As we mentioned earlier, the Wall St. Journal has reported that out-going New York Attorney General Andrew Cuomo will be filing civil fraud charges against Ernst & Young related to its actions (mostly lack thereof) that led to the Lehman Brothers bankruptcy. Charges are expected this week but everyone is talking about it now obviously (and we were hoping for a quiet week).
Anyhoo, we’ve rounded up some of the early
sound blog bites out there and we’ll keep you updated throughout the day. Of course, if you’re with E&Y and have any insight or hear some calming, soothing words from TPTB, email us t��������������������ore–>
In her column at Forbes, Francine McKenna is happy that Andrew Cuomo is actually doing something, which is more than can be said for the Feds:
Whether Cuomo is doing this on his own, in defiance of the Feds, or has their implicit blessing in light of the Federal Government’s seeming unwillingness to act, New York’s Attorney General is showing the world he’s the only one in the US with the nerve to shake this tree.
Fox News’s Greta Van Susteren is not so impressed, saying criminal charges are really what’s needed:
Attorney General Andrew Cuomo needs to get tough instead of this “window dressing” CIVIL business. He is soon to be the Governor of NYC and this is his last act as the State’s Attorney General. I hope this is not to appease Wall Street. Let a jury decide whether is is criminal behavior or not and whether anyone has committed a crime. As it stands now, Cuomo is blocking that determination with only civil charges.
Felix Salmon postulates that Cuomo is using the possibility of criminal charges to scare E&Y into a settlement:
On the other hand, a civil fraud suit is not a criminal prosecution. Even if E&Y fights the charges and loses, it probably won’t find itself on the receiving end of the kind of criminal charges which brought down Andersen. Still, I’m sure that Cuomo’s office is doing nothing to downplay the contingent existential threat here, in its negotiations with E&Y.
Yves Smith at Naked Capitalism is practically giddy and hopes that this will turn up the heat on Dick Fuld:
One can only hope turning up the heat on Ernst & Young will lead to the prosecution of Richard Fuld. The buck is supposed to stop with the CEO, particularly when they are paid as many bucks as Fuld received. Given the scale of looting that took place in the runup to and after the crisis, there is no hope of getting the banking industry back in its proper role of supporting the real economy until we see some senior bank executives in orange jumpsuits.
CNBC’s John Carney thinks that execs at both Lehman and E&Y should take the civil charges as good sign:
Why should executives at Lehman and Ernst & Young be relieved? Because the filing of civil charges rather than criminal charges may signal that prosecutors do not believe they can prove a criminal case. The key difference between criminal and civil charges in these contexts is the quality of evidence and it looks as if New York Attorney General Andrew Cuomo’s office has decided it doesn’t have the evidence to prove a criminal case beyond a reasonable doubt.
Fortune’s Colin Barr is appalled that E&Y’s Global CEO Jim Turley believes that there wasn’t any chicanery going on:
Take this exchange between E&Y chief Jim Turley and Fortune’s Geoff Colvin, from a September interview.
Colvin: Would it be fair to say that the crisis was caused in part by some financial firms doing misleading things that were within the rules?
Turley: I don’t know that it would be fair to say they were doing misleading things.
It’s remarkable Turley would still say that two months after the financial firm of the best and the brightest, Goldman Sachs (GS), agreed to pay $550 million to settle Securities and Exchange Commission charges that it misled investors in a bubble-era debt deal. The auditors weren’t involved in that one, but the Wall Street mindset was pretty obvious to everyone not running an audit firm.
Over at DealBook, Peter Henning has an interesting theory that the NYAG could be going after the accountants while the SEC focuses on individuals:
If the S.E.C. agreed to share the Lehman case with the New York attorney general, then it may be that the state took the accountants as the focus of its investigation while the federal government concentrates on individuals. Such a division of labor would allow each to husband resources by avoiding any duplication of effort in the investigation – and may be the reason the state is planning to file charges before the S.E.C. decides to act.
Emily Chasan at Reuters managed to get a statement out of someone (Charlie Perkins’s phone has likely exploded by now) although the firm is sticking to the talking points:
A spokeswoman for Ernst & Young said the company did not comment on speculation and repeated a previous statement made by the firm about its dealings with Lehman Brothers. “Throughout our period as the auditor of Lehman, we firmly believe our work met all applicable professional standards, applying the rules that existed at the time,” the statement said.
