We’ve seen it before: Corporate giants (Enron), high-profile hedge funds (Bear Stearns) and Wall Street banks (Lehman) break down. Indictments follow. The central questions: Who told whom what, how fundamental was the statement and what did the speaker know when he/she said it?

So it goes in the aftermath of Lehman’s bankruptcy. final Friday, news broke that at least a dozen current and former Lehman execs, including Chairman and CEO Dick Fuld, have been subpoenaed as part of a federal probe into whether the bank misled investors before face-planting final month.

Today, the WSJ reports that, as part of the exploration, prosecutors have subpoenaed other Wall Street securities firms, seeking info about whether analysts were misled by Lehman about its financial health. For instance, according to a transcript of a conference shout, a Deutsche Bank analyst asked whether Lehman would need an additional $4 billion in capital. Lehman CFO Ian Lowitt responded: “We don’t feel that we need to raise that additional amount.” At another point in the sign, Lowitt said: “Our capital position at the moment is strong.” (For a recent WSJ feature, entitled “The Two Faces of Lehman’s Fall,” visit here.)

A Lehman exec has said since soon after that the company’s comments were accurate at the date considering executives hoped to raise more money by selling assets.

To gauge the importance of these statements, and get a sense of the overall climate folks like Messrs. Fuld and Lowitt could face whether they go to trial, we called up a former AUSA and current white collar litigator. He walked us through the following issues:

For securities-fraud reasons, how do statements made to individual investors differ from statements made to analysts?

When you’re making statements to an analyst, given who they are and what they’re doing, the materiality of those statements is nearly a given. It’s different in the Bear Stearns fund manager case, when you’re dealing with statements that were made to individual investors, considering it’s
not always easy to know what’s vital to investors. But when it comes to statements made to analysts, it’s tough to argue that they aren’t fabric.

So whether materiality can be assumed, what must prosecutors deal with next?

The issue with these statements made to analysts is whether they were intentionally misleading. And that’s the hardest part of a securities swindle case besides. Lehman executives seem to be saying that we thought we were getting more capital, so we didn’t mean to mislead anyone. So thereupon the issue becomes whether prosecutors can find contemporaneous statements or info suggesting they knew full well that that they weren’t getting more capital.

Beyond the legal framework of these cases, what kind of climate will Lehman execs (and others) face whether they go to trial?

Anytime you are a senior executive what the jury consistently says is, you’re getting paid an terrible lot and we expect that you know these types of things. When you combine that with the devastation of the economy right now, and the political tenor – that that all a aftereffect of greed on Wall Street, as oppose tod market forces or simple mistakes – you have a large jury pool that’s coming in with an assumption of dishonesty that goes along with that view of greed. A well-paid executive in one of these cases starts out behind the 8 ball to start with, but with what’s going on now, it’s a scary moment to consider trying one of these cases.

Calls to Dick Fuld’s lawyer, Allen & Overy’s Patricia Hynes, and a spokesman for Ian Lowitt, who now works for Barclays, were not immediately returned. A spokesman for Lehman declined to comment.

Original post by Dan Slater

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