Richard Posner Explains SEC Refusal to Act in Lehman Brothers Case

1:31 pm in Financial Crisis by masaccio

Neoliberals digesting fruits of someone else’s labor, photo by Artemesia

The New York Times provided a detailed discussion of the reasons for the refusal of the Securities Exchange Commission to refer any cases from the collapse of Lehman Brothers for prosecution, or even to file a civil suit. Once more, we get our slapped in the face by the reality that the rich are not subject to law. Or, as Judge Richard Posner explained it to us simpletons in a 1985 article in the Columbia Law Review:

This means that the criminal law is designed primarily for the nonaffluent; the affluent are kept in line, for the most part, by tort law. This may seem to be a left-wing kind of suggestion (“criminal law keeps the lid on the lower classes”), but it is not. It is efficient to use different sanctions depending on an offender’s wealth. P. 1204-5, fn omitted.

Posner is a member of the Mont Pelerin Society, a group devoted to spreading the cause of neoliberalism. I’m sure Judge Posner is delighted to see his theory put into practice by the SEC and the Department of Justice, under Eric Holder and Barack Obama. Posner’s idea is so preposterous that only the feral rich, their neoliberal tools, people utterly insulated from reality, and fools could possibly endorse it. And so we come to George S. Cannellos, who headed up the SEC team of investigators.

It is deeply moving to see Cannellos’ concerns. The Times says this:

The S.E.C. team also concluded that Repo 105 would not have been “material” to investors because the firm’s leverage ratio was trending downward regardless of Repo 105.

That conclusion set off a wave of dissent inside the S.E.C. Senior accountants and the head of the S.E.C. unit that oversaw corporate disclosures questioned the findings. Ms. Schapiro [then Chair of the SEC] urged Mr. Canellos to keep digging.

But Mr. Canellos, a former federal prosecutor who is now the co-head of the S.E.C.’s enforcement unit, did not budge. Despite the political pressure, he told colleagues at one of the meetings, they could not bring a case if the evidence was lacking.

“Our job is to seek justice,” he said.’’

I can picture it, bedeviled by the concerns of average Americans and his boss, who didn’t understand the rights of power and money, sneered at by cheap-suited SEC accountants, he leans across the table, tears of emotion streaming down his slightly puffy face, and confronts his demon adversaries. Now he delivers for the SEC the same outcome Eric Holder and his team of incompetents at the Department of Justice had reached on criminal prosecution. How perfect. How deliriously joyful it must be to judge powerful Wall Street Gentlemen and find them pure as the driven snow.

Well, maybe not as pure as the driven snow. The Bankruptcy Court overseeing the Lehman Brothers bankruptcy appointed Anton Valukas, the head of a giant law firm, Jenner and Block, as examiner, charged with reporting to the court and the creditors on the facts leading to the bankruptcy. You may recall that one of Lehman’s schemes was the use of an accounting technique called Repo 105. Valukas says:

Lehman employed off‐balance sheet devices, known within Lehman as “Repo105” and “Repo 108” transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008. P. 732

Richard Fuld, the CEO of Lehman Brothers, claims to have taken less than $310 million of compensation out of the company, (others say he took a hundreds of millions more) but he testified to Congress that he couldn’t remember anything about Repo 105. That was good enough for Cannellos. How could he possibly think that Fuld knew anything, just because Bart McDade testified that he told Fuld about it in June, 2008? Valukas report at 919 et. seq.

Mary Jo White, the new Chair of the SEC, announced recently that Cannellos would be promoted to Co-Head of the SEC Division of Enforcement, saying in part:

In recent years the division has achieved remarkable success prosecuting financial crisis cases, insider trading and other violations, while returning billions to harmed investors.

Judge Posner and his neoliberal buddies must be so proud to have true believers in a positions of power.