Fortune Looks at Possible Prosecutions

Fortune’s cover story this week looks at something I’ve been wondering about for, oh, a year or so now: Who’s going to jail?

As Warren Buffett famously said, “You only find out who is swimming naked when the tide goes out.” And the tide is most assuredly going out.

So Fortune’s Roger Parloff assembles a list of the biggies who are under investigation or are likely to face intense scrutiny, including AIG, Bear Stearns, Lehman Brothers.

So there’s an angry mob with pitchforks assembling, and they want to see some heads on pikes. While former Enron CEO Jeff Skilling could at least try to have his case transferred out of Enron-devastated Houston, the credit-crisis targets will have no such card to play. This time the corporate shenanigans have wrecked the globe. “This is the ugliest enforcement environment I’ve ever seen in my professional career,” says one criminal- defense lawyer, who also asks for anonymity.

The mag has a nice sidebar with examples of ill-timed statements and doings by the chieftains of some of the companies under scrutiny.

This is an interesting quote:

But if you ask a lawyer who advises corporations, you’ll get a very different answer. “The reality is, you’ve put your finger on one of the most difficult situations that will come up in counseling executives of corporations,” says one who does that for a living and insists on anonymity. “You can’t lie,” he says. “You’re trapped between serving the best interests of shareholders and the legal requirement not to lie. You need to thread the needle.” (Now you see why he wants anonymity.)”

It’s surprising Fortune got someone to admit that on the record, even if anonymously. And the magazine throws out my favorite example of the crisis, Bear Stearns CEO Alan Schwartz insisting on CNBC just hours before the bottom fell out that his company was just fine:

A tougher case is presented by his successor, Alan Schwartz, who was saying much the same thing as late as the morning of March 12, 2008, just 36 hours before seeking emergency funding. “Our liquidity and balance sheet are strong,” Schwartz told CNBC’s David Faber. “We don’t see any pressure on our liquidity, let alone a liquidity crisis.

Lehman also comes into focus for touting its turnaround just days before it filed for bankruptcy.

Among other things, Fuld assured investors that “we are on the right track to put these last two quarters behind us,” while Lowitt stressed, “Our liquidity pool also remains strong at $42 billion.” The question today is essentially, How does $42 billion vanish in five days, and did Lehman officers know then of any harbingers of doom that they weren’t sharing?

The Manhattan federal prosecutor’s office, meanwhile, is focused on whether Lehman was overvaluing its commercial real estate holdings shortly before bankruptcy (even though it had already marked them down significantly), according to a person familiar with the situation. The former head of Lehman’s global real estate group, Mark Walsh, is therefore among the executives coming under the microscope.

Fortune explains the nuances and the difficulties of prosecuting these executives, and I like how it lays out the terrain for what’s likely to come in the next year. It’s going to be interesting to watch it unfold.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

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.