Earlier this week the SEC sent letters to more than 20 financial firms inquiring whether they use or used accounting methods similar to Lehman’s now notorious Repo 105, in order to book transactions as sales. Marie Leone of CFO.com has the story here. Marian Wang, at ProPublica.org, has a good piece on this as well. Meanwhile Floyd Norris at the New York Times attempts here to demystify the alleged “Lehman Shell Game.” To this reader, he merely succeeds in showing that FASB considers it a “gray area” when companies characterize as a “sale” a ”loan” secured by assets worth 105% percent of the loan amount. Memo to prosecutors: this regulatory ambiguity will make your criminal case more difficult. On the other hand, published reports that several U.S. law firms refused to bless the Repo 105 transactions should, if true, be troubling to any potential defendants who were contemporaneously aware of these refusals. The Wall Street Journal had an excellent story several days back, by Mike Spector and Michael Corkery, about “What Lehman’s Central Players Knew.”
Most of this recent journalistic and regulatory activity has been occasioned by bankruptcy examiner, and former U.S. Attorney, Anton Valukas’ massive report on the Lehman collapse. The press reporting has generally been outstanding. But there is one aspect of the matter that I have not seen covered. Why were so many former Lehman execs even talking to Valukas? Don’t they understand that many of their number are potential criminal defendants? Haven’t they heard of the Fifth Amendment? Haven’t their attorneys explained that alleged cover-ups and alleged Section 1001 false statements are almost always easier to prove than alleged underlying crimes? Are they really that astoundingly arrogant? Valukas’ report details significant differences in recollection among the major players regarding who knew what and when. All of this will be eagerly poured over by federal prosecutors and agents. You can bank on it.