NYSE Regulation Inc. announced today that it has censured and fined Lehman Brothers Inc. US$400,000 for the submission of inaccurate monthly reports of short positions in securities listed on the NYSE, and for supervisory and internal control violations in connection with NYSE short-interest reporting requirements.

It found that in April 2004, the firm inaccurately reported to the NYSE short interest of 26,089,923 shares of a certain stock when the correct figure was 625,360 shares. The investigation disclosed that the underlying cause of the reporting error was the firm’s failure to update its systems for determining its short-interest position. Because of this failure, manual entry was required, and a firm employee incorrectly designated the number of shares into the wrong short and long account types in connection with the unwinding of a swap transaction.

The NYSE said the significant fluctuation in the April 2004 short-interest position should have triggered heightened vigilance and inquiry by the firm of the short interest reported in that security. This did not occur due to the lack of internal controls and clear policies and procedures for the firm’s short-interest reporting and verification process.

During the investigation, Lehman reported to the NYSE additional errors in its systems and procedures for determining its short interest. Due to these errors, the firm made erroneous monthly filings to the NYSE for approximately three and a half years, between January 2001 and May 2004. Inaccurate reporting by Lehman caused the NYSE’s report of short interest in a particular security in a particular month to be inaccurate in more than 4,000 instances.

The NYSE said that the reporting errors stemmed from: the firm’s failure to update and add new accounts to the firm’s computer system used to adjust and correct short positions; a programming error in that same system; and, the firm’s inclusion of certain syndicate accounts in its reporting. The firm’s short-interest reporting errors had a material impact on the NYSE’s overall short-interest reporting during this time period, it said.

Additionally, it found that Lehman failed to exercise reasonable supervision over its short-interest reporting activities. The firm did not have written procedures in place for the review and verification of the short-interest reports filed with the NYSE, and provided to its employees conflicting verbal guidelines for this process that resulted in a lack of supervisory review. Moreover, the firm failed to have adequate supervisory systems or procedures in place to monitor, review, and perform follow-up reviews regarding its compliance with applicable short-interest reporting requirements, and failed to implement internal controls designed to capture errors in its systems that were used to generate its short-interest reports.

The NYSE Hearing Panel Decision notes Lehman’s representations to NYSE Enforcement that the firm has implemented new procedures to, among other things, pre-test the short-interest data before reporting. In settling these charges the firm neither admitted nor denied the charges.

“These errors in reporting short-interest information, including the incorrect verification of its own inaccurate report, resulted in the dissemination of inaccurate information into the marketplace,” said Susan Merrill, chief of enforcement, NYSE Regulation. “The firm’s inattentiveness to the size and frequency of these errors only exacerbated the recurring failures in reporting and supervision.”