Matt Taibbi (whole post is worth a read) is calling for the paramedics:
My guess is that this suit is the beginning of the end for Ernst and Young and, who knows, may be the beginning of a series of investigations that ultimately take down the auditors and ratings agencies that made the financial crisis possible. Without accountants and raters signing off on all the bogus derivative math and bad bookkeeping, a lot of this mess would never have happened.
We’ll be updating this post with more reactions and as things develop.
We don’t recognize anyone but you’re invited to point any notables out.
And you just know that somewhere, Dick Fuld is slobbing around in a old CU sweatshirt, muttering about backroom number-crunching dweebs that are still in business.
AIG to Convert Preferred Shares Into Common to Repay U.S. [Bloomberg]
“American International Group Inc. agreed with U.S. regulators to repay its bailout by converting the government’s holdings into common shares for sale, a step toward independence for the insurer whose near collapse two years ago threatened the global economy.
The U.S. Treasury Department will convert its preferred stake of about $49.1 billion for 1.66 billion shares of common stock and then sell the holdings in the open market, AIG said today in a statement. Common shareholders, who hold about 20 percent of the company, will have their stake dilut ent, the insurer said. Those investors will receive as many as 75 million warrants with a strike price of $45.”
Spain loses AAA status, stands firm on austerity [Reuters]
“Spain lost its final top-line debt rating on Thursday as the government sought backing from lawmakers for a budget it hopes will be austere enough to convince markets it can slash the deficit at a time of economic weakness.
Moody’s become the third and last rating agency to cut Spain out of the highest AAA category which has helped it finance its debt relatively cheaply. The one-notch cut had been expected and the agency said it hoped not to have to cut again soon, bolstering Spanish debt markets.
But the agency also said a poor growth outlook meant Madrid would have to take further steps to meet its deficit targets in years to come. The Bank of Spain said a sluggish recovery would slow further in the third quarter.”
IASB head knows all about cross-channel frictions [FT]
“In a decade spent overseeing international accounting standards, Sir David Tweedie has become an amateur student of French psychology.
The Scot has locked horns with France several times as head of the International Accounting Standards Board, the body that sets the International Financial Reporting Standards rules followed in the European Union and other countries.
His fascination for his adversary is such that he recently thrust into my hands an academic paper entitled “France and the ‘Anglo-Saxon’ Model: Contemporary and Historical Perspectives”. The article explores the hostility often felt in France towards the British and American way of doing business.”
McDonald’s May Drop Health Plan [WSJ]
“While many restaurants don’t offer health coverage, McDonald’s provides mini-med plans for workers at 10,500 U.S. locations, most of them franchised. A single worker can pay $14 a week for a plan that caps annual benefits at $2,000, or about $32 a week to get coverage up to $10,000 a year.
Last week, a senior McDonald’s official informed the Department of Health and Human Services that the restaurant chain’s insurer won’t meet a 2011 requirement to spend at least 80% to 85% of its premium revenue on medical care.”
Wal-Mart picks successor to longtime CFO [Reuters]
“Wal-Mart Stores Inc (WMT.N) named Charles Holley to succeed Chief Financial Officer Tom Schoewe, who will retire on November 30.
The world’s biggest retailer said on Wednesday that Schoewe, 57, will stay at Wal-Mart until January 31 to help with the transition.
Holley, 54, joined Wal-Mart in 1994 and is treasurer and executive vice president of finance.
Those credentials should make him a capable CFO, said Wall Street Strategies analyst Brian Sozzi, though Wall Street could view the transition negatively since it adds uncertainty.”
All We Are Saying Is Give Dick Fuld a Chance [Jonathan Weil/Bloomberg]
Names being floated to replace Larry Summers as the National Economic Council include Citigroup Chairman Dick Parsons and Xerox CEO Anne Mulcahy. Jonathan Weil sees where Obama is going with this:
“There’s much we can learn about the kind of person the president is looking for by studying these two contenders’ credentials. In addition to CEO chops, it seems Obama is seeking someone who also has served on the board of directors of at least one company that either had a massive accounting scandal, blew up so spectacularly that it threatened to take down the global financial system, or both.”
…and doesn’t think he’s aiming high enough. He has some of his own suggestions.
