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SEC Dropping Lehman Case: Where’s the Outrage?

Aaron Task
Editor in Chief
Daily Ticker

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After more than three years of investigating the largest corporate bankruptcy in U.S. history, the Securities and Exchange Commission is reportedly dropping the case against Lehman Brothers.

"The staff has concluded its investigation and determined that charges will likely not be recommended," reads an internal SEC memo, obtained by Bloomberg.

If true, this is 'a travesty of a mockery of a sham of a mockery of a travesty of two mockeries of a sham,' to quote Woody Allen's Bananas.

In 2010, the court appointed examiner for Lehman's bankruptcy concluded Lehman executives used "materially misleading" accounting gimmicks in the months prior to its September 2008 bankruptcy.

Specifically, Lehman "reverse engineered the firm's net leverage ratio for public consumption" to the tune of $50 billion, according to Valukas. This refers to the now infamous accounting practice called a Repo 105, whereby Lehman offloaded some of its most toxic assets at the end of the quarter in order to temporarily reduced the leverage it disclosed in quarterly filings.

Valukas also found Lehman placed "unreasonable" valuations on its real estate holdings in the months prior to its collapse. (See: "Materially Misleading": Will Lehman Execs or Ernst and Young Face Criminal Charges?)

It's hard to believe senior Lehman executives were unaware of these violations. Former CEO Richard Fuld was "at least grossly negligent in causing Lehman Brothers to file misleading periodic reports," according to Valukas.

In his new book, Predator Nation, Academy Award-winning filmmaker and author Charles Ferguson, recounts how a Lehman executive, Matthew Lee, warned the firm's senior executives in May 2008 and, later, its auditor, Ernst & Young, about how "the manner in which the firm is reporting these assets is potentially misleading to the public and various government agencies."

Ferguson's book is about much more than Lehman, and the issue here is much bigger than whether the SEC really is dropping the investigation (The New York Times reports top SEC officials "are still analyzing a potential case.")

"One of the reasons I wrote the book is we now have...a substantial record of evidence about what did in fact occur," Ferguson says. "It's absolutely clear [that] criminal behavior contributed to the crisis."

In his book, Ferguson scoffs at the idea Wall Street execs were guilty of mere stupidity and greed -- as some industry apologists claim.

"There was some stupidity and legal greed but a lot of clear criminality," he says, detailing a laundry list of criminal conduct in the financial industry, including:

  • Securities fraud
  • Accounting fraud
  • Honest services violations
  • Bribery
  • Perjury
  • Sarbanes-Oxley violations
  • RICO offenses
  • Federal aid disclosure violations
  • Personal conduct (tax evasion, prostitution, drug use, insider trading, etc.)

"If you really wanted to get these people, you could," he concludes.

Of course, this raises the question: Why don't government officials want to prosecute white-collar fraud and criminal behavior?

More than four years after the crisis, the American public is hankering for some "perp walks" and you'd think some enterprising prosecutor would urgently pursue them, even if only to score political points.

"Money" is the short answer as to why there's been a bipartisan failure to reign in Wall Street and vigorously investigate allegations of criminal behavior, of which there's no shortage.

Maybe it's the long weekend but the fact the 'SEC is dropping Lehman case' story isn't HUGE news prompting outrage across America today is, itself, a big story: We've come to assume financial crimes won't be prosecuted, a development with deeply troubling implications for our society.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com