NEW PRESIDENTIAL ADMINISTRATIONS APPOINT new US attorneys. The Obama administration, based on a recommendation from the powerful New York senator Charles Schumer, picked Preet Bharara to be the next US attorney for the Southern District of New York. Nominated in May 2009 and sworn in in August, Bharara began overseeing the more than 220 prosecutors. Bharara had been a staff attorney in the Southern District and after that, Schumer’s chief counsel.
Schumer was known as “the senator from Wall Street,” friendly to the major industry of New York City. Not so much an outright enemy of regulation, he subtly undermined it. In the bubble years, Schumer argued that New York might lose out to London as a financial world capital if it didn’t further loosen Wall Street’s regulatory shackles. Veteran prosecutors worried that Bharara won the appointment over more seasoned and qualified rivals. Would Bharara take on the most powerful industry in New York?
Preetinder Singh Bharara’s life story has appeal. He was born in the northern Punjab region of India to a Sikh father and Hindu mother. He had married a woman whose father was Muslim and mother was Jewish. Their four different families practiced four different faiths, and all had fled religious oppression. He’d often joke, “Even when my wife fasts for Yom Kippur, and my father-in-law fasts for Ramadan, I get to stuff my face with samosas all day.”1
Bharara grew up in Monmouth County, New Jersey, and was valedictorian of his high school class. He graduated magna cum laude from Harvard in 1990 and Columbia Law School three years later. He worked at a top law firm but had clear political inclinations. The summer after graduating from law school, he volunteered for liberal Mark Green’s campaign for New York City’s public advocate. Bharara became a prosecutor in the Southern District and then, thanks to his friend and colleague Ben Lawsky’s recommendation, went to work as a staffer for Schumer. There he investigated the Bush administration’s firing of US attorneys, which culminated in Alberto Gonzales’s resignation as attorney general.
Bharara looks older than his age, with dark circles under his eyes and thinning black hair. But his eyes gleam in conversation, attentive and amused, which restores youthful energy to his appearance. Bharara preens in front of a crowd, cracking self-deprecating jokes and moralizing. He dazzled audiences with passages from legal texts, often quoting from memory his hero Clarence Darrow’s 1926 defense summation from The People v. Henry Sweet, a hallmark civil rights trial. Bharara spoke quickly as if to keep the crowd from noticing his didacticism.
He courted the media, both on the record and off, and lectured the subjects of his enforcement. He railed against New York State’s political corruption and Wall Street’s business culture. His speeches reflected careful tailoring for the audience. “Is corporate culture becoming increasingly corrupt?” he asked, talking tough in a 2011 speech to New York financial journalists. “[Is] ethical bankruptcy on the rise?”2
When Bharara arrived, the Southern District had major insider trading cases in development. Investigators had wiretaps on hedge fund managers and Wall Street research firms. Insider trading cases, especially when there is hard evidence from recorded phone calls, are easier to investigate and prove to a jury than cases concerning financial deals of dizzying complexity. Financial crisis cases might take years to investigate, and after all that, a prosecutor might determine no crime had been committed, let alone a provable one.
Bharara had no easy choices. He could have his prosecutors chase after leads where they weren’t sure crimes had been committed and they didn’t have targets. Or they could go after insider trading, where they knew what the infractions were and who committed them. Investigating esoteric financial instruments like collateralized debt obligations, or CDOs, could take three years or more. Insider trading cases could go much more quickly.
Staff prosecutors gravitated to the easier cases.3 They had tapes of bad guys conspiring. Listening to the wiretaps felt like they were inside the rooms hearing the secret thoughts of every hedge fund manager in the city. They tracked young, rich, and cocky men plotting to destroy evidence by tossing pieces of their phones in Dumpsters in the middle of the night. They had engaged FBI agents to doorstep suspects at five o’clock in the morning. They flipped people before they lawyered up. Each dramatic twist of the cases—breakthroughs, arrests, trials—made front-page news in the Wall Street Journal and elsewhere.
