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Uncooperative Laws Kept SEC Off Dick Fuld's Back

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Prosecutors got bored investigating Lehman Brothers pretty fast, but not so the SEC, which persisted until last year in trying to come up with something, anything to throw at Dick Fuld, at great personal risk and to no avail. Some (Mary Schapiro, for one) are still puzzled by this. He has George Canellos to thank.

“I don’t get it,” she said during a tense exchange with Mr. Canellos in her private conference room in Washington, according to the officials, who were not authorized to speak publicly. “Why is there no case?” she continued, staring at Mr. Canellos, instructing him to continue investigating whether Lehman misled investors. “The world won’t understand….”

The S.E.C. quietly reached the decision in 2012 after officials sparred for months over whether Lehman omitted “material” information in disclosures to investors, an important legal standard. Mr. Canellos argued that the omissions were not material. And those who questioned that reasoning — like Ms. Schapiro, as well as some accountants and enforcement officials — acquiesced to Mr. Canellos’s team, which was closest to the evidence.

The S.E.C. also debated the culpability of top Lehman executives. But Mr. Canellos’s team argued that Mr. Fuld did not know that Lehman was using questionable accounting practices despite testimony from another Lehman executive that suggested otherwise. Ms. Schapiro did not override his judgment after S.E.C. officials cautioned her that it could be unethical for a political appointee like herself to do so. Mr. Canellos also had the backing of Robert S. Khuzami, who ran the S.E.C.’s enforcement unit at the time….

Mr. Canellos, the officials said, instead proposed that the S.E.C. publish a report that would publicly explain the decision to forgo charges. Ms. Schapiro and other S.E.C. officials rejected that option, concerned that Mr. Canellos’s first draft was too sympathetic to Lehman.

Inside the End of the U.S. Bid to Punish Lehman Executives [DealBook]


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