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Cold Case: Lessons from the Lehman Autopsy

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Cold Case: Lessons From The Lehman Autopsy.


Barrett, Paul M.


BusinessWeek; 4/5/2010, Issue 4172, p20-22, 3p, 2 Color Photographs

Document Type:


Subject Terms:

*ACCOUNTING -- Corrupt practices

Geographic Terms:




LEHMAN Brothers



FULD, Richard


The article examines the collapse of Lehman Brothers, a U.S. investment bank. The central focus of the article is on Anton Valukas, a Chicago, Illinois, trial attorney who led an investigation into Lehman Brothers. According to the author Valukas uncovered a number of underhand accounting practices that regulators tend to ignore. Among other issues the article discusses whether the actions of Richard Fuld, the former chief executive officer of Lehman Brothers, constitutes gross negligence that could support civil actions against him.

Cold Case: Lessons From The Lehman Autopsy



The SEC can learn from Anton Valukas, the Chicago attorney who led a probe into Lehman--and uncovered accounting chicanery that regulators largely ignored

In 2008, Anton R. Valukas, a trial attorney in Chicago, published a four-page stiletto thrust of an essay entitled, "Arrogance: My Favorite Sin." The piece, included in a lawyers' guide to cross-examination, recounted Valukas' delight in using understated questioning to tempt executives into making implausible statements of the sort that reliably alienate jurors. "Frequently, the smartest witnesses--the most sophisticated and the most arrogant--are most susceptible to this type of examination," he wrote.

The piece reads today like a preamble to Valukas' voluminous autopsy of Lehman Brothers, which he performed as the court-approved bankruptcy examiner in the investment bank's formal unwinding. The 2,200-page Lehman report, released on Mar. 11, constitutes the single most penetrating document we have on the recent misbehavior on Wall Street. Valukas' earlier primer suggests why he did such an exemplary job: Although he heads a prestigious corporate law firm, Jenner & Block, the former federal prosecutor just plain resents dissembling by big shots in expensive suits. Not coincidentally, Jenner, a pillar of the Chicago business elite, sues Wall Street institutions as often as it defends them.

In the interest of preventing future Lehman disasters, we might ponder how to transplant Valukas' zeal into Washington's financial beat cops. That could help preclude the need to call him back again as corporate pathologist.

He'd be a hard man to clone. During a four-decade career, Valukas, 66, has represented all manner of white-collar rogues. When called to public service, he used his knowledge of the market's shadowy corners to prosecute well-heeled miscreants. In the late 1980s, as U.S. Attorney in Chicago, he sent agents disguised as commodity traders to clean up the futures exchanges. The probe protected investors and led to a slew of indictments. Some called him the Rudy Giuliani of the Midwest.

Unlike Giuliani, Valukas avoided elective politics and returned to his law firm. He prospered at Jenner, not least in his yearlong assignment as the Lehman examiner. Backed by colleagues from Jenner, he went over millions of pages of documents, interviewed scores of witnesses, and billed the Lehman estate $38.4 million. I'd say it was money well spent. His findings will provide the script for what's likely to be a theatrical airing in April, when Representative Barney Frank (D-Mass.) convenes his House Financial Services Committee to interrogate Lehman's former CEO, Richard S. Fuld Jr., and other participants in the debacle.


What Valukas brought to the endeavor was a no-nonsense lack of deference toward Wall Street game playing, says Francine McKenna, a former managing director at PricewaterhouseCoopers. "That's a Chicago thing," adds McKenna, herself a resident of the city. She now runs an investigative Web site called Re: The Auditors. "The mindset is: I've been around the block, I know how the game is played, and I'm not impressed by fancy names," she says.

As the Lehman examiner, Valukas doggedly unmasked the dubious behavior of executives once lauded as among Wall Street's conquering heroes. Fuld insisted to Valukas that he knew nothing about the accounting trickery called Repo 105, which was used to hide the bank's financial decline. Fuld's self-portrait--a veteran CEO blithely unfamiliar with the workings of his company--was not just implausible; it could support lucrative civil claims that he "was at least grossly negligent," as Valukas wrote. The examiner noted that Fuld's denials were undercut by evidence that he was thoroughly briefed on the chicanery,

Contacted by phone, Valukas declined to comment. Fuld's attorney, Patricia Hynes, has said her client told the truth and did nothing wrong.

There will be time enough to sort out legal culpability for Lehman's demise. The Justice Dept. is investigating, and civil litigation is under way. Valukas lays out facts without playing judge or jury. "There are many reasons Lehman failed," he noted, "and the responsibility is shared."

Beyond the bank itself, Valukas pointed to evidence that Lehman's auditor, Ernst & Young, committed malpractice when it sat on a whistleblower's warnings and failed to keep the bank's board apprised of suspicious executive conduct. Ernst has denied any professional failings or liability.

The regulators also bear blame in Valukas' account. Some of the most unnerving portions of his report explain that while Lehman failed to keep investors informed, staff members from the Securities & Exchange Commission and Federal Reserve Bank of New York did know what was going on--and shrugged their shoulders.




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