The End of the Lehman Witch Hunt

This Sunday marks the fifth anniversary of the collapse of Lehman Brothers, which marked the start of the Great Recession just as surely as Black Tuesday heralded the Crash of ‘29 and the depression that followed.

Sept. 15, 2008, also kicked off what we might call the Great Wall Street Witch Hunt, a search through emails, instant messages, financial statements and prospectuses for the person or persons responsible for the financial market meltdown. The hunt proceeded from two political certainties: First, that somebody had to be held to account for all the bad things that happened in the economy, and second, that this somebody could not be government employee, least of all a regulator who was supposed to keep an eye on things before they got out of hand.

No qualified culprit has emerged, at least as far as Lehman Brothers is concerned. And, because of the fortunate fact that our laws include statutes of limitations, this Sunday will mark the end of the Lehman witch hunt.

Just in time for the milestone, The New York Times reported that the Securities and Exchange Commission concluded as early as 2011 that it had no legally justified case against executives from the investment bank. Mary L. Schapiro, the Securities and Exchange Commission chairman at the time, pushed for the investigation to continue. “The world won’t understand,” she told George S. Canellos, who supervised the SEC’s investigation of Lehman Brothers.

Yet while the SEC never officially announced a decision to close the investigation, the agency quietly abandoned the probe in 2012. Investigators found that Lehman Brothers hadn’t omitted “material” disclosures, a point on which a potential lawsuit might have turned. Further, they found that Lehman Chief Executive Richard S. Fuld did not know the firm was using questionable accounting methods, and that the “Repo 105” accounting technique, while questionable, was not actually illegal. The SEC ruled out suing the company because it was already in bankruptcy, and concluded that it did not have the authority to sue Fuld for lack of oversight regarding Lehman’s risky behavior.

Whether the world understood or not, the SEC investigated and found no case. Despite Schapiro’s urging, Canellos rightly held to his position that the government could not bring a case without evidence or any legal basis. “Our job is to seek justice,” he said.

Canellos has thus emerged as something of a hero, because not many in the regulatory or prosecutorial functions of government seem to have recognized exactly what their obligations were after things went sour. The SEC’s job was not to pursue scapegoats, or convictions, or admissions of guilt, or fines. The point of the investigation was to determine whether someone who knew, or should have known, that they were breaking the law did so anyway. Canellos and his team came to the conclusion that there was no evidence that this description fit anyone at Lehman.

Yet Canellos’ approach was the exception. The government has been trying to satisfy public opinion by reaching for convictions, going as far as invoking tangentially related statutes to extend the clock on some investigations and bringing weakly supported charges in order to create the appearance of action.

Five years after Lehman Brothers collapsed, the likelihood of a high-profile criminal case as a result of the financial crisis has shrunk to almost nothing. Rita M. Glavin, a former federal prosecutor, said, “It’s not like a murder case, where you have a dead body and you know a crime has been committed.” And without evidence, any government official of conscience cannot move forward with charges. That is a feature of our system, not a failing.

Hindsight is sharper, if not always quite 20/20. The fact that no one from Lehman Brothers acted in a way that merits prosecution does not mean nobody made mistakes, or that policymakers have nothing to learn from the firm’s collapse and the subsequent economic fallout. But the lessons we learned from the collapse are not substitutes for evidence of illegal action. Canellos and his team were right to acknowledge the difference.

Readers can judge for themselves whether the Times article took the position that the lack of prosecution in the Lehman collapse was ultimately an injustice. I think most readers will conclude that it at least leans in that direction. But when the histories are written about who did what to whom before, during and after the financial crisis, aggressive prosecutors and blame-shifting political appointees will not rank high on the lists of heroes. Principled investigators like Cannellos will.

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