Essex Equity Holdings USA, LLC (f/k/a Maher Terminals Holdings Corp.), M. Brian Maher and Basil Maher v. Lehman Brothers Inc. and Individual Respondents

The Situation

Claimants Essex Equity Holdings USA, LLC ("Essex") and M. Brian Maher and Basil Maher (the "Mahers") purchased private placement auction-rate securities (ARS) in their account with Lehman Brothers Inc. in July 2007. ARS are variable-rate instruments that have their coupon or dividend rates reset at periodic auctions. The specific ARS purchased by Claimants included contingent capital ARS, derivative product company (DPC) ARS, and Regulation XXX ARS.  The financial performance of contingent capital ARS is linked to the performance of monoline insurance companies via put-provisions.  Regulation XXX ARS are collateralized by notes issued by life-policy reinsurers. DPC ARS are bonds issued by DPCs -- firms that specialize in selling credit protection to various counterparties.

Prior to August 2007, auction failures were rare. Beginning in August 2007, the ARS purchased by Claimants experienced auction failures. This meant that seller supply at auction exceeded buyer demand. As a result, the Claimants were unable to liquidate the securities at par in the auctions. The Claimants later sold some of the ARS on the secondary market at prices below par, and continued to hold the remaining ARS.

In an arbitration before the Financial Industry Regulatory Authority (FINRA), Claimants asserted several causes of action in relation to their ARS purchases, including violations of the Securities Exchange Act and Securities Act of 1933, as well as breach of contract, breach of fiduciary duty, and unsuitability. Claimants sought compensatory damages of more than $200 million.

NERA's Role

Former NERA Senior Vice President Dr. Chudozie Okongwu was retained to provide expert economic analysis and testimony on behalf of the Individual Respondents, six former Lehman Brothers Inc. employees. Dr. Okongwu was qualified as an expert and provided expert opinions at the arbitration hearing on the following topics: financial and credit markets and financial economics; financial instruments, including the ARS at issue in the matter; the global credit crisis; and, the foreseeability (or lack thereof) in July 2007 of the global credit crisis and its impact on the ARS markets.

The Result

The arbitration panel denied Claimants' claims in their entirety.