters) - Aggrieved investors in Lehman Brothers Holdings Inc have added new legal claims in what is sure to be one of the most closely watched lawsuits of the mortgage crisis, accusing company insiders and others of misleading them before the firm collapsed.

New court papers filed this week by a group of public pension funds suing to try to recover money lost on Lehman's (LEHMQ.PK: Quote, Profile, Research) fall include information gleaned from more than 20 former employees at the Wall Street firm and its mortgage lending subsidiaries.

These "confidential witnesses" include a former Lehman vice president who is quoted as saying that employees were "skeptical" of the Wall Street firm's own public statements that it was well-positioned to withstand a housing downturn.

The executive worked in the fixed income research group, and was employed by the firm from 2000 until this year, the court papers say.

Other former employees cited in the lawsuit -- none of whom were named -- include ex-employees at the company's mortgage lending units Aurora Loan Services LLC and BNC Mortgage LLC, who describe what they contend were poor underwriting procedures.

The pension funds contend that these statements back up their arguments that Lehman did not adequately disclose the risks in its real estate investments. The defendants have yet to reply to the accusations with their own court papers.

Lehman filed the largest U.S. bankruptcy case last month. Because of those proceedings, the firm itself is not a defendant in the investor lawsuit, which was brought in U.S. District Court in Manhattan. A Lehman spokesman declined to comment on the case on Thursday.

"Lehman assured investors, falsely, that its exposure to the real estate meltdown was well contained, due, in part, to its claimed excellence in 'hedging' against losses in that sector," the 182-page court filing contends. It says the company's financial reports "lacked transparency, masking Lehman's exposure to mortgage-related losses."