Lehman’s murky hedge fund play

Date: Friday, July 4, 2008
Author: Katie Benner, Fortune.cnn.com

If you’re Lehman Bros. (LEH), the market has doubts about your balance sheet, your stock is down, and rumors say you’re going out of business or bound for the auction block. So forming a hedge fund that looks like nothing more than a place to dump unknown assets might not be the smartest idea.

But, reports Bloomberg, this seems to be exactly what Lehman has done. The firm has sold $4.5 billion worth of assets to a newly-formed hedge fund that counts Lehman as a significant investor; is run by seven recently-departed Lehman executives; and operates out of Lehman office space, three floors down from the office of Lehman’s corporate secretary, the report says. What’s more, Lehman is keeping its dealings with the fund, R3 Capital Partners quiet, and it isn’t mentioned in the firm’s Securities and Exchange Commission filings.

You don’t need to know much more about R3 to see that this could be cause for alarm.

Lehman investors will want to know how any transactions with the fund have affected the bank’s financial statements. R3 told Bloomberg that it is “an independently managed fund in which Lehman Brothers is a limited partner and holds a passive, minority stake in the general partner.”

Not good enough for a firm that wants to restore investor confidence, says Bloomberg. “That [statement] won’t keep investors from forming their own conclusions. If Lehman doesn’t like what they decide, it will have only itself to blame.”