Former executives at Lehman Brothers may face criminal charges after a report by a court-appointed examiner on the collapse of the Wall Street investment bank. The damning 2,200-page dossier could lay the groundwork for charges under securities fraud laws, legal experts say, while there could also be stern consequences for Ernst and Young, the bank's auditors. "I think there are definitely criminal liability issues here, especially for at least the handful of executives who sent e-mails 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.
But a criminal case can be difficult to prosecute, as intent must be proven. And while Lehman may have been at the centre of the financial crisis, it was not the only failure. That may explain why, a year and a half after the Lehman bankruptcy, no criminal cases have yet been announced. But a dozen former Lehman executives, including Richard Fuld, the former chief executive, have been subpoenaed in federal grand jury investigations. Representatives for the US attorney in Manhattan and the US attorney in Brooklyn declined to comment on Friday.
The report by the examiner, Anton Valukas, a former prosecutor and the chairman of the law firm Jenner and Block, points to one direction prosecutors may take: accounting tricks. The report details how Lehman used an accounting gimmick to move US$50 billion (Dh183.63bn) in troubled assets off its balance sheet, making the now-bankrupt banking firm appear financially healthier than it was. The dossier 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 "colourable 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 chief executives and chief financial officers who knowingly attest to misleading statements. "What Sarbanes-Oxley tried to do was eliminate the old 'blind, deaf and dumb' defence of CEOs," said Terry Connelly, the dean of the Edward S Ageno School of Business at Golden Gate University in San Francisco 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 last Thursday evening, a lawyer for Mr 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".
Mr Connelly called that response "very much like the old deaf, dumb and blind defence". "You could get away with that before Sarbanes-Oxley. I'm not sure you can get away with that now," he said. * with agencies