tv 60 Minutes on CNBC CNBC January 9, 2013 12:00am-1:00am EST
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tomorrow. >> do you believe that there are people at countrywide who belong behind bars? >> yes. >> do you want to give me their names? >> no. >> would you give their names to a grand jury if you were asked? >> yes. >> we spent nine months investigating our story and asked the justice department about the state of their own investigations. the perception-- i mean, it doesn't seem like you're trying. >> well-- >> it doesn't seem like you're making an effort, that the justice department does not have the will to take on these big wall street banks. [ticking] >> anton valukas was the man in charge of investigating the collapse of lehman brothers, the fourth-largest investment bank in the world. >> isn't the government supposed to protect the investors? >> yes. >> aren't they charged with informing investors? >> yes. >> why didn't they do it? >> welcome to 60 minutes on cnbc. i'm bob simon. even though fraud played a significant role in the 2008 meltdown of the american
economy, as of late 2012, there have been several civil suits filed against major wall street financial firms, but not a single criminal prosecution. in this edition, we look back at the 2008 financial crisis and the failure of government regulators to prosecute those who might be criminally responsible. later, lehman brothers bankruptcy investigator anton valukas shares his findings on the collapse of the giant investment bank where no senior official has ever faced charges in the biggest bankruptcy in u.s. history. but first we begin with a nine-month 60 minutes investigation looking for wall street cases that might have prosecutorial merit. in december 2011, steve kroft reported on two such cases. we begin with a woman named eileen foster, a former senior executive at countrywide financial, one of the epicenters of the crisis.
>> do you believe that there are people at countrywide who belong behind bars? >> yes. >> do you want to give me their names? >> no. >> would you give their names to a grand jury if you were asked? >> yes. >> but eileen foster has never been asked, and never spoken to the justice department, even though she was countrywide's executive vice president in charge of fraud investigations. at the height of the housing bubble, countrywide financial was the largest mortgage lender in the country, and the loans it made were among the worst, a third ending up in foreclosure or default, many because of mortgage fraud. it was foster's job to monitor and investigate allegations of fraud against countrywide employees and make sure they were reported to the board of directors and the treasury department. >> how much fraud was there at countrywide? >> from what i saw, the types of things i saw, it was-- it appeared systemic. it wasn't just one individual or two or three individuals.
it was branches of individuals. it was regions of individuals. >> what you seem to be saying was, it was just a way of doing business. >> yes. >> in 2007, foster sent a team to the boston area to search several branch offices of countrywide's subprime division, the division that lent to borrowers with poor credit. the investigators rummaged through the office's recycling bins and found evidence that countrywide loan officers were forging and manipulating borrowers' income and asset statements to help them get loans they weren't qualified for and couldn't afford. >> all of the--the recycle bins, whenever we looked through those, they were full of, you know, signatures that had been cut off of one document and put onto another and then photocopied, you know, or faxed and then the-- you know, the creation thrown-- thrown in the recycle bin. >> and the incentive for the people at countrywide to do that was what? >> the loan officers received
bonuses, commissions. they were compensated regardless of the quality of the loan. there's no incentive for quality. the incentive was to fund the loan. and that's--that's gonna drive that type of behavior. >> they were committing a crime? >> yes. >> after foster's investigation, countrywide closed six of its eight branches in the boston region, and 44 out of 60 employees were fired or quit. >> do you think that this was just the boston office? >> no. no, i know it wasn't just the boston office. what was going on in boston was also going on in chicago and miami and detroit and las vegas and, you know, phoenix, and in all of the big markets all over florida. >> after the boston investigation, foster says countrywide's subprime division began systematically concealing evidence of fraud from her in violation of company policy and countrywide's internal financial controls system.
