Editorial: Districts lose fight for Lehman fundsTwelve local school districts found out last week that even though they lost millions of dollars invested by a county official in the failed Lehman Brothers investment bank, they had no recourse to sue the county to recover.
The dismissal of their case by a state appeals court wrecked the hopes of the districts, including five in the Almanac's circulation area, to pin the responsibility for their cumulative loss of about $20 million on then-county treasurer Lee Buffington's investment policies. After the collapse of the Lehman Brothers investment bank in September 2008, his strategy of using the bank for short-term investments of millions of dollars was criticized by representatives of the school districts, which were legally required to put their bond revenue and other working capital into the county's investment pool.
Mr. Buffington's trust in Lehman, despite hearing rumblings that the investment bank was on shaky ground, ultimately cost county taxpayers a collective $155 million, a stunning loss that shocked the school districts and other government agencies that had trusted the county to safely manage their funds.
Unless the districts decide to appeal to the state Supreme Court, the case against the county is over, although the districts have recovered a small percentage of their losses in a federal case that is being pursued by the county with seven other plaintiffs.
That action was bolstered by a federal judge's decision last October, which allowed some allegations of misconduct against Lehman's London-based accounting firm of Ernst & Young, and Lehman executives, including the chairman and chief executive officer, to proceed.
As part of the Lehman liquidation, the county already had been paid back $15.2 million, about 10 percent of its total $155 million investment in Lehman, from distribution payments in April and October of last year. And that could grow to 22 percent or more as auditors unravel the complex distribution of what is left at Lehman.
The school districts' lawsuit, led by the county Office of Education, bristled with allegations against Mr. Buffington (who died in late 2011), claiming that the treasurer's office violated state and county investment policies, failed to adhere to legally required prudent investment practices, and failed to properly diversify the $155 million "among sectors of the economy." It also said the treasurer failed to sell the Lehman notes "after learning of deterioration in the finances, credit rating and stock price of Lehman."
The school districts that lost big in this case include Menlo Park City, $3.9 million; Las Lomitas, almost $400,000; Portola Valley, nearly $150,000; and Woodside, nearly $100,000. For the smaller districts, the losses represent just 1 or 2 percent of their total budget, but Menlo Park City lost 14 percent of its $28 million annual budget. The Sequoia Union High School District, which includes M-A and Woodside, lost $6.5 million (7 percent of its budget), but was not a party to the lawsuit.
Since 2008, the school districts have become much more vigilant in watching how county officials invest their money, an entirely appropriate reaction after such a large loss. Some school officials were aware of Lehman's shaky status just prior to the collapse and suggest ed to Mr. Buffington that he pull out of the investment bank. But he declined and his decision turned into a huge loss.
It was a monumental error that school district and county officials should make sure can never happen again.