In comparison, the evidence from the financial crisis cases sat dead on the page. There were millions of documents to wade through describing credit default swaps, BBB-rated mortgage-backed securities, super-senior tranches, CMBS,4 RMBS,5 CDX index, ABX index. Each had more impenetrable jargon than the last. The insider trading evidence had the perverse effect of making the financial crisis evidence seem inadequate and paltry. The young prosecutors worried how they would ever make a jury see any of it. But it didn’t even get that far. The prosecutors themselves weren’t seeing it. Their bosses weren’t making them.
The insider trading cases became the path to further one’s career. At one point, the office was 85-0 on insider trading cases.6 In the office’s biggest coup, it sent Raj Rajaratnam, who managed the multibillion-dollar fund Galleon Group, to prison. The media noticed. The New York Times celebrated that the Southern District was “back” in action after lackluster years under previous US attorneys. Time put Bharara on its cover, with the headline: “This Man Is Busting Wall St.” Fortune headlined its profile “The Enforcer of Wall Street.” The New Yorker, for its online version: “The Man Who Terrifies Wall Street.” Almost alone among US attorneys in his class, Bharara had achieved celebrity status, even appearing at events such as the Vanity Fair Oscar Party.
But Preet Bharara wasn’t taking on Wall Street. He might castigate corporate culture in a speech, but he was busting insider traders at hedge funds, a different beast altogether. Hedge funds were generally small firms. Each was a discrete entity, raising little possibility of systemic consequences if it were closed.7 Though their principals were wealthy, they had few employees and little in the way of political power. Insider trading was a minor offense, a tilting of the seesaw. The victims, to the extent there were some, were often corporations or other big investors. The financial crisis and bank wrongdoing immiserated tens of millions of Americans.
The Southern District did not bring criminal charges against big investment and commercial banks. The office did not take on the power structure of American finance. Bharara did not charge top executives at the biggest companies. After the biggest bubble and financial crisis in generations, bankers at the biggest institutions sold defective products, misrepresented them, played games with their own finances, and almost crashed the global financial system, save for a multitrillion-dollar taxpayer bailout. The most important prosecutorial office in the country took on hedge funds. It was a prosecutorial non sequitur.
“The government failed,” says a former top prosecutor in the Southern District, in a sentiment echoed by several former assistant US attorneys in the office. “We didn’t do what we needed to do.” Another former prosecutor who worked on insider trading cases said, “They made my career, but they don’t change the world. They are not events that affect the public. If Raj Rajaratnam trades on a merger, who gives a shit at the end of the day?”
The staff understood the risks, rewards, and incentives of the Southern District. “It’s a hell of a thing to tell someone they will spend the next three years of their life where we have virtually no evidence, whereas you can work on case where do have evidence,” said the prosecutor who worked on insider trading cases. “If someone had come to me to say, ‘We are going to take you off this case to have you toil on this hole,’ I wouldn’t have been happy about that. That’s the human reality of all organizations.”
Southern District top officials assigned financial crisis cases, but these were never the office priority. The leadership never tried to change the staff attorneys’ calculus. The few cases that the office did catch were distributed piecemeal, with little plan or coordination. The Southern District prides itself on its entrepreneurialism. When one Southern District star got assigned a case on a dodgy Morgan Stanley residential mortgage-backed security, the prosecutor couldn’t get the FBI interested. Then the office lost a turf war, and the San Francisco US Attorney’s Office got the case. Main Justice seized investigations into interest rate and foreign exchange rate manipulation. Since when did the vaunted Southern District lose turf wars on securities fraud cases? Since its priorities now lay elsewhere.
The Southern District passed on the case that would become the first trial of the financial crisis: the Bear Stearns hedge fund case, in which two of the investment bank’s employees were accused of misleading investors about the state of their mortgage investments. The Brooklyn US Attorney’s Office picked it up. In November 2009, when a jury acquitted the two hedge fund managers, some Manhattan prosecutors felt private vindication. Others boasted that they would have won the case. But prosecutors around the country drew an unfortunate lesson from the experience: that the evidence required in these cases was almost insurmountable.