Sharpton faced with fresh tax woe [Tax Watchdog]
The Rev. owes around $538k to the IRS for 2009. His lawyer is a tad confused by the whole thing and says everything will paid up by Oct. 15th.
Lehman, Nortel, Bank of America, Google in Court News [Bloomberg BusinessWeek]
Dick Fuld and the rest of the ex-Lehman Brothers management team as well as Ernst & Young asked a judge to throw out the lawsuit against them brought by the Alameda County Employees’ Retirement Association in Oakland, California, and the Government of Guam Retirement Fund.
This lawsuit focuses on the failed disclosure by Fuld et al. of the use of Repo 105 and E&Y’s confirmation of its usage as being in accordance with U.S. GAAP.
George Clinton in funk: Accountants sue Parliament-Funkadelic star over fees [NYDN]
GC engaged Wlodinguer Erk & Chanzis to audit his royalties from Universal Records and EMI in 2003. The firm claims that they have only been paid $25,000 while the agreement they had stated that WEC would receive 20% of the $1.2 million settlement Clinton received.
KPMG Study Shows Tapering Off in Goodwill Impairment [Compliance Week]
How bad of a year was 2008? KPMG’s recent study of goodwill impairment charges of 1,700 U.S. public companies found that ’08 was a bloodbath “KPMG’s study shows goodwill impairment charges across the 1,700 companies fell from $340 billion in 2008 to $92 billion in 2009. Only 12 percent of companies in the study took a charge for goodwill impairment in 2009 compared with 17 percent in the prior year.”
And of that bleeding, banks were considerably less involved, “The study showed the technology hardware sector accounted for 23 percent of total goodwill impairment charges in 2009, followed by telecommunication services. Banks had the highest level of goodwill impairment charges in 2008, but represented only 4 percent of the total goodwill charges in 2009.”
Inquiries mount after PwC ‘failed to notice’ mistakes [Times Online]
JP Morgan settled with the UK’s Financial Services Authority (“FSA”) last week over its mishandling of client funds, fining the bank £33.3 million. Now the Financial Reporting Council and the Institute of Chartered Accountants in England and Wales, who both oversee accountants in the UK, are now expected to launch inquiries into PwC’s role in JPM misallocation of client funds of £1.3 billion to £15.7 billion between 2002 and July 2009:
In addition to serving as principal auditor, PwC was retained by JP Morgan to produce an annual client asset returns report — a yearly certification to prove that customers’ funds were being effectively ring-fenced and therefore protected in the event of the bank’s collapse. But PwC signed off the client report even though JP Morgan was in breach of the rules.
MOVES-Barclays Wealth, Deloitte, BlueCrest Capital, RFIB [Reuters]
Reuters reports that Deloitte’s tax practice promoted eight new partners: Pippa Booth, Andy Brook, Stephen Brown, Christie Buck, Sue Holmes, Anbreen Khan, David McNeil and Marcus Rea and three associate partners: Andrew Cox, Ashley Hollinshead and Claire Wayman.
Dick Fuld has a big date with the House Financial Services Committee tomorrow and he’s going to say that he knew absolutely nada about Repo 105 until that nasty little report came out last month.
Fuld will also state that Repo 105 complied with GAAP and that Ernst & Young “reviewed that policy and supported the firm’s approa f the relevant rule, FAS 140.” Further, E&Y was “auditing our financial statements and reviewing our quarterly and annual SEC filings. Each year, E&Y issued formal opinions that Lehman’s audited financial statements were fairly presented in accordance with GAAP, and they were.”
Presumably E&Y will be okay with this since they’re standing by their audits of LEH so we’re sure no one at 5 Times Square will be interested in tomorrow’s testimony.
Full testimony, via Deal Journal:
Mr. Chairman, Ranking Member Bachus, and Members of the House Committee on Financial Services, you have invited me here today to address a number of public policy issues raised by the Lehman Brothers bankruptcy report filed by the Examiner.
Since September of 2008, I have given much thought to the financial crisis and the perfect storm of events that forced Lehman into bankruptcy. Everyone’s focus is now on how to prevent another crisis. The key is how regulation and governance should be deployed going forward to better protect the financial markets and the entire system.
The idea of a “super regulator” that monitors the financial markets for systemic risk, I believe, is a good one. To be successful in today’s challenging environment, this new regulator should have actual experience and a true understanding of the business of financial institutions, the capital markets and risk management and must be given the resources sufficient to accomplish its important mission.
