The Lehman Brother’s major accounting gimmick was known internally as “Repo 105.” Repos, short for repurchasing agreements, are a standard practice on Wall Street. To obtain short-term cash to fund operations, a bank will borrow from another bank, giving that bank some of its assets with the stipulation that it will buy back the assets within a set number of days.

For accounting purposes, such transactions are recorded as financings, not sales, and the assets that are shifted, often overnight, remain on the balance sheet of the bank doing the borrowing. Lehman, however, valued its repo assets at 105 percent or more of the cash it received, and on that basis recorded its “repo 105’s” as sales?moving bad debts off of its balance sheet just long enough to doctor its quarterly financial reports.

According to the examiner, Lehman by such means shed $39 billion from its balance sheet at the end of the fourth quarter of 2007, $49 billion in the first quarter of 2008, and $50 billion in the second quarter.

The accounting scam was so smelly that Lehman was unable to find a US law firm that would sign off on its legality. In the end, it retained a British firm that sanctioned the maneuver as legitimate under British law. Lehman had to conduct its “Repo 105” operations through its London-based branch and shift funds from the US to Europe to carry out the deals.

Valukas asserts that CEO Richard S. Fuld Jr. and three chief financial officers knew of and approved the shady transactions, and the bank’s auditor, accounting firm Ernst & Young, covered up for the executives. The examiner concludes that the four executives breached their “fiduciary duty” to Lehman’s shareholders and board of directors, and adds that there is “sufficient evidence” to support a legal claim that Fuld was “at least grossly negligent.”