Lehman’s Accounting Deception

The blistering report by the bankruptcy-court examiner investigating the collapse of Lehman Brothers should make investors blood boil.  The report outlines in painstaking detail how Lehman managed risk by essentially cooking its books with off-balance-sheet accounting shenanigans reminiscent of Enron. That Lehman’s deception took place years after the collapse of Enron makes the dishonesty especially outrageous. Former CEO Dick Fuld reportedly claims that he didn’t know about the deception but ignorance isn’t a defense.  He and the three CFOs named in the report should be held accountable civilly and possibly criminally. Lehman’s auditor Ernst & Young could also be held accountable.

What is especially galling given Lehman’s blatant deception is the public statement the company issued in June 2008 in response to short-seller David Einhorn publicly questioning Lehman’s earnings:

“We will not continue to refute Mr. Einhorn’s allegations and accusations. Mr. Einhorn cherry-picks certain specific items from our quarterly filing and takes them out of context and distorts them to relay a false impression of the firm’s financial condition which suits him because of his short position in our stock. He also makes allegations that have no basis in fact with the same hope of achieving personal gain.”

No basis in fact? Einhorn based his conclusions after meeting with former CFO Erin Callan and determined that she didn’t have a good handle on the company’s numbers.  As best I can tell, Lehman’s deception was far greater than even Einhorn figured out.  Regulators should investigate the chain of command involved with the issuance of this statement and charge all of them. There has to be serious consequences for issuing such a patently false statement.

The examiner’s findings will have a ripple effect and could potentially help bolster securities arbitration cases of retail investors who were sold Lehman “100 Percent Principal Protected Notes.”  As noted earlier, in December I won a significant arbitration award on behalf of a client in South Carolina relating to these securities.

What concerns me is how Lehman’s rivals would fare if Lehman’s bankruptcy court examiner spent a year combing the books of the other major Wall Street firms, particularly those that received TARP money.  It’s painfully obvious that investors can’t rely on the Big Four accounting firms to provide effective oversight.

Some Questions for President Obama’s Financial Crisis Probe Panel to Consider

Tomorrow, A Who’s Who of Wall Street executives, including the top honchos from Goldman Sachs, Morgan Stanley, and Bank of America will parade before a bi-partisan panel of 10 wise men and women appointed by members of Congress to determine the root causes of our country’s brush with economic collapse last year.  Speculation is rife that the commission could create initiatives as meaningful as the Glass-Seagall Act and the creation of the SEC which were headed by Ferdinand Pecora in the midst of the Depression. Regretfully, I’m skeptical that will be the case.

Although the U.S. was on the brink of economic disaster again in 2008, the stock market’s subsequent surge has given Americans a false sense of confidence.  Wall Street understands that investors have short memories and that their anger has subsided, hence the decision to pay themselves big, fat bonuses again. The fact that Timothy Geithner remains Treasury Secretary speaks volumes about how Washington still serves at the behest of Wall Street.

Nevertheless, the members of President Obama’s Financial Crisis Inquiry Commission (FCIC) are an impressive bunch, and I have no doubt they will ask some pointed questions and elicit some headline grabbing answers.  A good start would be for them to read today’s column in The New York Times by Andrew Ross Sorkin.  He identifies several important questions we’ve yet to get a clear answer on.

Nevertheless, I remain skeptical that this commission will have lasting impact.