He'll Go Free

Lehman Brothers CEO Dick Fuld was smug and reckless, but he wasn’t criminally negligent, a new report says. So despite the public’s blood lust, he won’t be charged for his role in the biggest bankruptcy in modern history.

Dick Fuld may be “grossly negligent” in his role in Lehman Brothers’ historic implosion, but he and other top Lehman executives probably won’t go to jail, according to a long-awaited autopsy released late Thursday.

Fuld’s negligence is the opinion of Lehman’s bankruptcy-court examiner, Anton Valukas, who issued a lengthy, far from unbiased report into the root causes of the biggest bankruptcy in modern history, in dollar terms and certainly in impact, given the financial upheaval it unleashed.

After having their criminal prosecution of the Bear Stearns hedge-fund managers shot down, prosecutors are gun-shy, I am told.

I’ll be the first to tell you that Fuld was a good CEO who over time became arrogant and delusional, and with that allowed his firm to embrace risk in astronomically absurd ways, particularly as Lehman became more successful. Increasingly, he appointed yes men and yes women to senior posts, including Erin Callan, who in my opinion was grossly unqualified to be the chief financial officer of a major Wall Street firm that was rolling the dice on esoteric bonds.

On top of that, he packed the Lehman board, management’s gatekeeper, with equally inept people—including, at one point, a former actress—who may have been kept in the dark about these activities (a point made in the report) but didn’t ask the right questions so that they could see through management’s mindlessness.

Fuld, meanwhile, lost all sense of reality. When I asked him in 2007 if Lehman had held on to its balance sheet bonds, packed with increasingly toxic debt tied to the souring real-estate markets, he said Lehman hadn’t—in fact, he said Lehman’s business model was that of a middleman, simply creating the bonds and then selling them to third parties.

I can’t tell you if he was lying to me, but I do know that one of the causes of Lehman’s demise was that it held those same assets on its balance sheet that Fuld said the firm was selling off.

Given the fallout from Lehman’s collapse—the need to spend hundreds of billions of dollars to prop up banks that began their death spiral after Lehman’s bankruptcy and the broader economic problems that ensued—the blood lust to string up the bad guys (and at least one bad girl) is palpable and understandable.

But consider this: Valukas, a former U.S. attorney, works for the Lehman estate. It’s his job to get money for the estate to make creditors whole. In doing so, it’s his job to make Fuld & Co. look as culpable as possible in the way they handled the firm’s finances as it slid into bankruptcy.

Then consider something else: For all the time spent on this report, and the amount of evidence collected, and the high-ranking executives interviewed, there’s very little here to show that for all their recklessness, Fuld, Callan, and the rest of the crew knew that what they were doing was illegal. Quite the opposite: They thought the slimy ways they manipulated the firm’s balance sheets (the report makes reference to a particularly odious thing called “Repo 105”) were a legal way to make bad stuff look temporarily better. They even asked their auditors, Ernst & Young, if it was OK and it was, at least according to the accountants.

If Fuld & Co. didn’t think what they were doing was illegal—after all, Lehman didn’t come up with Repo 105—well then where's the intent to defraud investors, a key ingredient to any criminal case? And if they didn't think such maneuvers were illegal, the rest of Wall Street probably didn’t think it was illegal, either. Were Merrill Lynch, Morgan Stanley, and even the great Goldman Sachs using similar manipulative measures? We’ll never know because they were bailed out by the feds, but it wouldn’t be a stretch to think they were.

But what about the blood lust of the public for perp walks and prosecutions? After having their criminal prosecution of the Bear Stearns hedge-fund managers shot down, prosecutors are gun-shy, I am told. They know they need more than what’s in this report to get a jury to convict the Lehman executives. That's why they continue to dig and have not brought a case now more than a year after the firm's implosion.

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Does that mean Fuld and his team are completely off the hook? Not really. As Columbia law professor John Coffee told me, they’ll probably be sued by the Lehman estate and others and be forced into settlement in amounts that far surpass their insurance policies. Ernst & Young will face similar civil cases, Coffee said, and will settle those for large amounts as well.

The Securities & Exchange Commission—which files civil securities fraud charges, meaning its threshold is lower and it can’t put people in jail—also seems to have a case, Coffee said. But like me, he is dubious about the potential for criminal charges. He points to the overturning of the conviction of Enron accountant Arthur Andersen and other cases that were associated with that scandal that never met the threshold for criminality.

Was Dick Fuld smug and reckless? Of course. Was he criminally negligent, as opposed to grossly negligent? Not based on the information at hand. In this country, people don’t go to jail for being stupid, at least not yet.

Charlie Gasparino is a senior correspondent for Fox Business Network. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His new book about the financial crisis, The Sellout, was published by HarperBusiness.