------ Forwarded Message > From: "dasg...@aol.com" <dasg...@aol.com> > Date: Sat, 13 Mar 2010 02:58:55 EST > To: Robert Millegan <ramille...@aol.com> > Cc: <ema...@aol.com>, <j...@aol.com>, <jim6...@cwnet.com>, > <christian.r...@gmail.com> > Subject: What Do You Call a Wall Street CEO in San Quentin? A Good Start. >
> Findings on Lehman > Take Even Experts by Surprise > By MICHAEL J. de la MERCED > <http://topics.nytimes.com/top/reference/timestopics/people/d/michael_j_de_la_ > merced/index.html?inline=nyt-per> > New York Times: March 12, 2010 > http://www.nytimes.com/2010/03/13/business/13lehman.html > > > <javascript:pop_me_up2('http://www.nytimes.com/imagepages/2010/03/13/business/ > 13lehman_CA0.html','13lehman_CA0_html','width=570,height=600,scrollbars=yes,to > olbars=no,resizable=yes')> > Richard Fuld, former chief executive of Lehman, testifying on Capitol Hill in > October 2008. > > <http://www.nytimes.com/adx/bin/adx_click.html?type=goto&opzn&page=www.nytimes > .com/yr/mo/day/business&pos=Frame4A&sn2=a23bc051/6ffe8c2e&sn1=c488950/af17707f > &camp=foxsearch2010_emailtools_1225564c_nyt5&ad=OFW_120x60_d_03.12&goto=http%3 > A%2F%2Fwww%2Efoxsearchlight%2Ecom%2Fourfamilywedding> > For the year that it took the court-appointed examiner to complete his report > on the demise of Lehman Brothers > <http://topics.nytimes.com/top/news/business/companies/lehman_brothers_holding > s_inc/index.html?inline=nyt-org> , officials from Wall Street to Washington > were anticipating it as the definitive account of the largest bankruptcy in > American history. >> >>> >>> >>> >>> >>> In Lehman¹s Demise, Some Shades of Enron >>> <http://dealbook.blogs.nytimes.com/2010/03/12/in-lehmans-demise-some-shades- >>> of-enron/?ref=business> >>> >>> >>> >>> >>> White Collar Watch finds Lehman Brothers¹ accounting gimmicks are eerily >>> reminiscent of those used by Enron, and it anticipates that the government >>> will pursue civil charges, at the least, for securities fraud. > > And the report did just that when it was unveiled on Thursday, riveting > readers with the exhaustive detail contained in its nine volumes and 2,200 > pages. Yet almost immediately, it raised a host of new questions. > > Now government regulators have what some lawyers call a road map for further > inquiry into former Lehman executives like Richard S. Fuld Jr. > <http://topics.nytimes.com/top/reference/timestopics/people/f/richard_s_fuld_j > r/index.html?inline=nyt-per> and the auditing firm Ernst & Young. > > Whether the Justice Department and the Securities and Exchange Commission > <http://topics.nytimes.com/top/reference/timestopics/organizations/s/securitie > s_and_exchange_commission/index.html?inline=nyt-org> will actually pursue > their own legal actions is unclear. But legal experts said on Friday that the > examiner, Anton R. Valukas, had provided plenty of material for civil > regulatory action at the least with his findings of ³materially misleading² > accounting and ³actionable balance sheet manipulation.² > > ³It¹s certainly not helpful to any of them,² Michael J. Missal, a partner at > the law firm K&L Gates and the examiner in the bankruptcy case of New Century > Financial, said of some individuals accused of impropriety in the report. ³It > certainly assists private litigants and probably increases the pressure on the > government to take some kind of action here.² > > Representatives for the S.E.C. and the United States attorneys > <http://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_ > attorneys/index.html?inline=nyt-classifier> offices in Manhattan and Brooklyn > declined to comment. > > While Mr. Fuld and other former top Lehman officials are already defendants in > a number of civil lawsuits, the new discoveries by Mr. Valukas have taken even > veteran observers by surprise. Chief among these was the revelation of a > particularly aggressive accounting practice, known internally as Repo 105, > that Mr. Valukas said helped the investment bank mask the true depths of its > financial woes. > > Examiners in bankruptcy cases are appointed by the Justice Department to > investigate accusations of wrongdoing or misconduct. Their job is to determine > whether creditors can recover more money in these cases, and their findings > often serve as guides for more lawsuits and even regulatory action. What > examiners are not asked to do is play judge and jury. > > Though the report contains strong language Mr. Valukas deems Mr. Fuld ³at > least grossly negligent² in his role overseeing Lehman it stops short of > accusing anyone of criminal conduct or of violating securities law. > > Patricia Hynes, a lawyer for Mr. Fuld, said on Thursday that her client ³did > not know what those transactions were he didn¹t structure or negotiate them, > nor was he aware of their accounting treatment.