Legal News

Lehman Case: Jurors Will Start With An Assumption of Greed

By Dan Slater

We’ve seen it before: Corporate giants (Enron), high-profile hedge funds (Bear Stearns) and Wall Street banks (Lehman) collapse. Indictments follow. The central questions: Who told whom what, how important was the statement and what did the speaker know when he/she said it?

So it goes in the aftermath of Lehman’s bankruptcy. Last Friday, news broke that at least a dozen current and former Lehman execs, including Chairman and CEO Dick Fuld, have been subpoenaed as part of a federal probe into whether the bank misled investors before face-planting last month.

Today, the WSJ reports that, as part of the investigation, prosecutors have subpoenaed other Wall Street securities firms, seeking info about whether analysts were misled by Lehman about its financial health. For instance, according to a transcript of a conference call, a Deutsche Bank analyst asked if Lehman would need an additional $4 billion in capital. Lehman CFO Ian Lowitt responded: “We don’t feel that we need to raise that extra amount.” At another point in the call, Lowitt said: “Our capital position at the moment is strong.” (For a recent WSJ feature, entitled “The Two Faces of Lehman’s Fall,” click here.)

A Lehman exec has said since then that the company’s comments were accurate at the time because executives hoped to raise more money by selling assets.

To gauge the importance of these statements, and get a sense of the overall climate folks like Messrs. Fuld and Lowitt could face if they go to trial, we called up a former AUSA and current white collar litigator. He walked us through the following issues:

For securities-fraud purposes, how do statements made to individual investors differ from statements made to analysts?

When you’re making statements to an analyst, given who they are and what they’re doing, the materiality of those statements is almost a given. It’s different in the Bear Stearns fund manager case, when you’re dealing with statements that were made to individual investors, because it’s not always easy to know what’s important to investors. But when it comes to statements made to analysts, it’s hard to argue that they aren’t material.

So if materiality can be assumed, what must prosecutors deal with next?

The issue with these statements made to analysts is whether they were intentionally misleading. And that’s the hardest part of a securities fraud case anyway. Lehman executives seem to be saying that we thought we were getting more capital, so we didn’t intend to mislead anyone. So then the issue becomes whether prosecutors can find contemporaneous statements or information suggesting they knew full well that that they weren’t getting more capital.

Beyond the legal framework of these cases, what kind of climate will Lehman execs (and others) face if they go to trial?

Anytime you are a senior executive what the jury consistently says is, you’re getting paid an awful lot and we expect that you know these types of things. When you combine that with the devastation of the economy right now, and the political tenor – that this all a result of greed on Wall Street, as oppose tod market forces or simple mistakes – you have a large jury pool that’s coming in with an assumption of dishonesty that goes along with that view of greed. A well-paid executive in one of these cases starts out behind the 8 ball to begin with, but with what’s going on now, it’s a scary time to consider trying one of these cases.

Calls to Dick Fuld’s lawyer, Allen & Overy’s Patricia Hynes, and a spokesman for Ian Lowitt, who now works for Barclays, were not immediately returned. A spokesman for Lehman declined to comment.

Full post as published by Law Blog - WSJ.com on October 22, 2008 (boomark / email).