Dim Prospects for Financial Crisis Prosecutions

The S.E.C. chairwoman, Mary L. Schapiro, has said that the investigation of Lehman "is still under review." Chip Somodevilla/Getty ImagesThe S.E.C. chairwoman, Mary L. Schapiro, has said that the investigation of Lehman “is still under review.”

As has been noted many times, the lack of criminal prosecutions arising out of the financial crisis has been painfully obvious. And two items in the news last week underscores that the prospect for a signature case is growing even more distant.

First, Reuters reported on Thursday that Securities and Exchange Commission staff members wrote in a memo that fraud charges “will likely not be recommended” against Lehman Brothers executives.

Then, the New York attorney general, Eric T. Schneiderman, said that the federal-state mortgage fraud working group announced in President Obama’s State of the Union address in January needed more resources — an indication that the group was still trying to digest evidence from transactions made more than four years ago.

The collapse of Lehman seemed to be the most likely source of criminal prosecutions, or at least civil enforcement actions. The firm’s examiner, Anton R. Valukas, issued a report in 2010 castigating senior management for shifting up to $50 billion off the balance sheet through the so-called Repo 105 transactions.

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The S.E.C.’s chairwoman, Mary L. Schapiro, testified on April 25 before a House Financial Services subcommittee that the investigation of Lehman “is still under review.” DealBook reported that people close to the investigation cautioned that “the memo was months old, had been updated since and did not necessarily reflect how more senior agency officials viewed the case.”

But unless the earlier assessment of the evidence has changed significantly, the likelihood of an enforcement action this long after Lehman’s failure looks fairly low. A securities fraud case would be led by trial lawyers from the S.E.C.’s enforcement division, and their view of the viability of any proposed charges will have a significant impact on the final determination.

Senior officials often get the credit – and blame – for an agency’s enforcement actions, but it is the staff members who are responsible for gathering the evidence and bringing the matter to trial. If they are not committed to pursuing a case, then their superiors are unlikely to second-guess them.

At this point, it is not clear whether the S.E.C. has obtained any new information or cooperating witnesses to show that Lehman executives had any intent to defraud or at least acted recklessly – the standard required to prove civil securities fraud. If the S.E.C. is struggling to decide whether to pursue charges, the likelihood of a criminal case is even less because of the higher standard of proof prosecutors must meet.

In its defense, the S.E.C. has argued that it has been aggressive in pursuing banks and Wall Street firms over their role in possible fraud in the mortgage-backed securities market. But it does not seem that any of those cases will have a major impact on the public’s perception that individuals have been held accountable.

The S.E.C.’s most prominent cases against individuals for actions related to the mortgage market collapse are those it is pursuing against the former chief executives and senior officers at Fannie Mae and Freddie Mac, the two erstwhile mortgage giants. But the charges claim the executives misled investors in the companies about their exposure to subprime mortgages, and are largely unrelated to the role of Fannie and Freddie in the foreclosure crisis.

Mr. Schneiderman, a co-chairman of the Residential Mortgage-Backed Securities Working Group, said in an interview last week with The Wall Street Journal, “Do I want more resources, and want things to go faster? Yes, Am I asking for more? Yes. Do I believe we’ll get that? Yes.”

His statement is hardly a ringing endorsement of the working group’s effort because it is a common refrain to blame a lack of resources for the absence of any real progress on cases.

The fact that the transactions under investigation took place four to seven years ago does not bode well for pursuing cases against any individuals because evidence, like memories, tends to not get better with age.

The working group has issued a number of civil subpoenas as part of its effort, but apparently none have been issued on behalf of a grand jury, which is the primary vehicle for a criminal investigation. The absence of any involvement by a grand jury is another indication that criminal charges are unlikely.

Unlike criminal cases, which are subject to strict time constraints, civil cases tend to take years to resolve because of the extensive discovery rights provided. For example, the charges against the former Fannie and Freddie executives that were filed in late 2011 are unlikely to see the inside of a courtroom before 2014, if the cases are not settled before then.

So it is the same refrain: the likelihood of a prominent criminal case against a corporate or Wall Street executive in the near future looks to be nearly zero at this point.