² She did not return an e-mail > seeking additional comment on Friday. > > Mr. Valukas¹s findings have stirred loud discussion among legal and accounting > experts over the ways Lehman sought to improve its quarterly results months > before it collapsed. > > Over hundreds of pages, Mr. Valukas details the genesis of and the process > behind Repo 105. Based on standard repurchase agreements short-term loans > commonly used by many firms for daily financing needs, in which borrowers > temporarily exchange assets in return for cash up front Lehman took a > particularly aggressive accounting approach to these transactions. > > Here, the investment bank used repos to temporarily park assets off its books > to make its end-of-quarter debt levels look better than they did while > calling them sales instead of loans. > > The accounting tactic, first used by Lehman in 2001, had one catch, according > to Mr. Valukas: no American law firm would sign off on its use. > > Enter Linklaters, a highly respected British law firm that gave Lehman the > answer it wanted. So long as the repos were conducted in London through the > bank¹s European arm, and so long as the company took other cosmetic steps to > make these transactions appear to be sales instead of financings, Linklaters > determined that they would pass regulatory muster. > > A spokeswoman for Linklaters said on Friday that the firm was not contacted by > Mr. Valukas and that its legal opinions were not criticized in the examiner¹s > report as wrong or improper. > > Lehman also had the backing of Ernst & Young, which certified the bank¹s > financial statements despite receiving warnings from a whistle-blower who said > there were accounting improprieties. An Ernst & Young spokesman said on > Thursday that the firm stood by its work for 2007, the last year it conducted > an audit of Lehman¹s financial results. > > But Lynn E. Turner, a former chief accountant for the S.E.C., accused Ernst & > Young of abdicating its responsibility to the audit committee of Lehman¹s > board by not presenting the concerns. > > ³This is pretty aggressive and pretty abusive. I don¹t know how under GAAP > this follows the rules whatsoever,² he said, referring to Generally Accepted > Accounting Principles. > > ³That reeks of an auditor who, rather than being really truly independent, is > beholden to management,² he said, adding that the S.E.C. and the Justice > Department should follow up on Mr. Valukas¹s findings. > > Executives at other Wall Street banks professed surprise at Lehman¹s > accounting maneuvers. Goldman Sachs > <http://topics.nytimes.com/top/news/business/companies/goldman_sachs_group_inc > /index.html?inline=nyt-org> , Barclays > <http://topics.nytimes.com/top/news/business/companies/barclays_plc/index.html > ?inline=nyt-org> Capital, and other banks said on Friday that they did not > use repos to hide liabilities on their balance sheets. > > > Lehman report may point way for criminal charges > Dan Margolies > WASHINGTON > Fri Mar 12, 2010 6:36pm EST > http://www.reuters.com/article/idUSTRE62B4M820100312 > <http://www.reuters.com/article/idUSTRE62B4M820100312> > WASHINGTON (Reuters) - An explosive report by a court-appointed examiner on > the collapse of Lehman Brothers may prove to be a roadmap for prosecutors to > bring criminal cases against the investment bank's former executives, legal > experts say. > > The 2,200-page report could lay the groundwork for felony charges under > securities fraud laws, the Sarbanes-Oxley Act or New York's Martin Act, which > is more expansive than federal securities laws, the experts say. > > "I think there are definitely criminal liability issues here -- especially for > at least the handful of executives who sent emails making clear they knew they > were helping Lehman hide its liabilities," said Elizabeth Nowicki, a former > lawyer with the Securities and Exchange Commission and now a visiting > professor at Boston University School of Law. > > Even with a roadmap, getting to a place where a criminal case can be brought > will be difficult. The bar is high, as prosecutors must be able to prove > intent. And while Lehman may have been at the epicenter of the financial > quake, it was not the only failure during the financial crisis. > > That may explain why, a year and a half after the Lehman bankruptcy, no > criminal cases have yet been announced. > > Still, a dozen former Lehman executives, including former CEO Richard Fuld, > have been subpoenaed in federal grand jury investigations. Representatives for > both the U.S. attorney in Manhattan and the U.S. attorney in Brooklyn declined > to comment on Friday. > > The report by the