The Wall Street Journal reports today that the SEC is focusing on Lehman Brothers’ $50 billion Repo 105 accounting trick in its investigation into wrongdoing at the bankrupt firm.

Gee, we’re glad to hear the Wall Street coppers can read—however slowly.

It was six months ago tomorrow that Anton Valukas, Lehman’s court-appointed bankruptcy examiner, released his devastating report on why Lehman went down. That’s where we first heard the term Repo 105, which was an accounting fraud—no two ways about it—that Lehman perpetuated to make its balance sheet look smaller—to the tune of 50 billion big ones. It deceived the markets, Lehman investors, and regulators. There’s not much doubt about this:

The examiner also cited an interview with Lehman’s former global financial controller, who confirmed “the only purpose or motive for [Repo 105] transactions was reduction in the balance sheet.” He added that “there was no substance to the transactions.”

The WSJ’s Kara Scanell reports that the SEC is looking at former CFOs Ian Lowitt, Erin Callan, and Christopher O’Meara, as well as CEO Dick Fuld. And she reports it’s also looking at whether Lehman failed to write down and disclose its disastrous Archstone Smith investment quickly enough. The SEC is also taking a look at Lehman auditor Ernst & Young, which let Repo 105 go down.

Despite all that:

The narrowing probe could move the SEC closer to bringing civil charges related to Lehman’s collapse in September 2008, though a decision doesn’t appear imminent.

Again: The Valukas Report was six months ago, and even that came a year and a half after Lehman went under. It’s worth revisiting a Jon Weil column from April:

Here’s what boggles the mind. Before Lehman filed for bankruptcy in September 2008, the SEC had been its primary regulator. The SEC’s enforcement division presumably has been investigating Lehman’s accounting ever since the company collapsed, or at least it should have been. Yet it wasn’t until after Valukas released his report that the SEC began showing any concern, or even awareness, that such accounting hocus-pocus may have been going on at Lehman or elsewhere.

Could it be that the SEC, led by Chairman Mary Schapiro, didn’t know the full scope of Lehman’s Repo 105 chicanery until after Valukas made his report public? The agency has said nothing to dispute such an inference.

Yves Smith makes some good points about Ernst & Young coming under the gun:

I would not hold my breath about obtaining criminal indictments. Look at the recent experience with Joe Cassano, of AIG, another obvious target for investigations. His “get out of jail free” card was that he told his accountants what he was up to. One of the huge FUBARs in our current legal regime is that it allows desperate or criminal managements to use compliant accountants and attorneys as cover.

In the sort of thefts that little people engage in, like holding up a store, the person who drives the car is an accessory and can be prosecuted. But white collar crooks can escape if they get their advisors to wink and nod (in both criminal and civil cases, most juries will be very reluctant to find an executive guilty for something his accountant signed off on). Now that would suggest that the logical route is to go after the crooked (or at best criminally incompetent) advisors. But as we wrote in ECONNED:

Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.

That sounds like a good idea to me, and a good bit of history for the press to dig into.

Meantime, the SEC pussyfoots around. Maybe they’re holding out for an October Surprise.


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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 rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.