Lehman Examiner Says SEC Knew Firm Broke Risk Rules

Attorney Anton Valukas
Anton Valukas, criminal law specialist at Jenner & Block LLP, leaves federal court during a case in Chicago in this file photo. Photographer: Frank Polich/Bloomberg

Lehman Brothers Holdings Inc., which filed the biggest bankruptcy in U.S. history, violated its own risk-management rules with the knowledge of the U.S. Securities and Exchange Commission, a bankruptcy examiner said.

“We found that the SEC was aware of these excesses and simply acquiesced,” Anton R. Valukas, the Lehman examiner, said in testimony to be presented in Washington tomorrow on policy issues arising from his 2,200-page report on Lehman’s downfall.

Valukas is scheduled to testify before the House Committee on Financial Services. His statement was posted today on the committee’s Web site.

After Bear Stearns Cos. almost collapsed in March 2008, the SEC and the Federal Reserve Bank of New York placed “embedded teams” at Lehman to gather information and monitor its financial condition, Valukas said in a transcript of his prepared remarks. The heads of those institutions also spoke regularly to former Lehman Chief Executive Officer Richard S. Fuld, according to Valukas.

“So the agencies were concerned,” Valukas said in his statement. “They gathered information. They monitored. But no agency regulated.”

John Heine, an SEC spokesman, didn’t immediately respond to a call seeking comment.

Former SEC Chairman Christopher Cox “had direct calls with Mr. Fuld every few weeks” starting in March 2008, according to the transcript.

Geithner, Fuld

Timothy F. Geithner, the U.S. treasury secretary, who was president of the New York Fed through 2008, advised Fuld in regular talks that Lehman needed to raise more capital or form an “alliance” with a stronger company, and spoke often about Lehman with his boss, Ben S. Bernanke, chairman of the Federal Reserve.

“The Fed and Treasury took pains to tell us that the SEC was Lehman’s regulator, and that they therefore deferred to the SEC,” Valukas said in the transcript. “But former SEC Chairman Cox took equal pains to say, during our interview with him on January 8, 2010, that the SEC’s statutory jurisdiction was limited to Lehman’s broker-dealer subsidiary and that it was not the regulator of Lehman itself.”

“Despite Chairman Cox’s statement, we believe it is clear that the SEC was Lehman’s primary regulator,” he said in the transcript, adding that all of the major investment banks, including Goldman Sachs Group Inc. and Morgan Stanley, voluntarily submitted to SEC regulation.

Lehman’s Bankruptcy

Lehman filed for bankruptcy in September 2008 with $639 billion in assets. It has said it will spend five years liquidating to pay unsecured creditors as little as 14.7 cents on the dollar.

Cox, a partner at the law firm Bingham McCutchen LLP, and Andrew Williams, a spokesman for Geithner, didn’t immediately respond to e-mails seeking comment.

The bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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