In the spring of 2010, Raymond Lohier, then the Southern District’s chief of the Securities and Commodities Fraud Task Force, made the rounds in Washington as part of his confirmation process to become a judge on the Second Circuit Court of Appeals. Senator Ted Kaufman of Delaware asked him what the Manhattan US Attorney’s Office’s priority was. Lohier told the gathering: “Cybersecurity.” He didn’t cite the financial crisis.8 The audience was aghast. (Bharara later told the staff that did not accurately reflect the office’s priorities.)9
Lohier was a few years older and more experienced than Bharara, and not one of his loyalists. To replace him, Bharara chose a younger staff attorney. Bharara preferred young unit chiefs. He viewed them as energetic. And they would owe him their loyalty.
When Lohier left, even by that early stage, there were almost no financial crisis investigations being pursued anymore. The securities fraud unit had generally about fifteen or twenty prosecutors at any one time. Most of the hotshots in the office chose to work on insider trading cases. A handful worked the Bernie Madoff Ponzi scheme case.
The office scored one success in a financial crisis prosecution; an accomplishment that serves to underscore its failure otherwise. The Southern District had prosecuted a supervisor at Credit Suisse named Kareem Serageldin. In 2007 Serageldin oversaw traders who lied about the value of their residential mortgage-backed securities as their value plummeted. Serageldin knew it and passed along the faulty valuation. He pleaded guilty. (One of the lower-level traders was spared prison for cooperating in the investigation. Another fled the country.) Serageldin went to prison with a thirty-month sentence. Such mismarking was commonplace. Traders had every incentive to lie, as did their supervisors and the top officials at the banks. Few, if any, Wall Street traders, bankers, or prosecutors believe that Serageldin’s traders were the only ones who lied and covered up mismarked portfolios. The Department of Justice could not uncover any similar major cases at top banks.
The Madoff investigation was a higher priority at the Southern District, but even that moved agonizingly slowly. Prosecutors had gone after Madoff, whose fraud collapsed in late 2008, and then they seemingly stalled. By 2015, the government had prosecuted some of his colleagues and accountants. But what about Madoff’s enablers on Wall Street? The Ponzi schemer had decades of help from major financial institutions.
JPMorgan Chase appeared guilty. It had been Madoff’s primary banker for more than two decades. There were loads of incriminating documents. One employee wrote that Madoff’s returns were “possibly too good to be true” and warned of “too many red flags.” Another executive noted that there was a “well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” Bankers in the London offices attempted to create a derivative to match Madoff’s performance—and couldn’t. The unit even filed a suspicious-activity report. It pulled out money.
JPMorgan lawyers, both in-house and at outside firms, received emails alerting them to concerns about the money manager. In 2008, before the crisis and the Ponzi’s collapse, the bank’s global head of equities suggested “disclosure to US/UK regulators” about their concerns about Madoff, and said he assumed that the bank’s general counsel would have to be a part of the “ultimate decision” because of Madoff’s importance as a customer and the seriousness of the suspicions. JPMorgan’s lawyers did not alert any authorities.10
The Southern District dithered. Because divisions within the bank communicated few of their Madoff concerns with one another, the government feared it couldn’t make criminal cases against individual bankers. JPMorgan had loose oversight and warning systems, but prosecutors struggled to tie that to any one crime by any one person. In a way, JPMorgan insulated itself from criminal charges through its own lack of adequate internal oversight. No one group or person saw enough of Madoff’s activities—at least that was what the prosecutors came to believe.
JPMorgan’s lawyers helped prosecutors arrive at that conclusion. Give white-collar defense attorneys time, and they can muddy any investigation. As the Madoff probe dragged on, JPMorgan had time to prepare. There were civil suits. There were investigations of Madoff himself. The bank and its lawyers knew what documents the government had. They were ready. In the post–Thompson memo world, white-collar defense attorneys coordinate closely with the other lawyers representing other institutions and individuals, often forming joint defense agreements. They glean a full picture of the government’s strategy. When the government interviews well-coached witnesses, they have mastered the materials the government lawyers ask about. If the government inquires about something that isn’t in black and white on the page, memories go blank and knowledge dries up.
