Something sinister about the lack of prosecutions at Lehman Brothers

January 24th, 2013

This is the first interview that Chicago lawyer Anton Valukas has given since the publication of his 2,292 page report into the bankrutpcy of Lehman Brothers on March 11th, 2010. At that time, Valukas found strong evidence of financial and accounting fraud designed to deceive investors at the defunct New York-based investment bank. Valukas is surprised, especially given Lehman Brothers’ rampant abuse of Repo 105 to disguise its precarious financial position in the quarters ahead of its September 2008 collapse, that neither Lehman Brothers’ former chief executive Dick Fuld nor any other former Lehman director has been charged with fraud or related offences.

Matthew Lee, a Lehman Brothers’ whistleblower who raised grave concerns about the bank’s deceptive approach to accounting to his bosses — controller Martin Kelly, head of capital markets product control Gerard Reilly, chief financial officer Erin Callan, and chief risk officer Christopher O’Meara — is also interviewed in the CBS programme above. The Englishman, senior vice president in charge of the investment bank’s consolidated and unconsolidated balance sheet, was stonewalled on repeated occasions when he sought to alert Kelly, Reilly, Callan, and O’Meara to evidence of book-cooking. He eventually became so frustrated by their failure to even discuss the issues he went nuclear and sent them this powerful May 16th 2008 letter. But yet again Lehman Brothers’s most senior financial and risk officers muffled their ears. They continued to ignore his warnings and fired him within a week.

And surprise, surprise, that incredibly honest and upstanding international firm of accountants, Ernst & Young, the failed bank’s auditors, failed to carry out their legal duties (they should have alerted their client’s audit committee or the board of directors to Lee’s concerns after their meeting with whistleblower — at which he warned them of among other things, the bank’s persistent abuse of accounting trick Repo 105 to park toxic assets offshore and manipulate its balance sheet).

Andrew Cuomo, former attorney general of New York State, initiated a process of pursuing Ernst & Young for aiding and abetting a fraud using the Martin Act, one of the most powerful prosecutorial tools in the United States, just before stepping down from that role in December 2010. The case bounced from the New York State to the Supreme court and is now back in the State court. A trial is expected soon [thanks, Cate Long, for the update here].

The whole thing is sinister and astonishing in equal measure. The reason that no director of Lehman Brothers has been brought to book would appear to be that US financial regulator the Securities & Exchange Commission, which had a dedicated team inside Lehmans’ headquarters at 745 Seventh Avenue prior to the uber-leveraged bank’s collapse, knew all this chicanery was going on, and must therefore have given it the nod at the time. The SEC may therefore be complicit in the alleged crime and no less guilty than Lehman. Shades of the FSA’s hopelessly compromised position where failed UK banks like Royal Bank of Scotland and HBOS are concerned?

H/T Cate Long