My view is that the new regulator also should have access, on a real-time basis, to all information and data regarding transactions, assets and liabilities, as well as current and future commitments. In addition, we should put in place established and effective methods of communication between the regulator and the firms being regulated, all of whom should be guided by clear standards for capital requirements, liquidity and other risk management metrics. The job of the new regulator can only be done, in my opinion, with the creation and utilization of a master mark-to-market capability that determines valuations and capital haircuts on all assets, commitments, loans and structures. In short, to have a fair and orderly market, I believe we need a single set of transparent rules for all of the participants.
You have asked specifically about the role of the SEC and the Federal Reserve Bank of New York. Beginning in March of 2008, the SEC and the Fed conducted regular, at times daily, oversight of Lehman. SEC and Fed officials were physically present in our offices monitoring our daily activities. The SEC and the Fed saw what we saw, in real time, as they reviewed our liquidity, funding, capital, risk management and mark-to-market processes. The SEC and the Fed were privy to everything as it was happening. I am not aware that any data was ever withheld from them, or that either of them ever asked for any information that
was not promptly provided. After an extended investigation into Lehman’s bankruptcy, the Examiner recently published a lengthy report stating his views.
Despite popular and press misconceptions about Lehman’s valuations of mortgage and real estate assets, liquidity, and risk management, the Examiner found no breach of duty by anyone at Lehman with respect to any of these.
Speaking of asset valuations, the world still is being told that Lehman had a huge capital hole. It did not. The Examiner concluded that Lehman’s valuations were reasonable, with a net immaterial variation of between $500 million and $2.0 billion. Using the Examiner’s analysis, as of August 31, 2008 Lehman therefore had a remaining equity base of at least $26 billion. That conclusion is totally inconsistent with the capital hole arguments that were used by many to undermine Lehman’s bid for support on that fateful weekend of September 12, 2008.
The Examiner did take issue, though, with Lehman’s “Repo 105” sale transactions. As to that, I believe that the Examiner’s report distorted the relevant facts, and the press, in turn, distorted the Examiner’s report. The result is that Lehman and its people have been unfairly vilified.
Let me start by saying that I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was CEO of Lehman. Nor do I have any recollection of seeing documents that related to Repo 105 transactions. The first time I recall ever hearing the term “Repo 105” was a year after the bankruptcy filing, in connection with questions raised by the Examiner.
My knowledge, therefore, about Lehman’s Repo 105 transactions, and what I will say about them today, is based upon my understanding of what I have recently learned.
As CEO, I oversaw a global organization of more than 28,000 people with hundreds of business lines and products and with operations in more than forty countries spread over five continents. My responsibility as the CEO was to create an infrastructure of people, systems and processes, all designed to ensure that the firm’s business was properly conducted in compliance with the applicable standards, rules and regulations.
There has been a lot of misinformation about Repo 105. Among the worst were the completely erroneous reports on the front pages of major newspapers claiming that Lehman used Repo 105 transactions to remove toxic assets from its balance sheet. That simply was not true. According to the Examiner, virtually all of the Repo 105 transactions involved highly liquid investment grade securities, most of them government securities. Some of the newspapers that got it wrong were fair-minded enough to print a correction.
Another piece of misinformation was that Repo 105 transactions were used to hide Lehman’s assets. That also was not true. Repo 105 transactions were sales, as mandated by the accounting rule, FAS 140.
Another misperception was that the Repo 105 transactions contributed to Lehman’s bankruptcy. That was not true either. Lehman was forced into bankruptcy amid one of the most turbulent periods in our economic history, which culminated in a catastrophic crisis of confidence and a run on the bank. That crisis almost brought down a large number of other financial institutions, but those institutions were saved because of government support in the form of additional capital and fundamental changes to the rules and regulations governing banks and investment banks.
The Examiner himself acknowledged that the Repo 105 transactions were not inherently improper and that Lehman vetted those transactions with its outside auditor. He also does not dispute that Lehman appropriately accounted for those transactions as required by Generally Accepted Accounting Principles.
I have recently learned that, in 2000, the Financial Accounting Standards Board published detailed accounting rules for transactions of this very type, described them and dictated how they should be accounted for. In 2001, Lehman adopted a written accounting policy for Repo 105 transactions that incorporated those accounting rules. E&Y, the firm’s independent outside auditor, reviewed that policy and supported the firm’s approach and application of the relevant rule, FAS 140.