One of the main fights that JPMorgan and the government waged was over privileged materials. Bankers told investigators they were relying on the advice from their attorneys. Defendants can use an advice-of-counsel defense only if they provide a complete and accurate record to their lawyers about the matter under investigation. To demonstrate that is the case, the subjects of an investigation have to produce the full documentary record for the prosecutors to assess. JPMorgan and its attorneys at Wachtell, Lipton fought the requests. The government and the bank eventually agreed to a partial waiver. Then prosecutors requested to talk to witnesses. Wachtell said no. They battled, almost went to court, and then compromised at the last moment. But the government never got as free a hand to probe into JPMorgan regarding Madoff as it wanted.
Such fights over privilege in corporate investigations are now routine, since the government capitulated on attorney-client privilege. Prosecutors are at a terrible disadvantage. The defense bar knew that even though the government would threaten to litigate, prosecutors rarely did so. The government had been accused of being overzealous, most damagingly in the KPMG case. The law requires the government to argue to a judge that the documents it seeks are important factual material (which should not be protected) and not just full of lawyerly advice (which is protected). That’s a difficult task when the prosecutor doesn’t know what is in the documents. As one Southern District official says, “You are going into a gunfight. But you don’t have any bullets. You are supposed to say, ‘We suspect those are full of facts, Judge’?”
Having failed to prosecute any individual JPMorgan bankers, the Southern District moved to negotiate the bank’s punishment. Bharara talked defiantly. He warned JPMorgan that there was enough to charge it criminally. He was posturing. The Southern District did not charge the bank, nor did it win many concessions. The parties settled. The bank did not plead guilty, instead entering into a deferred prosecution agreement in January 2014—the first with an American bank after the financial crisis. JPMorgan paid a $1.7 billion penalty to the Department of Justice (with another $350 million to the Office of the Comptroller of the Currency). Madoff’s investors lost about $20 billion in the scam.
The Southern District’s weak corporate settlements—no weaker than the rest of the Department of Justice’s but no stronger, either—extended to industries beyond banking. In March 2014 the office entered into a deferred prosecution agreement with Toyota, charging that the car company concealed and misled the public about how its vehicles suffered from unintentional acceleration. The automaker had reassured the public that it had fixed the problem. However, subsequent accidents killed people. The office poured resources into the investigation. In its agreement with the Southern District, the car company paid $1.2 billion, which the office considered a hefty sum. In some ways, it was a triumph. The Department of Justice had never brought such an action against a car manufacturer.
But Toyota had not cooperated fully with the Southern District’s investigation. It had not made Japan-based executives available for interviews. In light of the lack of full cooperation, the office might have been justified in taking much more serious action: making the company plead guilty, taking it to trial, or attempting to indict individual executives. The Southern District did not do that.
Without a national task force to tackle the financial crisis investigations, all the US Attorney’s Offices were left on their own in 2009 and beyond. They liked it that way. Top officials from Washington weren’t calling every week, so they could set their own office’s priorities without paying any bureaucratic cost. The Southern District of New York should have conducted the most serious probes of the most important banks. Instead, the only major financial crisis investigation that the most important US Attorney’s Office in the country conducted was into the September 2008 collapse of Lehman Brothers. The Lehman investigation may be the highest-profile casualty of Bharara’s insider trading priorities.
Press accounts described the Justice Department as snapping into action almost immediately. By late October 2008, investigations into whether executives had misled the markets and whether the firm engaged in accounting fraud had begun. The probe was split among three offices: the Southern and Eastern Districts of New York, and the New Jersey office. According to a story in the New York Times that month, the offices were cooperating with one another and making progress.11
The Lehman investigation provided an embarrassment of rich targets for the government. The investment bank had had months of warning as the subprime credit crisis brewed. It had precarious finances and was desperate to find lenders and investors to take pieces of the company. Could top executives have misled anyone in its final, desperate months, weeks, and hours? The sprawling possibilities would require resources. Something on the order of ten FBI agents and five prosecutors dedicated full-time might have done it. No one office dedicated nearly those numbers.
