Behind Lehman probe, a sharp debate

NEW YORK — At a closed-door meeting in early 2011, Wall Street regulators were close to throwing in the towel on their biggest case.

The Securities and Exchange Commission’s eight-member Lehman Brothers team, having hit one dead end after another over the previous two years, concluded that suing the bank’s executives would be legally unjustified. The group, noting that prosecutors and FBI agents had already walked away from a parallel criminal case, reached unanimous agreement to close its most prominent investigation stemming from the financial crisis, according to officials who attended the meeting, which has not been reported previously.

But Mary L. Schapiro, the SEC chairwoman, disagreed. She pushed George S. Canellos, who supervised the Lehman investigation as head of the SEC’s New York office, to explain how executives who presided over the biggest bankruptcy in US history could escape without a single civil charge.


“I don’t get it,” she said during a tense exchange with Canellos in her private conference room in Washington, according to the officials, who were not authorized to speak publicly. “Why is there no case?” she continued, staring at Canellos, instructing him to continue investigating whether Lehman misled investors. “The world won’t understand.”

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She was right. Five years after Lehman’s collapse hastened a worldwide economic panic, the government faces lingering questions about the decision to spare executives like Richard S. Fuld Jr., who ran Lehman for 14 years until its demise. Not a single senior executive from any Wall Street bank faced criminal charges from the crisis, either. And the government’s deadline for filing most charges will expire this month, the anniversary of Lehman’s collapse, providing a reminder of the case and its unpopular outcome.

Federal prosecutors and the SEC have never officially announced its decision to close the Lehman investigation.

But a New York Times examination of the case, based on interviews with more than a dozen lawyers and officials involved in the inquiry and a review of Bankruptcy Court documents, pulls back a curtain on private deliberations and clashing philosophies surrounding the decision not to bring charges. The SEC quietly reached the decision in 2012 after officials sparred for months over whether Lehman omitted “material” information in disclosures to investors, an important legal standard. Canellos argued the omissions were not material. And those who questioned that reasoning acquiesced to Canellos’s team, which was closest to the evidence.

The SEC also debated the culpability of top Lehman executives. But Canellos’s team argued that Fuld did not know that Lehman was using questionable accounting practices, despite testimony from another Lehman executive that suggested otherwise. Schapiro did not override his judgment after SEC officials cautioned her that it could be unethical to do so. Canellos also had the backing of Robert S. Khuzami, who ran the SEC’s enforcement unit at the time.


The SEC’s decision came in stark contrast to a report by Lehman’s bannkruptcy examiner, who accused executives of using an accounting gimmick to “manipulate” the balance sheet.

“There were many instances where the SEC had information and didn’t act,” the examiner, Anton R. Valukas, a former federal prosecutor, said in an interview.

There is widespread agreement that Lehman failed under the weight of risky real estate investments and an inability to finance itself amid the economic turmoil of 2008.

It has been less clear whether the government did a thorough review of the firm’s collapse.

Yet The Times examination reveals new details about the breadth of the government’s effort — SEC officials reviewed more than 15 million Lehman documents and interviewed some three dozen witnesses. The decision not to bring charges, the officials said, came despite early hope among investigators.


The SEC, which has a lower burden for proving its cases than criminal authorities, has brought civil cases against 66 senior officers in cases linked to the financial crisis. The agency also extracted nine-figure settlements from banks like Goldman Sachs.

The agency’s enforcement unit, overhauled by Khuzami after the crisis, has struck an even harder line in recent months under its new chairwoman, Mary Jo White. A former federal prosecutor, White has pushed the enforcement unit to seek rare admissions of wrongdoing from defendants.

Yet the continued absence of parallel criminal cases against top executives reflects the challenge of white-collar investigations in which prosecutors struggle to pinpoint where risky dealings cross the line into illegality.

The Lehman case once seemed like the exception. Federal prosecutors in Manhattan, Brooklyn, and New Jersey, in addition to the FBI and the SEC, all swarmed Lehman in the days after its collapse. The SEC’s eight-person team included senior lawyers and accountants, several of whom were assigned exclusively to the Lehman case.

It was Lehman’s accounting practices that probably drew the most attention. In his report on Lehman’s failure, a rebuke that spanned more than 2,200 pages, Valukas, the Bankruptcy Court examiner, outlined accounting maneuvers that he called “balance sheet manipulation.”

By early 2011, Canellos’s team had run out of leads. It ruled out suing Lehman itself, because the firm was in bankruptcy.

The team also decided not to sue Fuld for failing to supervise the firm’s risk-taking, believing that the SEC did not have the authority to do so.