Apr. 23rd, 2012

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The case against Lehman Brothers
On September 15, 2008, Lehman Brothers, the fourth largest investment bank in the world, declared bankruptcy -- sparking chaos in the financial markets and nearly bringing down the global economy. It was the largest bankruptcy in history -- larger than General Motors, Washington Mutual, Enron, and Worldcom combined.

[snip]

Anton Valukas [Bankruptcy Examiner]: They'd fudged the numbers. They would move what turned out to be approximately $50 billion of assets from the United States to the United Kingdom just before they printed their financial statements. And a week or so after the financial statements had been distributed to the public, the $50 billion would reappear here in the United States, back on the books in the United States.

Steve Kroft: And then the next financial statement, they would move it overseas again, and file the report, and then move it back?

Anton Valukas: Right.

Steve Kroft: It sounds like a shell game.

Anton Valukas: It was a shell game. It was a gimmick.

[snip]

Steve Kroft: Do you think that Lehman executives knew that this was wrong?

Anton Valukas: For some of 'em, certainly. There was concerns being expressed by-- at high levels about whether this is appropriate, what happens if the street found out about it. So, you know, there was a concern that there's a real question about whether we can do this, whether this was right or not.

One of those people was Matthew Lee who had been a senior executive at Lehman and the accountant responsible for its global balance sheet. Lee was one of the first to raise objections inside Lehman about the accounting trick known as Repo 105.

Matthew Lee: It sounded like a rat poison, Repo 105, when I first heard it. So I investigated what it was, and I didn't like what I saw.

[snip]

Steve Kroft: By refusing to sign it, you were saying that you didn't believe the numbers.

Matthew Lee: Correct.

Steve Kroft: That this wasn't a fair and accurate representation of the financial condition of Lehman Brothers.

Matthew Lee: Right. 'Something's up here. Why can't people answer my questions?' You know, 'Why has Repo 105 doubled? Give me an answer.' You know, nothing was said.

Lee continued to press people for more information, but nothing changed. And four months before Lehman collapsed, he sent this letter to Lehman's top executives.

Matthew Lee: 'I've been telling you all year. I've been banging my head against the wall. I'm now putting it in writing.'

Steve Kroft: Says, "it requires me to bring to the attention of management conduct and actions on the part of the firm that I consider to be possibly unethical and unlawful."

[snip]

Steve Kroft: Did Dick Fuld know?

Anton Valukas: Did Dick Fuld know? Well, he says no.

The only place Lehman's CEO, Richard Fuld, has publicly answered any questions about his firm's bankruptcy has been in front of Congress.

Anton Valukas: He said the same thing to me face-to-face.

Steve Kroft: Do you believe him?

Anton Valukas: There was evidence which would show that that's not accurate. The president of Lehman Brothers told us that in fact he had conversations with Dick Fuld about this and documents were shared with him which would reflect the Repo 105 transactions and how they were being used. Richard Fuld's view on that was that he has no knowledge of it. You have other evidence that he did. A jury would have to decide who's telling the truth.

But so far there has been no jury to hear the evidence. Despite Valukas' findings -- and the supporting documents and testimony to back them up -- the Securities and Exchange Commission has not brought any charges of any kind against former Lehman executives. For the past few months, we've made numerous requests to interview the SEC's head of enforcement. All of those requests have been declined.

[snip]

It was not widely known at the time, but during the last six months of Lehman's existence, teams of officials from the SEC and the Federal Reserve took up residence inside the firm to monitor its precarious financial situation. They were inside the building when Matthew Lee wrote his letter to Lehman executives alleging unlawful accounting practices, and they were there when the practices took place. Valukas says the SEC also knew that Lehman was being less than truthful when it said it had enough assets to survive the crisis. But that and other damaging information was never disclosed to investors who continued to pump billions of dollars into the firm.

[snip]

Steve Kroft: If the SEC knew about some of these problems at Lehman Brothers and they weren't disclosed, doesn't that make it difficult for the SEC enforcement division to come back and bring action against Lehman Brothers? They were there; they saw it.

David Kotz [former SEC Inspector General]: Yeah. I think that that's definitely an impediment to a potential case. And, certainly, if you go before a jury, the defense lawyers can make a big point about the fact that, "You were there. You knew about it. Why didn't you do anything at the time? Now, you're coming after them."

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