The offices all got off to slow starts. Despite the notoriety of Lehman’s collapse and the repeated Justice Department insistence that the case was important, the investigation received limited resources. The Brooklyn and New Jersey offices hardly did anything at all. Southern District attorneys puzzled over why the probe generated little of the usual watercooler talk. This pursuit was not aggressive.
In January 2009 the law firm Jenner & Block won the job to be Lehman’s bankruptcy examiner. Courts appoint examiners to investigate fraud or mismanagement. Anton Valukas, the chairman of the firm and a former US attorney in Chicago, took an active role. He gathered a handful of partners in a room. “Tell me what your investigative work plan is in the next couple of days,” he said, giving what seemed to the partners an unreasonable and extremely tight deadline. Valukas worked hard and efficiently and wanted everyone else to do so, too. The Jenner & Block lawyers split into four teams, each taking a piece of the mystery.
Jenner & Block partners learned that Main Justice had no involvement in the probe. The law firm had no contact with Eric Holder, his deputies, or Lanny Breuer. Lawyers from the firm soon made the courtesy rounds with all three US Attorney’s Offices supposedly investigating the collapse. These months later, the government was not far along at all. Jenner & Block lawyers realized the prosecutors didn’t understand much about what had happened.
Jenner & Block continued to see little progress out of the US Attorney’s Offices. The lawyers submitted requests to prosecutors of names of Lehman executives with whom they wanted to speak. They anticipated being told no, an indication that prosecutors were using those witnesses for their own cases. Though they had to wait on occasion, Jenner & Block eventually interviewed everyone it requested. Valukas sat in on the major interviews, drilling down into the important matters.
Jenner & Block had about 130 lawyers working on the Lehman case for more than fourteen months. The firm conducted the kind of all-encompassing investigation the government cannot do anymore, given its choices over how to allocate people and time. These lawyers probed more deeply and thoroughly. Their firm put more money into it, organizing documents and breaking down the tasks into manageable pieces. Jenner & Block had a special motivation to uncover wrongdoing. As bankruptcy examiner, it sought to recoup losses for creditors. It could sue culpable entities for damages. Law firms hired by boards of directors lack that motivation. They want to appear cooperative to the government and protect their clients.
Ultimately, it seemed to the Jenner & Block team that the federal investigation, despite the three offices and various securities and banking regulators involved, fell to one person: Bonnie Jonas, a dogged assistant US attorney in the Southern District. Jonas had help here and there, but she shouldered the bulk. And she didn’t work on Lehman full-time. (The Southern District says it devoted multiple people and ample resources to the investigation.)
White-collar prosecutors have more control over their schedules than the narcotics and gang specialists who have to respond to random acts of violence and crime. Supervisors rarely oversee their daily activity, and they don’t have a lot of imposed deadlines from their bosses. A prosecutor’s day usually starts on the late side, around nine thirty or ten. Typically, they’ll work until eight at night. They almost never work on only one case at a time, dividing their attention among several matters. When they work on a trial, the days last much longer. “The shorter the trial, the longer the hours,” goes the saying. Jonas worked longer hours than most. Most of the offices have windows at One St. Andrew’s Plaza. The least desirable face a municipal jail, with its roof filled with concertina wire. When prosecutors work late into the night and peer out the window, sometimes they feel like prisoners themselves.
Jonas, who had been in the office for over a decade at that point, came on the investigation in the fall of 2009. Several Southern District prosecutors had already been assigned the case but had either left the office or moved off the case. A respected veteran, Jonas had a sharp memory and a fierce work ethic. She was deliberate. She wanted to know everything and never, ever wanted to be surprised. “If you were involved in a complicated set of facts and you were innocent, you’d want her investigating your case,” a colleague says.