someone high up in the top levels of management--she won't say who--told employees to circumvent her office and instead report suspicious activity to the personnel department, which foster says routinely punished other whistleblowers and protected countrywide's highest earning loan officers. >> i came to find out that there were--that there was many, many, many reports of fraud as i had suspected. and those were never--they were never reported through my group, never reported to the board, never reported to the government while i was there. >> and you believe this was intentional? >> yes. yes, absolutely. >> foster, with the support of her boss, took the information up the corporate chain of command and to the audit department, which confirmed many of her suspicions, but no action was taken. in late 2008, with countrywide sinking under the weight of its bad loans, it merged with bank of america. foster was promoted and not long afterwards was asked to speak
with government regulators to discuss countrywide's fraud reports. but she was fired before the meeting could take place. what would you have told them? >> i would have told them exactly-- exactly what i've told you. >> did you have any discussions with anybody at countrywide or bank of america about what you should say to the federal regulators when they came? >> i got a call from an individual who, you know, suggested how-- how i should handle the questions that would be coming from the regulators, made some suggestions that downplayed the severity of the situation. >> they wanted you to spin it, and you said you wouldn't? >> mm-hmm. >> and the next day you were terminated? >> mm-hmm. >> i mean, it seems like somebody at countrywide or bank of america did not want you to talk to federal regulators. >> no, that was part of it. no, they absolutely did not. >> do you feel like you were a victim of criminal activity? >> it's a crime to retaliate
against someone for making reports of mail fraud, bank fraud, wire fraud, mortgage fraud, things that would harm stockholders and investors. and that's what i did, and that's why i was terminated. >> were you offered a settlement? >> they asked me to sign a 14-page document that basically... would buy my silence in exchange for a large amount of money. >> but you didn't sign it? >> no. >> why not? >> how many people can they-- can they buy off? they just pay for it. they commit the crime, and they buy their way out of it and just do it over and over and over again. i wanted them to have some sleepless nights thinking about what they would say to a federal investigator and worry about being exposed and being held accountable for committing a crime. >> eileen foster spent three years trying to clear her name. in fall of 2011, she finally won
a federal whistleblower complaint against bank of america for wrongful termination and was awarded nearly $1 million in back pay and benefits. bank of america appealed the decision, and as of october 2012, the case is still pending. when we come back, we examine the justice department's reluctance to use one of its most powerful legal weapons: the sarbanes-oxley act of 2002. [ticking] [ male announcer ] staples is the number-one
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employ one of its most powerful legal weapons against anyone in the company. it's called the sarbanes-oxley act of 2002. [applause] >> it was overwhelmingly passed by congress and signed by president bush following the last big round of corporate scandals involving enron, tyco, and worldcom. it was supposed to restore confidence in american corporations and financial markets. the sarbanes-oxley act imposed strict rules for corporate governance, requiring chief executive officers and chief financial officers to certify under oath that their financial statements are accurate and that they have established an effective set of internal controls to ensure that all relevant information reaches investors. knowingly signing a false statement is a criminal offense punishable with up to five years in prison. frank partnoy is a highly regarded securities lawyer, a professor at the university of san diego law school, and an expert on sarbanes-oxley.
>> the idea was to have a criminal statute in place that would make ceos and cfos think twice, think three times, before they signed their names attesting to the accuracy of financial statements or the viability of internal controls. >> and this law has not been used at all in the financial crisis? >> it hasn't been used to go after wall street. it hasn't been used for these kinds of cases at all. >> why not? >> i don't know. i don't have a good answer to that question. i hope that it will be used. i think there clearly are instances where ceos and cfos signed financial statements that said there were adequate controls, and there weren't adequate controls. but i can't explain why it hasn't been used yet. >> we told partnoy about eileen foster's allegations of widespread mortgage fraud at countrywide and efforts to prevent the information from reaching her, the federal government, and the board of directors--in violation of the company's internal controls. i mean, that's a deliberate circumvention, right?
