Lehman Brothers – Fall from grace

Tips For Officers And Directors In The Current Economic CrisisJohn P. BrinckoBrincko Associates, Inc.530 Wilshire Blvd., Suite 201Santa Monica, CA 90401(310) 553-4523jpb@brincko.com

Lehman Brothers – Fall from grace • Lehman Brothers – Never reported a loss as a publicly held company until June 08 • Watershed Events – Substantive covenant default, failure to refinance existing debt or raising additional funds for a bridge loan • These watershed events usually are critical today and lead to the point of no return making bankruptcy inevitable and imminent

Fiduciary Duties – Shifting Sands In A Distressed Economic Environment • Officers And Directors Must Understand Their Fiduciary Duties When Company Is Operating In A Distressed Mode • The Duty Of Care Requires That Management Exercise REASONABLE CARE In Overseeing The Activities Of The Company, Including Becoming Fully Informed Of All Material Information When Making Decisions

The Duty Of Loyalty Requires Management To Act In The Best Interests Of Shareholders and CREDITORS In Distressed Situations • Business Judgment Rule – Officers and Directors Are Subject To It

Zone Of Insolvency – Management Must Preserve The Value Of Company’s Assets For The Benefit Of Creditors • Zone Of Insolvency – Liabilities Greater Than Assets With Limited Prospects To Overcome In The Short Term; Inability To Cover Maturing Obligations As They Become Due In The Ordinary Course • Zone Of Insolvency Warning Signals – Company Experiencing Repeated Losses; Entire Business Sector Or Industry Experiencing A Downturn; Poor Cash Flow Attention; Trade Payable Extension; Aggressive Accounting Techniques

Contingency Planning Vital • “We Will Cross That Bridge When We Get To It” Perspective Should Be Tossed Out The Window

Examples Of Potential Breach Of Fiduciary Duties To Creditors: • Unviable Business Plan Approval • Raising Additional Debt To Fund Continuing Losses Or Expansion • Lack Of Cost Reduction Efforts • Failure To Consider Strategic Alternatives Quickly • Untimely Purchase Of D&O Insurance • Excessive Compensation

Recommendations: • Document Exercise Of Business Judgment • Management and Advisors Accountability • Board Actions Should Be Deliberative • Have Timely D&O Coverage • Hire Restructuring Professional • Consult With Creditors • Avoid Self Dealing

Lehman Brothers – Fall from grace