examiner, Anton Valukas, a former prosecutor and chairman of > the law firm Jenner & Block, points to one direction prosecutors may take -- > accounting tricks. > > The report details how Lehman used an accounting gimmick to move $50 billion > in assets off its balance sheet, making the now-bankrupt banking firm appear > financially healthier than it was. > > The report said the use of the accounting device was "materially misleading" > and done for the sole purpose of "balance sheet manipulation." > > In finding that there may be "colorable claims" against senior officers who > oversaw and certified misleading financial statements, the report virtually > invited prosecutors to bring claims under Sarbanes-Oxley, which imposes > criminal penalties on CEOs and CFOs who knowingly attest to misleading > statements. > > "What Sarbanes-Oxley tried to do was eliminate the old 'blind, deaf and dumb' > defense of CEOs," said Terry Connelly, dean of the Edward S. Ageno School of > Business at Golden Gate University and a former executive at Salomon Brothers. > > "The question is whether the treatment of these accounting transactions was > material and misleading. Did it matter to the market? The answer is, of > course, yes. The relevant question is whether they were misleading, and the > facts there, I think, speak for themselves." > > In a statement on Thursday evening, a lawyer for Fuld said the former chief > executive "did not know what those transactions were -- he didn't structure or > negotiate them, nor was he aware of their accounting treatment." > > Connelly called that response "very much like the old deaf, dumb and blind > defense." > > "You could get away with that before Sarbanes-Oxley. I'm not sure you can get > away with that now," he said. > > To make it appear that it was reducing its debt levels in 2008, Lehman > employed an accounting device called "Repo 105," a kind of repurchase > agreement. > > Lehman did not disclose the Repo 105 transactions to the investing public and > a top Lehman executive, global financial controller Martin Kelly, believed > "there was no substance to the transactions," according to the examiner's > report. > > "These transactions were undertaken for no legitimate economic purpose," said > Bill Black, a criminologist at the University of Missouri-Kansas City and a > former savings and loan regulator. "They were done to game the numbers." > > To the extent investors were kept in the dark, "you have all the elements here > of felony securities fraud," he added. > > Black said criminal culpability could reach Fuld if prosecutors proceed up the > chain, first targeting those responsible for the accounting chicanery and > "flipping" them to obtain their testimony against higher-ups. > > "It's pretty hard to conceive that prosecutors would not go after them. And > those guys are going to point the finger at the chief financial officers, who > will point the finger at the CEO," he said. > > Dan Richman, a law professor at Columbia University, said Valukas had produced > "a thorough and intensive report" that could prove invaluable to prosecutors > and civil enforcement agencies like the Securities and Exchange Commission. > > "It certainly provides a very major assist to prosecutors trying to understand > particularly complex transactions over a long period of time," Richman said. > > Several legal experts speculated that New York Attorney General Andrew Cuomo, > who has not been shy about going after Wall Street and is widely expected to > run for governor, may be the first law enforcement official to jump in. With > New York's Martin Act, Cuomo has an especially potent tool at his disposal to > combat financial fraud. > > The once-dormant law, which was enacted in 1921, was used by New York Attorney > General Eliot Spitzer in bringing cases, both civil and criminal, in > investigations of Wall Street research, mutual fund market timing and > insurance brokers. > > Cuomo has deployed the law recently in pursuing a lawsuit against Bank of > America Corp and its former chief executive, Kenneth Lewis, and former chief > financial officer, Joe Price, accusing them of misleading shareholders about > the bank's acquisition of Merrill Lynch & Co. > > A spokesman for Cuomo's office did not respond to a request for comment on > Friday. > > "I think prosecutors are going to have a very difficult time NOT moving > forward with criminal charges," Nowicki, of Boston University, said. > > "The reality is that this report, after experts and the media start going > through and commenting on it, is going to stir up some level of public outrage > that I don't think the SEC or the Department of Justice is going to want to > ignore." > > > ------ End of Forwarded Message
