At a closed-door meeting in early 2011, Wall Street regulators were close to throwing in the towel on their biggest case. The US Securities and Exchange Commission's eight-member Lehman Brothers team, having hit one dead end after another over the previous two years, concluded that suing the bank's executives would be legally unjustified. The group, noting that prosecutors and FBI agents had already walked away from a parallel criminal case, reached agreement to close its most prominent investigation stemming from the financial crisis, according to officials who attended the meeting, which has not been reported previously.
But Mary L Schapiro, SEC chairwoman, disagreed. She pushed George S Canellos, who supervised the Lehman investigation as head of the SEC's New York office, to explain how executives who presided over the biggest bankruptcy in US history could escape without a single civil charge. "I don't get it," she said during a tense exchange with Canellos, according to sources. "Why is there no case?" she continued, staring at Canellos, instructing him to continue investigating whether Lehman misled investors. "The world won't understand."
Run Out of Leads?
She was right. Five years after Lehman's collapse hastened a worldwide economic panic, the government faces lingering questions about the decision to spare executives like Richard S Fuld Jr, who ran Lehman for 14 years until its demise. Not a single senior executive from any Wall Street bank faced criminal charges from the crisis, either. And the government's deadline for filing most charges will expire this month, the anniversary of Lehman's collapse, providing a reminder of the case and its unpopular outcome.
Federal prosecutors and the SEC have never officially announced its decision to close the Lehman investigation. But a New York Times examination of the case, based on interviews with more than a dozen lawyers and officials involved in the inquiry and a review of bankruptcy court documents, pulls back a curtain on private deliberations and clashing philosophies surrounding the decision not to bring charges.
The SEC 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. Canellos argued that the omissions were not material. Those who questioned that reasoning — like Schapiro — acquiesced to Canellos' team, which was closest to the evidence.
The SEC also debated the culpability of top Lehman executives. But Canellos' team argued that Fuld did not know that Lehman was using questionable accounting practices despite testimony from another Lehman executive that suggested otherwise. Schapiro did not override his judgment after SEC officials cautioned her that it could be unethical to do so. The agency's enforcement unit has struck an even harder line in recent months under its new chairwoman, Mary Jo White. Yet the continued absence of parallel criminal cases against top executives reflects the challenge of white-collar investigations in which prosecutors struggle to pinpoint where risky dealings cross the line into illegality.
When the evidence is murky, prosecutors sometimes hesitate to charge top executives, who have the money to fight rather than settle. The Lehman case once seemed like the exception. But by early 2011, Canellos' team had run out of leads. It ruled out suing Lehman itself, because the firm was in bankruptcy.
The team also decided not to sue Fuld for failing to supervise the firm's risk-taking, believing that the SEC did not have the authority to do so.
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But Mary L Schapiro, SEC chairwoman, disagreed. She pushed George S Canellos, who supervised the Lehman investigation as head of the SEC's New York office, to explain how executives who presided over the biggest bankruptcy in US history could escape without a single civil charge. "I don't get it," she said during a tense exchange with Canellos, according to sources. "Why is there no case?" she continued, staring at Canellos, instructing him to continue investigating whether Lehman misled investors. "The world won't understand."
Run Out of Leads?
She was right. Five years after Lehman's collapse hastened a worldwide economic panic, the government faces lingering questions about the decision to spare executives like Richard S Fuld Jr, who ran Lehman for 14 years until its demise. Not a single senior executive from any Wall Street bank faced criminal charges from the crisis, either. And the government's deadline for filing most charges will expire this month, the anniversary of Lehman's collapse, providing a reminder of the case and its unpopular outcome.
Federal prosecutors and the SEC have never officially announced its decision to close the Lehman investigation. But a New York Times examination of the case, based on interviews with more than a dozen lawyers and officials involved in the inquiry and a review of bankruptcy court documents, pulls back a curtain on private deliberations and clashing philosophies surrounding the decision not to bring charges.
The SEC 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. Canellos argued that the omissions were not material. Those who questioned that reasoning — like Schapiro — acquiesced to Canellos' team, which was closest to the evidence.
The SEC also debated the culpability of top Lehman executives. But Canellos' team argued that Fuld did not know that Lehman was using questionable accounting practices despite testimony from another Lehman executive that suggested otherwise. Schapiro did not override his judgment after SEC officials cautioned her that it could be unethical to do so. The agency's enforcement unit has struck an even harder line in recent months under its new chairwoman, Mary Jo White. Yet the continued absence of parallel criminal cases against top executives reflects the challenge of white-collar investigations in which prosecutors struggle to pinpoint where risky dealings cross the line into illegality.
When the evidence is murky, prosecutors sometimes hesitate to charge top executives, who have the money to fight rather than settle. The Lehman case once seemed like the exception. But by early 2011, Canellos' team had run out of leads. It ruled out suing Lehman itself, because the firm was in bankruptcy.
The team also decided not to sue Fuld for failing to supervise the firm's risk-taking, believing that the SEC did not have the authority to do so.
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