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Bankrupt Lehman Brothers May Face Public Rebuke and Little Else

There are growing indications that federal investigators at the Securities and Exchange Commission will opt to publicly scold the failed firm Lehman Brothers instead of filing fraud charges against former executives. The 2008 bankruptcy of Lehman Brothers, readers may remember, was the largest in U.S. history and sent shock waves through the global financial system spiraling into crisis.

In March, the Wall Street Journal had reported that charges were becoming less likely. Bloomberg came out with a more detailed story Friday that noted the possibility of a public rebuke instead. Securities law professor James Cox of Duke University told Bloomberg that the public rebuke “is about the least harmful sanction anybody could get.” Here's more from Bloomberg:

Instead, the enforcement staff may recommend that the agency take the rare step of publishing a so-called report of investigation, also known as a 21(a) report. The commission would have to vote on whether to issue a report and it’s still possible that the SEC may decide to bring legal claims in court, the people said. The 21(a) reports, which lay out allegations of misconduct without imposing penalties, have only been issued six times in the past decade, according to the SEC’s website.

The apparent lack of charges comes despite an extensive post-mortem on Lehman Brothers last year that turned up a number of balance sheet manipulations that the firm used to hide risk. According to the report, Lehman used an accounting gimmick known as “Repo 105” to create “a materially misleading picture of the firm’s financial condition” even while company’s executives continually assured investors that its balance sheet was in good shape. (Here's more on how Repo 105 worked.)

The company’s former CEO, Dick Fuld, has denied knowing about the transactions and has in the past criticized the government for allowing Lehman to fail while saving other big banks. 

A Lehman Brothers spokeswoman declined to comment to Bloomberg about the possibility of a public rebuke. We contacted what's left of Lehman to request comment but did not receive a response.

If indeed the SEC decides to publish the findings of its investigation without taking further action against executives, it would hardly be the first time that the agency has declined to bring charges. As we noted in our bank investigations cheat sheet, a number of probes by banking regulators have petered out over the last few years and no criminal charges have been brought against former execs at the nation’s biggest banks.

Meanwhile, Goldman Sachs—which has settled one civil suit and could face more as it continues to receive subpoenas—may be going on the offensive in an attempt to head off potential charges. The Journal reports today that the investment bank plans to publicly counter a stinging Senate subcommittee report that was referred to the Justice Department. The bank has said the report's conclusions were wrong.

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