DealBook’s sympathy for the SEC

NYT access gives the bumbling agency its preferred angle on Lehman inaction

The New York Times’s DealBook once again publishes a story about how the valiant crimefighters at the SEC who really, really wanted to prosecute wrongdoers for the financial crisis but found themselves thwarted by the higher standards of “justice.”

That’s the gist, anyway.

The piece shows the pluses and minuses of the type of reporting practiced by the paper’s DealBook arm, whose DNA comes from Access King Andrew Ross Sorkin.

The peg is the fifth anniversary of the collapse of Lehman Brothers, for which no one has been charged—not civilly, the SEC’s bailiwick, let alone criminally, the Justice Department’s job—despite significant evidence that the company’s executives committed fraud.

On the plus side, we get new information about how and why the SEC failed to go after Lehman Brothers or its executives. We learn details about the back and forth between George Canellos, who headed the SEC’s Lehman team and didn’t want to charge anyone, and others in the agency, including Mary Schapiro, who apparently did.

On the minus side, that information is framed in a way that bends over backwards to excuse the inaction, which, even after reading this sympathetic piece, remains inexplicable.

For instance, this paragraph:

Yet The Times’s examination reveals new details about the breadth of the government’s effort — S.E.C. officials reviewed more than 15 million Lehman documents and interviewed some three dozen witnesses. The decision not to bring charges, the officials said, came despite early hope among investigators, whose careers likely would have benefited from bringing such a prominent case.

First, when the SEC says they “reviewed more than 15 million Lehman documents” that hardly means they read them. They searched keywords.

Worse, the NYT acts like it’s impressive that the SEC interviewed 36 people for its Lehman probe.

Let’s put this in perspective: Sports Illustrated, investigating NCAA infractions in the Oklahoma State football program, interviewed more than 100 people for its story, which is about petty cash payments, football players getting academic passes, and college students smoking, and occasionally selling, weed.

The Lehman Brothers “story” is about the biggest bankruptcy of all time—one that played a big role in taking down the global economy and costing the US somewhere between $6 trillion and $28 trillion. Yes, with a “T.”

I’d bet good money Gretchen Morgenson and Louise Story, the NYT’s very non-DealBook business reporters, interviewed three dozen people for their 2011 investigation into the dearth of financial crisis prosecutions, which The Audit featured in our Best Business Writing 2012 anthology. I have serious doubts that this latest story will be making it into BBW2014.

In the comments below the Times’s story—of all places—we get a glimpse of people the SEC didn’t talk to. A commenter claiming to be Oliver Budde, a former Lehman associate general counsel turned whistleblower, writes that “During all the investigations and all the anguished deliberations of Schapiro, Khuzami and Canellos, no one ever contacted me.” Budde was last driving Ryan Lizza around in a cab (I’m trying to contact Budde to confirm that he wrote the NYT comment, but it matches what he’s told BusinessWeek and others).

The worst part is that the SEC and the Justice Department were handed a detailed roadmap of “colorable claims” of accounting fraud by Lehman bankruptcy examiner Anton Valukas, who I’m also willing to bet interviewed far more than 36 people, and who found that top Lehman executives made the company’s balance sheet look $50 billion better than it actually was through an accounting ruse called Repo 105.

After summarizing the 2,200 page report, DealBook dispatches it this way:

But soon after its release, according to the officials involved in the inquiry, prosecutors and the F.B.I. lost interest in the case. They discovered that Repo 105 had nothing to do with Lehman’s failure and was technically allowed under an obscure accounting rule. Noting that London lawyers had approved Repo 105, prosecutors in Manhattan also worried they could not prove that executives intended to mislead investors.

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.

Perhaps Canellos, who’s now co-head of enforcement at the SEC, deserves his own glowing DealBook profile like his mega-conflicted predecessor Robert Khuzami.

Khuzami, naturally, took Canellos’ side on not charging Lehman.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,