>> it certainly sounds like it. and it certainly sounds like a good place to start a criminal investigation. >> in fact, according to a civil suit filed by the securities and exchange commission, countrywide's chief executive officer, angelo mozilo, knew as early as 2006 that a significant percentage of its subprime borrowers were engaged in mortgage fraud and that it hid this and other negative information about the quality of its loans from investors. when the case was settled out of court, the s.e.c.'s director of enforcement, robert khuzami, called mozilo "a corporate executive who deliberately disregarded his duty to investors by concealing what he saw from inside the executive suite-- a looming disaster in which countrywide was buckling under the weight of increasing risky mortgage underwriting, mounting defaults and delinquencies, and a deteriorating business model." mozilo, who admitted no wrongdoing, accepted a lifetime ban from ever serving as an officer or director of a publicly traded company, and
agreed to pay a record $22 million fine, less than 5% of the compensation he received between 2000 and 2008. what did you think of the settlement with countrywide? >> i'd think a lot of it if i were angelo mozilo. i'd think i did pretty well for myself. no jail, a relatively small fine compared to the hundreds of millions of dollars i was able to take out of this company. >> slap on the wrist. >> clearly a slap on the wrist. and part of the problem is the dual nature of how we prosecute these kinds of violations. we have the department of justice, which can put people in jail, and the securities and exchange commission, which can't. and its sort of like we have this two-headed monster. one head has some teeth. the other head has no teeth. and it was the head with no teeth that went after angelo mozilo. so the greatest danger he was in from the beginning was maybe he'd be gummed to death, but not even that happened. >> three months after the s.e.c. settled the civil suit, federal prosecutors in los angeles
dropped their criminal investigation of countrywide and its ceo, angelo mozilo. we wanted to know why the justice department has been unable to bring a single criminal case against countrywide or any of the major wall street banks, and lanny breuer, the head of the criminal division at the justice department, agreed to talk to us. in september of 2010, you told the congressional hearing that you seek to prosecute people who make materially false statements-- people who told the investors one thing and did something different. >> that's absolutely right, and we're doing exactly that. >> we spoke to a woman at countrywide, who was a senior vice president for investigating fraud. >> mm-hmm. >> and she said that the fraud inside countrywide was systemic, that it was basically a way of doing business. >> well, it's hard for me to talk about a particular case. of course, in the countrywide case, steve, as you know, a terrific office, u.s. attorney's office in los angeles investigated that, interviewed
many, many people, hundreds of people perhaps, and reviewed millions of documents. >> they never talked to the senior vice president inside countrywide who is charged with investigating fraud. >> well, i--we-- look, i-- i can't speak about that because i actually don't know about that particular case, but if the senior vice president of any company believes they know about fraud, i want them to contact us. >> breuer says the department has brought major financial prosecutions involving hedge funds, insider trading, ponzi schemes, and a huge bank fraud case in florida, but he acknowledged there have been no prosecutions against major players in the financial crisis. >> in our criminal justice system, we have to prove beyond a reasonable doubt that you intended to commit a fraud. but when you can't or when we think we can't, there's still many, many important resolutions and options we have. and that's why there've been civil lawsuits and regulatory action. >> do you lack confidence in bringing cases under sarbanes-oxley? >> steve, no--
no one is-- really has accused this department of justice or this division or me of lacking confidence. if you look at the prosecutors all over the country, they are bringing record cases with respect to all kinds of criminal laws. sarbanes-oxley is a tool, but it's only one tool. we're confident. we follow the facts and the law wherever they take us. and we're bringing every case that we believe can be made. [ticking] >> when we come back, we talk to a whistleblower who was inside citigroup during the financial meltdown. [ticking] i have low testosterone. there, i said it.
