Peter J. Henning follows issues involving securities law and white-collar crime for DealBook’s White Collar Watch.
Richard S. Fuld Jr., the former chief executive of Lehman Brothers, went on the offensive on Wednesday by portraying the firm as a victim of the government and the market that pushed it into an unnecessary bankruptcy.
His testimony before the Financial Crisis Inquiry Commission shows how he may fight any allegations of fraud the government could levy against him. The Securities and Exchange Commission has been looking at Lehman’s accounting and public statements for nearly two years to determine whether there were misstatements about the firm’s finances by Mr. Fuld and other executives during the months before its demise.
Mr. Fuld’s portrayal of Lehman as a viable enterprise destroyed by outside forces, characterizing it as a victim and not a perpetrator of any wrongdoing, may be a way of supporting a defense that there was no intent to defraud investors should any civil charges should be filed.
About White Collar WatchPeter J. Henning, writing for DealBook’s White Collar Watch, is a commentator on white-collar crime and litigation. A former lawyer at the Securities and Exchange Commission’s enforcement division and then a prosecutor at the Justice Department, he is a professor at the Wayne State University Law School. He is currently working on a book, “The Prosecution and Defense of Public Corruption: The Law & Legal Strategies,” to be published by Oxford University Press.
Whether that position will persuade the S.E.C. to pass on pursuing a civil enforcement action remains to be seen.
As I noted in an earlier column, a recent surge in legal fees for Lehman executives being paid under insurance policies bought by the firm indicates that the investigation is coming to a head. A decision on whether to pursue fraud charges could be made in the near future.
In addition to the S.E.C., the Justice Department has also been looking into the Lehman’s collapse. The fact that Mr. Fuld testified before the F.C.I.C., just as he did earlier this year before a Congressional committee, suggests that his lawyers do not believe that criminal charges are likely to be filed, otherwise they probably would have advised him to assert his Fifth Amendment privilege and refuse to answer questions.
In describing Lehman’s demise, Mr. Fuld focused on the Federal Reserve Bank’s failure to extend the company the same financial lifeline it threw to other firms, like American International Group, and blamed rumors of financial troubles that swept through the markets as a reason for the loss of confidence in the value of its assets.
Had Lehman been treated fairly rather than singled out for harsh treatment, according to Mr. Fuld, the firm would have survived and no one would be pointing the finger at it for causing the financial meltdown in September 2008.
In his testimony, Mr. Fuld cited “uncontrollable market forces and the incorrect perception” of Lehman’s capital position as the reason for its precipitous decline, and the government forced it to file for bankruptcy rather than provide financial support. Only in the second to the last paragraph of the statement does Mr. Fuld make a passing reference to potential flaws at the firm, soft-pedaling internal problems by pointing out that “there is no question we made some poorly timed business decisions and investments, but we addressed those mistakes and got ourselves back to a strong equity position” before the bankruptcy filing.
The F.C.I.C. is not looking at how Lehman dealt with investors, instead focusing on the economic forces that led to the financial crisis. The S.E.C. investigation, on the other hand, is not concerned so much with the reasons for Lehman’s collapse but whether senior executives made misleading statements during the last few months of its existence when Lehman sold billions of dollars of its securities to investors in an effort to prop up its financial position.
While Mr. Fuld’s testimony does not directly address issues of disclosure to investors, his statement portraying Lehman as a victim of outside forces shows that he does not perceive any wrongdoing related to it operations. It is unlikely he would be willing to settle any fraud charges that would give credence to any claim of misconduct.
In contrast to Mr. Fuld’s statement, the report of Anton R. Valukas, the bankruptcy examiner for Lehman, put great emphasis on the firm’s use of the so-called Repo 105 transactions to dress up its balance sheet that made them materially misleading. This is likely to be a significant feature, along with statements made in the securities offerings, of any fraud claim against executives if the S.E.C. files a civil enforcement action.
Putting the blame on outsiders can be the foundation for an argument by Mr. Fuld that statements about Lehman Brothers’ financial condition and the Repo 105 transaction were not fraudulent because there was no intent to mislead investors when management believed the company’s balance sheet was sound. If it was not management’s fault that investors lost money, but instead the federal government and Wall Street’s rumor-mongers were to blame, then the S.E.C. cannot prove any executives sought to mislead investors, or at least intended to defraud them.
Mr. Fuld’s statement to the financial crisis commission further emphasized the potential strength of Lehman that would belie any need to mislead investors. His statement asserted that various funding efforts by the firm could have been successful.
“There is nothing about this profile that would indicate a bankrupt company,” he said.
If the bankruptcy was a mistake or, even worse, the result of some conspiracy, then Mr. Fuld can argue there was no effort to defraud investors and instead he was as much a victim as they were.
Mr. Fuld responded in the bankruptcy examination that he lacked knowledge about the Repo 105 transactions and their effect on Lehman Brothers’ financial statements. Taking his profession of ignorance with the assertion that the firm was forced into an unnecessary bankruptcy may be enough to thwart any fraud charge the S.E.C. might bring.
At a minimum, Mr. Fuld is signaling that he will not back down from the defense of his stewardship of Lehman as a viable firm felled by outside interests.
– Peter J. Henning
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