Fuld, Mozilo and Raj

Larry Ribstein —  12 March 2011

The WSJ reports that the investigation of Lehman’s collapse “has hit daunting hurdles that could result in no civil or criminal charges ever being filed against the company’s former executives.” The problem is that, despite Lehman’s examiner’s conclusion that Lehman used tricks (the famous Repo 105) to “paint a misleading picture of its financial condition,” Linklaters signed off on these transactions and Ernst & Young’s Lehman audit conformed with then-existing standards.

Prosecutors likely remember the acquittal of Bear Stearns’ hedge-fund managers despite some seemingly damaging emails.  They learned then that people don’t go to jail just for guessing wrong about the market.  This time, Lehman’s Fuld is saying he had “absolutely no recollection whatsoever of hearing anything” about Repo 105s and that Lehman sank because of “uncontrollable market forces” and the fact that the government decided not to rescue Lehman.

A couple of weeks ago Angelo Mozilo’s criminal investigation also ended without charges.  At the time I discussed a Holman Jenkins column explaining that

Mozilo basically got caught in a bubble.  * * * He didn’t foresee “unprecedented collapse in home prices” or “Countrywide’s own funding drying up overnight.” So Mozilo avoided jail for following the crowd and not foreseeing the unexpected.  That left him better off than Jeff Skilling or Ken Lay. 

But as Fuld and Mozilo go on with their lives, people are still howling for financier blood. It’s hard to believe that the trial of Raj Rajaratnam, who is facing 20 years in jail for trading in true information, doesn’t have something to do with that.

Larry Ribstein


Professor of Law, University of Illinois College of Law

One response to Fuld, Mozilo and Raj

    save_the_rustbelt 12 March 2011 at 1:02 pm

    If Fuld didn’t know about the Repo 105 transactions he was either incompetent or willfully ignorant. Real CEOs fret over any transaction that moves earnings or shifts debt ratios by tiny amounts.

    So why doesn’t the Gorilla repay all of his CEO compensation to the bankruptcy estate (said with tongue firmly in cheek)?

    The E & Y position borders on funny. Every junior auditor knows about window dressing.

    Truth is, if you are rich enough and white enough the law is a petty inconvenience. Skilling was one of the unlucky ones, he actually has to pay for his crimes.

    The SEC lawyers who pass on these cases will soon enough be making a lot more money with the Wall Street firms, maybe even the same firm representing Fuld. Legal ethics?