By the autumn of that year, the Southern District had narrowed its probe to two matters: whether Lehman had lied about the valuations of its commercial real estate portfolio, and a maneuver called Repo 105. With Repo 105, Lehman moved assets off its balance sheet at the end of quarters to make the bank look healthier, with less debt. When Jenner & Block lawyers brought up the name of a Lehman whistle-blower who raised concerns with US attorneys about Repo 105, the prosecutors warned the law firm to stay away—and not because they wanted to keep the witness for themselves. They told the law firm they didn’t find the witness credible. An assistant US attorney told Jenner & Block that the whistle-blower was a “kook.” Jenner & Block lawyers disagreed. Perhaps the man wasn’t a saint, but he’d gotten it right.
For months, Jonas would trudge up to Jenner & Block’s offices in Midtown Manhattan to look through the Jenner & Block database of interviews, sifting through the voluminous materials. Occasionally, she brought colleagues, but most of the time, she came on her own. Prosecutors from the Eastern District and New Jersey offices never did. By the time Jonas started in the fall of 2009, Brooklyn and New Jersey seemed to have wound down their efforts. Prosecutors agonized that Lehman executives had received plenty of advice from lawyers and accountants. Of course, modern business works no other way. Good prosecutors did not stop there. Jenner & Block had much greater resources, but prosecutors continue to have investigative powers that private actors lack.
Some Jenner & Block lawyers couldn’t understand what happened to the investigation into what Lehman executives had told the public about how much cash it had, known as liquidity. Misrepresenting a bank’s liquidity is a time-honored tradition to stave off a run. The saying is that corporations die of cancer, but financial firms die of heart attacks. Banks can suffer crises of confidence, and then it’s all over. Lehman executives knew the importance of cash and confidence. In an interview with financial journalist Maria Bartiromo in March 2008 after Bear Stearns had gone down, Lehman Brothers’s then chief financial officer, Erin Callan, said, “Liquidity is the thing that will kill you in a moment.”12 Lehman was especially dependent on short-term financing, even more so than similar investment banks. Liquidity was, therefore, even more important for Lehman than for other, more stable financial firms. Prosecutors knew how to bring such cases. In the mid-2000s, Southern District prosecutors had convicted executives of Refco, a major commodities broker, in part for lying about the firm’s liquidity on the eve of its failure.
But the Southern District did not take that part in the investigation, and the Brooklyn office, reeling from Bear Stearns, never probed the liquidity representations thoroughly. Jenner & Block did. Lehman executives appeared to have misled the public and regulators about the bank’s liquidity position.
At the end of the first quarter of 2008, Lehman reported to the public that its liquidity pool was $34 billion. During the next few months of choppy markets and frightened lenders, Lehman reported that its position strengthened. By the end of the second quarter, the investment bank said it had $45 billion. By the third quarter, the bank said its position remained strong, at $42 billion. Lehman executives gave daily updates on the number to the SEC and the New York Fed.
Internally, Lehman seemed to acknowledge that the figures were misleading. Employees produced a chart that broke down the $42 billion figure under the heading “Ability to Monetize.” It divided the money into three categories: high, mid, and low. Throughout the summer before its failure, Lehman deposited and pledged tens of billions of dollars at other banks to reassure them and to continue doing business with them. Retrieving that money would not have been easy. Of the $41 billion, $15 billion of it was in the “low” category, generally because it had been pledged as collateral to other banks. If something is truly liquid, it should not be difficult to monetize. At least two executives objected to how Lehman represented its liquidity, including the investment bank’s international treasurer, Carlo Pellerani. But Lehman officials kept counting that money as part of its liquidity.
Trouble with Lehman’s lenders started in June 2008. Citigroup demanded that Lehman put some money on deposit at the bank if it wanted Citi to continue as a trading partner. Lehman handed over $2 billion. Lehman continued to include this amount in its liquidity pool, because it had the right to call it back. Paolo Tonucci, the firm’s treasurer, understood the reality. Tonucci told a New York Federal Reserve overseer that “even though Lehman ‘technically’ has access to the $2B [Citigroup deposit], if they [Lehman] pull it or a major portion thereof, Citi will stop” working with Lehman, crushing its business. That money was not unencumbered. It was not, therefore, liquid.
