Why Lehman Brothers Wasn't Prosecuted

When SEC chief Mary Schapiro heard that her eight-member Lehman Brothers team had decided not to file charges for the bank's role in the financial crisis, she held a tense, private meeting with New York branch chief George Canellos. "I don't get it. Why is there no case?" Schapiro asked, according to New York Times sources. She ordered him to keep investigating, adding, "The world won't understand." Questions have indeed lingered about why Dick Fuld and company got off scot-free, so the Times investigated. Its findings:

• Canellos' team ruled out suing the firm itself, because it was bankrupt, and so instead focused on individual investors.
• It focused on a practice called "Repo 105," under which the firm would use its terrible securities as collateral for loans, and then list those transaction as sales on its balance sheet. A bankruptcy court examiner called this "materially misleading," and said Fuld was "at least grossly negligent."
• But the FBI decided the move was technically legal and stopped its criminal investigation, leaving things to the SEC.
• While one Lehman executive said Fuld knew about the practice, Fuld denied it. Canellos argued that Fuld was telling the truth. Other executives were ruled out for other reasons.
• Canellos' team also decided that Repo 105 was not "material" information to investors, and hence it wasn't criminal to withhold information about it. Schapiro and others disagreed, but ultimately bowed to Canellos.
• The SEC's second-highest-ranking enforcement official recommended drafting potential charges, so the agency could have a document to review. Canellos refused.
• Instead, Canellos drafted, and proposed publishing, a report on why the SEC wasn't filing charges. Schapiro shot down the idea, arguing that the draft was too sympathetic to Lehman.
• Schapiro ultimately bowed to Canellos' judgment in part because other SEC officials argued that it would be inappropriate for a political appointee like her to overrule him.

(More SEC stories.)