We’ve now learned that there are three different grand juries considering criminal charges related to the collapse of Lehman Brothers. One of the probes is related to auction-rate securities, another to Lehman’s June stock offering.
On the latter, a deep part of the problem with handling these matters as criminal prosecutions is that they can turn on a debate about the appropriate amount of pessimism. In retrospect, of course, it is obvious that Lehman Brothers wasn’t cautious enough and didn’t act swiftly enough to prevent collapse. But was that really obvious at the time? That’s the kind of question best suited for a civil fraud claim, but not a criminal case.
You can predict how this sort of thing will go. Investigators will turn up evidence that Lehman had ample warning it was in dire straights. Some junior analyst’s report warning they had exaggerated the value of their MBS holdings will be produced. He’ll testify that he was ignored. A business judgement by management that he was over-cautious will be presented as a “smoking gun,” evidence of a cover-up.
Of course, by the end, Lehman knew it was in trouble. Until the end, however, management also appeared to believe the firm could raise more money. Credit markets are, after all, unpredictable. In hindsight, we know the management of Lehman was wrong. But we haven’t seen any evidence yet that persuades us that anyone did anything criminal.
“Do we really want business people — whether at funds or companies — always to err on the side of pessimism in this situation?” Larry Ribstein once asked.
We await the evidence. And, if prosecutors are seeking indictments, we hope it is strong.
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