As investors panicked, the CEO Dick Fuld ousted CFO Erin Callan and elevated Ian Lowitt, a Rhodes scholar who had been a longtime executive at the investment bank, to the position. Lowitt said on a June 16, 2008, conference call that Lehman had “significantly increased . . . our liquidity pool.” Neither he nor anyone else from the investment bank disclosed the $2 billion on deposit with Citigroup. By the time Lehman issued its second-quarter SEC filing on July 10, the investment bank had also pledged $5.5 billion to JPMorgan. It disclosed neither in its quarterly SEC filing. Lehman said in the filing that it had “strengthened its liquidity position” and represented the liquidity pool as “unencumbered.” Lowitt signed the certification.
Over the next few months, Lehman’s relationships with trading partners devolved. Despite its haggling with banks across the world and despite having tied up billions in agreements to placate them, Lehman executives told the bank’s board of directors that everything was fine. In a September 9 meeting of the finance and risk committee of the board of directors, Tonucci said that the bank “was able to broadly maintain the status quo” for its liquidity. On September 10, 2008, five days before the investment bank would declare bankruptcy, Lowitt told shareholders on a conference call that Lehman’s liquidity “remains very strong.” He did not mention any of the assets on deposit at other banks. Nor did he tell investors that Lehman and JPMorgan agreed to more protection for JPMorgan’s exposure that morning. Some in the market believed the firm. On September 11 one Wall Street research analyst wrote in a research report, “[L]iquidity risk appears low.”
Regulators, credit rating agencies, and Lehman’s outside lawyer had no idea that the liquidity pool wasn’t, in fact, liquid. The SEC was unaware of the extent the firm was using pledged collateral until just before Lehman’s bankruptcy.13
Attorney Lewis Liman, of Cleary Gottlieb, represented Lowitt. He prepared an elaborate defense of his client, presenting it to the SEC. Liman also spent several hours with Jenner & Block. Liman insisted that Lowitt had not intended to mislead anyone. He said his client wasn’t a numbers guy. Yes, he was the investment bank’s chief financial officer, but he was not an accountant. He had been relying on what his underlings told him, and no one raised red flags to him.
That may be a reasonable defense, but it does not appear that prosecutors and federal investigators made a serious attempt to test how much Lehman’s chief financial officer or any other top executives knew about the bank’s financial position. Prosecutors did not work their way up through lower-level employees to get to the top Lehman executives. Multiple midtier Lehman executives and some regulators involved in the bank’s desperate attempts to keep itself liquid were never even interviewed by any federal government officials about the collapse. And, while he was interviewed by the Jenner & Block team, no federal prosecutor ever interviewed Lowitt.
In March 2010 Jenner & Block issued a blockbuster 2,200-page report on Lehman’s collapse. The firm highlighted the Repo 105 transactions. Jenner & Block believed the transaction merited at least civil claims. The report included new, damning facts about Lehman’s liquidity misrepresentations, but did not recommend bringing civil claims. As for Lehman’s CFO, “although there is some evidence that Lowitt knew that the liquidity pool contained clearing-bank collateral,” examiner Valukas wrote, he did not believe any legal claims could be brought against him for making misrepresentations or omissions about the investment bank’s liquidity. Prosecutors at the Justice Department told the law firm that they had looked into liquidity representations but that they didn’t think Lowitt, or any of the other top executives, had any firsthand knowledge of the key facts. Whatever the validity of this conclusion, some Jenner & Block partners and Lehman executives, at least privately, thought that crimes had been committed.
The SEC debated whether to bring civil charges over Repo 105 and to charge Lehman’s auditor, Ernst & Young. It passed on both. The role that regulators played during the collapse may have contributed to the stymied investigations. The SEC, which was responsible for the investment banks, had blown its oversight. The Fed, which regulated the big banks but not investment banks like Lehman, had not given much attention to Lehman’s precariousness.
US attorneys gave up on every probe they took up regarding the failure of Lehman Brothers. No office brought civil or criminal charges against the company or any Lehman executive.