As expected, Dick Fuld and other Lehman executives have now been subpoenaed to testify in a criminal investigation about whether they lied about Lehman’s condition in the months leading up to its collapse. Prosecutions and scapegoating go hand in hand with busts, of course, and Fuld & Co. are the first of this crash’s designated villains.
Over the next several months, the SEC and Justice Department will take thousands of hours of testimony and review hundreds of thousands of emails, notes, memos, recordings, and other evidence. And, almost certainly, they will find some “facts” that suggest that Dick Fuld and other Lehman executives might not have told the truth, the whole truth, and nothing but the truth in every public communication.
Specifically, they will likely find evidence that Lehman executives:
- Worried about the “marks” the firm was placing on its assets (their public claim about what the assets were worth)
- Worried about whether the firm had enough capital
- Worried about whether the firm was being forthright in its public statements
- Worried that the firm might go bankrupt
In some cases, in some of these communications, Lehman executives will no doubt have stated with complete conviction that the firm did not have enough capital and/or was marking its assets too high and/or was not being completely forthright.
Does this mean they all should be packed up and shipped off to jail? No. Why not? Because these sorts of dialogues and debates are exactly what responsible corporate executives do in the normal course of business all day long. And, most of the time, they don’t tell you what the final decision was–or, more relevantly, what the executive who made the final decision believed.
Honest, reasonable people disagree about asset valuations. Honest, reasonable people disagree about where the economy is heading, where the stock market is heading, what their firms should or shouldn’t do. Honest, reasonable people disagree about how well their leaders are handling a given situation or communication. Honest, reasonable people blow it–sometimes catastrophically, as Lehman’s senior team just did. And honest, reasonable CEOs leading global companies always express confidence in their decisions, no matter how worried or troubled they were before they made them. If they didn’t, their companies would collapse.
If the Justice Department wants to persuade us that Dick Fuld and Lehman’s senior team are guilty of criminal fraud instead of just ineptitude, we want to see evidence that Fuld & Co.:
- Knew the “true state” of Lehman’s condition and intentionally misrepresented it
- Actually lied in public statements (instead of just expressing opinions and confidence that turned out to be wrong).
(What kind of evidence would persuade us of this? An email from Dick Fuld to his COO like this would help: “I know we’re in trouble, Joe, but if I admit that publicly, we’re toast. So I’m just going to go out there and keep lying as I have for the last six months and keep my fingers crossed that we get a lucky break.”)
We also need to see evidence that Lehman’s senior managers weren’t just overruled by Dick Fuld. It is the CEO’s job to make hard decisions, and CEOs often make decisions that many smart, experienced managers violently disagree with. We are therefore not likely to be persuaded by, say, an email between two senior execs saying, “I told Dick we didn’t have enough capital and he just went and said we did.” For us to believe that Dick committed a crime, we need to see evidence that Dick believed Lehman didn’t have enough capital, not that his subordinates believed that.
The bar for proving criminal fraud in a case like this should be very high. Otherwise every confident public-company executive will, justifiably, believe that at any moment he or she could be slapped with an indictment and hauled off to jail. And that will neither protect investors nor help us fix our ailing economy.