Bill Black, the economics and law professor and a former S&L crisis investigator (who would have been a good person for the NYT interview to balance out all the SEC spin), excoriates the Times and the SEC in the second part of a three-part piece:
If you are wondering, no, it is not (remotely) normal for a U.S. investment bank to go to a UK firm to obtain a legal opinion on U.S. law. Nevertheless, the cynical act by Lehman’s leaders of legal dumpster diving to obtain a legal opinion blessing an obvious fraud was not treated by the Department of Justice (DOJ) as it should have been as an aggravating factor, but rather as a “get out of jail free card.”
The Times doesn’t push back on the London angle. Nor does it push back on the insane SEC PR that the Repo 105 fraud wasn’t “material” to investors, reporting this:
The S.E.C. team also concluded that Repo 105 would not have been “material” to investors because the firm’s leverage ratio was trending downward regardless of Repo 105.
First, an accounting scam does not have to “cause” a “failure” to be a crime or a violation of rules. Accounting frauds are frequently undertaken to cover up the failing firm’s problems. That is why Lehman engaged in the REPO 105 scam. So the first sentence was fed to the NYT reporters for the purpose of deceiving the reader. REPO 105 is an obscure accounting rule - that does not mean that Lehman was allowed to use it to deceive investors. I’ve explained why the desperate search by Lehman’s officers for an attorney willing to give them the opinion they were shopping to obtain. The attorney shopping actually confirms that Lehman’s officers intent to deceive investors.
The SEC’s line here makes you question whether they’re simply incompetent or willfully dishonest. Why would Lehman have used chicanery like Repo 105 if not to make itself look stabler than it really was? What other purpose was there? How, after being turned down by multiple
legal laundries law firms in the US unwilling to provide it cover, could Lehman not know that it shouldn’t have been doing Repo 105?
No pushback from the Times here, either.
And it gives the kicker to Canellos, who portrays himself valiantly fighting off “political pressure” to unjustly charge innocent Lehman execs:
But Mr. Canellos, a former federal prosecutor who is now the co-head of the S.E.C.’s enforcement unit, did not budge. Despite the political pressure, he told colleagues at one of the meetings, they could not bring a case if the evidence was lacking.
“Our job is to seek justice,” he said.
Khuzami, naturally, took Canellos’ side on not charging Lehman.