Lehman ex-CFO Callan under new scrutiny

by Patricia Sellers

"The fall of a Wall Street highflier," in the latest issue of Fortune, portrays Erin Callan as a star banker at Lehman Brothers who is catapulted to CFO, finds herself in a maelstrom, and flames out--all the while maintaining a fierce determination to perform for her bosses.

Ever since Lehman (BCS) died in September 2008, one key question has been: Was Callan so eager to please CEO Dick Fuld--and make Lehman look healthier than it was--that she breached fiduciary responsibility to shareholders? The answer is yes, according to the U.S. bankruptcy examiner's report on Lehman's collapse that was released to the public yesterday.

The 2,200-page report is quite critical of Callan--and of Fuld and the two men who held the CFO post before and after she did, Chris O'Meara and Ian Lowitt. But Callan, who was CFO from December 2007 until she was pushed from the job the following June, comes under particular scrutiny for failing to disclose Lehman's use of an accounting device called Repo 105. The gimmick, which Lehman used for years but employed increasingly in 2007 and 2008,  allowed the firm to remove some $50 billion of bad assets from its books temporarily, instead of selling the assets at a loss.

Examiner Anton Valukas, who chairs law firm Jenner & Block, finds Lehman's use of Repo 105 materially misleading. He criticizes Callan for telling analysts that Lehman was trying to give them "a great amount of transparency on the balance sheet," while saying "nothing about the firm's use of Repo 105 transactions."

Meanwhile, the report says, Lehman global financial controller Martin Kelly was raising red flags about the use of Repo 105. Callan failed, says the report, to pass on Kelly's concerns to Fuld and Lehman President Joe Gregory.

During this time when Lehman was prettying its balance sheet--and Callan was assuring investors that the firm was on solid ground--was she concerned about the actual state of things? Clearly. The report includes an email that Callan wrote to Fuld and Gregory two weeks before the close of Lehman's second quarter, in May 2008. "The skeptics are focused on our balance sheet and that is the key to the future," she wrote. "We HAVE to deliver on the balance sheet reduction this quarter."

One month later, Callan was replaced as CFO, accepted a job in investment banking at Credit Suisse (CS), quit after five months...and never was heard from again. Whatever happened to Erin Callan has been a Wall Street mystery ever since she cut off communication with her old crowd. Read the Fortune story to learn where Callan is today. Meanwhile, this new report, which is sure to impact the criminal and civil probes into who's to blame for Lehman's failure, proves that there's no escaping the past, really.