By Caroline Humer and Jonathan Stempel

NEW YORK (Reuters) - Top former executives of Lehman Brothers Holdings Inc <LEHMQ.PK> lost their bid to throw out a securities fraud lawsuit seeking to hold them responsible for billions of dollars of investor losses tied to the Wall Street investment bank's 2008 collapse.

Wednesday's decision, in a case first brought three months before Lehman went bankrupt, will allow the lawsuit by investors against former Chief Executive Richard Fuld and four top lieutenants to move forward.

The lawsuit, led by five retirement funds, seeks class-action status on behalf of other funds, companies and individuals who bought some of the more than $31 billion of equity and debt Lehman sold under a variety of offerings beginning in 2006.

"This is a complicated situation, but the real significance is that some of the most crucial claims of the plaintiffs survived a motion to dismiss," said James Cox, a professor at Duke University School of Law.

"It is entirely plausible" that the "misleading picture" Lehman portrayed about its financial condition inflated its stock price and resulted in investor losses, Kaplan wrote.

OTHER PROBES

The decision comes amid other investigations into Lehman's collapse, although there have been no U.S. prosecutions against top officials over the bankruptcy. In December 2010, the New York attorney general sued Ernst & Young, saying the auditor stood by as Lehman painted a false picture of its health.

Ernst & Young said in an email it is pleased Kaplan dismissed most claims against it. It said the remaining claim is the narrowest, limited to investors who bought securities after July 10, 2008.

"We strongly believe that we will ultimately prevail on the remaining claim," the auditor said. "We stand behind our work on the Lehman audit and our opinion that Lehman's financial statements were fairly stated."

Adam Wasserman, a partner at Dechert law firm representing the independent directors, said in a statement his clients are confident the evidence will show they acted "diligently and appropriately" while on Lehman's board.

Lawyers for Fuld and most of the underwriters, as well as the office of New York Attorney General Eric Schneiderman, did not return requests for comments. Lehman's bankruptcy estate is not named in the investors' lawsuit.

EXAMINER'S FINDINGS VALIDATED

Lehman filed for bankruptcy with $639 billion of assets, and its collapse was a principal trigger of the 2008 global financial crisis. Barclays Plc <BARC.L> took over a large part of its investment banking business.

Exhaustive details of Lehman's pre-bankruptcy accounting practices were revealed in March 2010, in a report by court-appointed examiner Anton Valukas.

He found that Lehman's use of so-called Repo 105 transactions, in which assets were moved on and off the balance sheet, let Lehman to obscure its leverage and health. Part of the investor lawsuit involves those transactions.

"As far as I can tell, this is the first judgment that's come down that really validates in the legal framework and courtroom the findings of the examiner's report and seems to go a little further," said Lawrence McDonald, author of a book about Lehman, "A Colossal Failure of Common Sense."

Kaplan also said the investors sufficiently alleged that Ernst & Young made a false statement in claiming ignorance of the impact of the transactions.

He wrote that the complaint "adequately alleged" that Lehman overstated its financial strength, understated its leverage, and understated its exposure to risky "Alt-A" mortgages and commercial real estate assets.

Steven Singer, a partner at Bernstein, Litowitz, Berger & Grossmann representing the plaintiffs, said the judge allowed the case to go forward against all parties in two key areas: Repo 105 transactions, and Lehman's risk management.

Among the claims Kaplan dismissed were allegations that the Repo 105 transactions materially affected Lehman's liquidity, or that Lehman made a material misstatement around their use.

The lead plaintiffs include two California pension funds: the Alameda County Employees' Retirement Association, and the Operating Engineers Local 3 Trust Fund; and public retirement funds in Guam, Northern Ireland and Edinburgh, Scotland.

The case is In re: Lehman Brothers Securities and ERISA Litigation, U.S. District Court, Southern District of New York, No. 09-md-02017.

(Additional reporting by Dena Aubin; editing by Maureen Bavdek Gerald E. McCormick and Andre Grenon)