By : Amir Efrati | May, 20 2009
The Justice Department has questioned several former executives at Lehman Brothers Holdings Inc. as part of its criminal investigation into whether they sold supposedly safe, liquid securities to clients while knowing that the market for the securities was drying up.
Prosecutors from the U.S. attorney's office in Brooklyn and lawyers from the Securities and Exchange Commission in recent weeks interviewed several former executives who ran Lehman's auction-rate-securities business, these people said. Auction-rate securities are short-term debt instruments in which the interest rates reset at periodic auctions.
The inquiry centers on whether Lehman employees defrauded customers as the market for these securities broke down in 2007. Authorities want to know if Lehman executives got these auction-rate securities off the firm's books and into client accounts at a time in which the securities were becoming hard to sell, according to the people with knowledge of the matter.
Authorities also want to know if executives knew the market was in trouble and sold their own personal holdings of auction-rate securities, which could constitute insider trading, according to the people.
The investigation is separate from Justice Department probes of Lehman that focus on whether executives overvalued the firm's commercial real-estate holdings or mischaracterized its financial condition prior to its September 2008 collapse, these people said. No charges have been brought in those investigations.
The auction-rate-securities investigation began before Lehman's collapse, and the government recently ramped up its activity. Authorities are examining the role of about 10 former executives and brokers, said a person familiar with the matter.
While charges have been brought previously against brokers at another firm, so far no high-level executives have been criminally charged related to the auction-rate-securities crisis.
Authorities recently questioned Gia Rys and Thomas Corcoran, who ran the auction-rate-securities business, and a broker who bought the securities for clients, Sanford Haber. Theodore Krebsbach, a lawyer for the three individuals, declined to comment but said they voluntarily met with regulators.
The government also is examining the role of two more-senior former executives: Alex Kirk, who was head of global credit products, and Eric Felder, who reported to Mr. Kirk, according to the people familiar with the matter. Lawyers for the men declined to comment. None of the former Lehman employees has been charged with wrongdoing by the government. Spokesmen for the U.S. attorney's office and the SEC declined to comment.
Amid the credit crisis in July 2007, investors stopped buying securities sold by Lehman and other Wall Street firms that were backed by collateralized debt obligations, which are pools of bonds tied to mortgages and other debt. These CDOs later lost value, as some of the debt backing them, including subprime mortgages, defaulted.
Lehman bid on these securities to prevent some auctions from failing, according to people familiar with the firm. Nonetheless, auctions increasingly failed. Around this time, Lehman brokers bought the same securities for some clients' discretionary accounts, for which the brokers could make trades often without asking for permission. When the market collapsed, investors were stuck holding the securities. Some customers have said they realized there was a problem only in early 2008, when auction failures for other securities drew publicity.
Prosecutors are looking at whether Lehman executives requested that brokers, who dealt directly with clients, purchase the hard-to-sell securities in order to get them off the firm's books, said people familiar with the matter.
Pluris Valuation Advisors LLC estimates that Lehman clients hold about $6 billion of these securities. "Lehman was one of the largest sellers of auction-rate securities that have turned out to be the most toxic," or lost the most value, said Barry Silbert, chief executive of SecondMarket Inc., which matches buyers and sellers of auction-rate securities. 