A Good Guy On Wall Street

Matthew Lee worked at banking giant, Lehman Brothers Holdings, for over 14 years. In May 2008, he uncovered irregular accounting practices designed to conceal the dire financial state that the bank was in.

As a senior vice-president in Lehman’s finance division, Lee felt responsible for raising his concerns with bank executives and with the bank’s auditing firm, Ernst & Young (E&Y). A few weeks after doing so, Lee was fired. Less than six months later, Lehman went bankrupt, helping to trigger the global financial meltdown.

Lee exhibited moral courage through his willingness to challenge his bosses using only proper channels. Nor did the “expertise” of one of the worlds largest auditing firms shut him down. In short, Lee did not let hierarchy prevent him from speaking truth to power.

The transaction that caught his attention, and would become his main point of concern, is known as “repo 105." This is a short term repurchase agreement. Lehman used the accounting maneuver to temporarily bring in $50 million in cash, creating a false boost in its balance sheet. The transfer was being exploited to hide the financial trouble Lehman was facing. Ultimately, the tactic prevented investors and regulators from identifying or investigating the financial problems drowning Lehman.

After consulting with his personal attorney, Lee crafted a memo outlining the red flags that he felt necessitated closer examination of Lehman’s accounting records. Chief among those red flags was repo 105. He sent the memo to Lehman executives who, in turn, asked E&Y to investigate.

E&Y concluded that Lee had no basis for concern. A report of the investigation was shared with Lehman’s board of directors. Curiously, the report left out Lee’s claim about repo 105. Later on, at least one Lehman director, former Vodafone CEO Sir Christopher Gent, agreed that such information should have been passed on.

In June 2008, Lee was let go as part of a wave of firm-wide lay-offs. While there is no direct evidence that Lee was fired because of his memo, the circumstances are certainly suspicious. Stephen Kohn, director of the National Whistleblowers Center based in Washington, D.C., acknowledged that, “If you’re a company and want to get rid of a whistleblower, it’s common to stick them in a round of layoffs…”

Furthermore, Kohn believes that the whistleblower protections in U.S. federal law have failed. ”Publicly traded companies are required to have an audit committee that will look at employee concerns and companies are not allowed to retaliate. People are supposed to be protected but those protections haven’t worked.”

Lee’s memo is now being used as evidence in the investigation of Lehman Brothers and Ernst & Young. In a 2,200-page report, bankruptcy examiner Anton Valukas noted that repo 105 was used excessively and questionably. He also noted that not everyone at Lehman was comfortable with it – among others, Matthew Lee.

Lee has been unable to find work since being laid off and, ironically, believes it has to do with his association with the auditing department at Lehman. His attorney, Erwin Shustak, confirms that “he has been living off of his now depleted 401(k) and is unable to find work…It’s been a difficult time.” As time passes, the truth is coming out, clearing Lee’s reputation and giving him new opportunities to make a living.

Few people recognized and called out the fraud that poisoned the banking industry before the collapse of the world’s financial centers. As industries and economies become more and more intertwined, corporations and organizations everywhere must become vigilant about how their ethical decisions impact the globe. Let’s hope that more employees emulate Lee’s moral courage in their professional culture.