As I now understand it, because Lehman’s Repo 105 transactions met the FAS 140 requirements, that accounting rule mandated that those transactions be accounted for as a sale. That was exactly what I believe Lehman did. Lehman should not be criticized for complying with the applicable accounting standards.
In other words, those transactions were modeled on FAS 140. The accounting authorities wrote the rule that expressly provided for those transactions and how they should be accounted for. To the best of my knowledge, Lehman followed those rules and requirements.
My job as the CEO was also to put in place a robust process to ensure that Lehman complied with all of its obligations to make accurate public disclosures. I had hundreds of people in the internal audit, finance, risk management and legal functions to ensure that we did, in fact, comply with all of our obligations.
Part of that process was E&Y’s role in auditing our financial statements and reviewing our quarterly and annual SEC filings. Each year, E&Y issued formal opinions that Lehman’s audited financial statements were fairly presented in accordance with GAAP, and they were.
We also had in place a rigorous certification process that was carried out in advance of every annual and quarterly SEC filing. That bottom-up process involved hundreds of people who had first-hand knowledge of the firm’s day-to-day business and the responsibility to review for accuracy and compliance the firm’s SEC disclosures before they were filed.
Before we made any annual or quarterly filing, the key people who were involved in this process signed certifications confirming that, to their knowledge, the filing did not contain any untrue statement of a material fact or any material omission and that it fairly presented Lehman’s financial position.
Our certification process culminated, every quarter, with a mandatory, allhands, in-person meeting, which was chaired by Lehman’s Chief Legal Officer. In addition to me, that meeting was attended by the firm’s President, Chief Financial Officer, Financial Controller, Executive Committee members, business heads, the principal internal audit, finance and risk managers, legal counsel and our outside auditors.
After we had reviewed the draft annual or quarterly filing in detail, the Chief Legal Officer and I would each ask everyone present to speak up if there was anything in the document that caused them concern, or if anything had been omitted that they thought should be included. Attendees were also told that they should speak separately with the Chief Legal Officer if they had an issue that they did not want to raise at the meeting. To my knowledge, no one ever, at any of those meetings, raised any issue about Repo 105 transactions.
I relied on this certification process because it showed that those with granular knowledge believed the SEC filings were complete and accurate. I never signed an SEC filing unless it was first approved by the Chief Legal Officer. Mr. Chairman, I thank you for allowing me to speak on these issues and I will be pleased to answer any questions this Committee may have.
• JPMorgan, Citigroup Helped Cause Lehman Collapse, Report Says [Bloomberg]
There’s so much blame to go around: Dick Fuld! Every Lehman CFO that ever worked there! JP Morgan, Citi, Ernst & Young (who we’ll get to shortly), you’re all at fault too! But mostly Dick Fuld. He was putting lots of pressure on Lehman’s balance sheet magicians to reduce the bank’s debt. The report states that Fuld was “at least grossly negligent” and if it gets worse than that, you’ll certainly hear about it.
According to the Bankruptcy Examiner’s report, there was plenty of parties that didn’t help matters. JP Morgan and Citi were demanding more collateral from Lehman as the firm tried to stave off death while E&Y sat back as LEH got all hocus-pocus with their accounting. So pick a company or person you don’t like and point the finger. It sounds like an argument can be made.
All this amounts to largest bankruptcy in history and boy will it sell a helluva lot of books, movie tickets, and HBO subscriptions. Silver lining!
• Trader faces up to 6 1/2 years in prison [Bloomberg via Boston Globe]
Former Boston Provident CFO Ezra Levy pleaded guilty to securities and wire fraud after being accused of stealing $3 million from New York-based Boston Provident Partners, LP. Levy told the judge that he used the money to pay ‘personal expenses’ although no word on what the loot was. Presumably not a fleet of limos.
• We Bought A Toxic Asset; You Can Watch It Die [NPR]
Ever dreamed of owning just a small piece of a toxic asset just watch the slow, agonizing death? Of course! Some reporters at NPR chipped in to invest $1,000 in a bond with over 2,000 bad, really bad mortgages all for the sake of journalistic interest. If the team somehow manages to make money it’s going to charity.