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>> if you'd looked at the financial statements of the major banks on wall street in the weeks leading up to the financial crisis of 2008, you wouldn't have guessed that most of them were about to crumble and require a trillion-dollar bailout from the taxpayers. it begs the question, "did the ceos of these banks and their chief financial officers withhold critical information from their investors?" if they did, they can be subject to prosecution under the sarbanes-oxley act, yet despite some compelling evidence, as of late 2012, the justice department has not brought a single case against wall street executives for violating sarbanes-oxley. in december 2011, steve kroft reported on 60 minutes an investigation of citigroup beginning with a former vice president named richard bowen. >> there are things that obviously went on in this
crisis, and decisions that were made, that people need to be accountable for. >> why do you think nothing's been done? >> i don't know. >> until 2008, richard bowen was a senior vice president and chief underwriter in the consumer lending division of citigroup. he was responsible for evaluating the quality of thousands of mortgages that citigroup was buying from countrywide and other mortgage lenders, many of which were bundled into mortgage-backed securities and sold to investors around the world. bowen's job was to make sure that these mortgages met citigroup's own standards-- no missing paperwork, no signs of fraud, no unqualified borrowers. but in 2006, he discovered that 60% of the mortgages he evaluated were defective. were you surprised at the 60% figure? >> yes. i was absolutely blown away.
this--this cannot be happening. but it was. >> and you thought it was important that the people above you in management knew this? >> yes. i did. >> you told people. >> i did everything i could, from the way-- in the way of email, weekly reports, meetings, presentations, individual conversations, yes. >> how high up in the company? >> my warnings, which were echoed by my manager, went to the highest levels of the consumer lending group. >> bowen also asked for a formal investigation to be conducted by the division in charge of citigroup's internal controls. that study not only confirmed bowen's findings, but found that his division had been out of compliance with company policy since at least 2005. did the situation improve? >> i started raising those warnings in june 2006.
the volumes increased through 2007, and the rate of defective mortgages increased to an excess of 80%. >> so the answer is no? >> the answer is no. things did not improve. they got worse. >> not only was citigroup on the hook for massive potential losses, bowen says it was misleading investors about the quality of the mortgages and the mortgage securities it was selling to its customers. we managed to get our hands on a prospectus for a mortgage-backed security that was made up of home loans that bowen had tested. it says, "these loans were originated under guidelines that are substantially, in accordance with citi mortgage's guidelines, for its own originations, its own mortgages." is that a true statement? >> no. >> this is not some insignificant statement. this is--speaks to the quality of the mortgages that investors are putting their money in.
>> yes. >> and it's wrong? >> yes. >> and people at citigroup knew it was wrong, had been warned that it was wrong, had been told that it was wrong. >> yes. >> in early november of 2007, with citi's mortgage losses mounting, bowen decided to notify top corporate officers directly. he emailed an urgent letter to the bank's chief financial officer, chief risk officer, and chief auditor as well as robert rubin, the chairman of citigroup's executive committee and a former u.s. treasury secretary. the letter informed them of "breakdowns of internal controls" in his division and possibly "unrecognized financial losses existing within our organization." why did you send that letter? >> i knew that there existed in my area extreme risks. and one, i had to warn executive management.
and two, i felt like i had to warn the board of directors. >> you're saying there's a serious problem here. you've got a big breakdown in internal controls. you need to pay attention. this could cost you a lot of money. >> yes, somebody needed to pay attention. somebody needed to take some action. >> the next day, citigroup's ceo charles prince, in his last official act before stepping down, signed the sarbanes-oxley certification endorsing a financial statement that later proved to be unrealistic and swore that the bank's internal controls over its financial reporting were effective. >> i know that there were internal controls that were broken. i served notice in that email that they were broken. and the certification indicates that they are not broken. >> it would seem the chief financial officer and the people that signed the sarbanes-oxley certification disregarded
those warnings. >> it would appear. >> we received a letter from citigroup saying that the bank had acted promptly to address richard bowen's concerns, and that the issues he raised were limited to his division and had little bearing on the bank's overall financial health. citigroup also told us that it did not retaliate against bowen for sending the email. but not long after he sent it, bowen's duties were radically changed. >> i was relieved of most of my responsibility, and i no longer was physically with the organization. >> you were told not to come into the office? >> yes. [ticking] >> coming up: are wall street executives above the law? >> i don't think wall street senior people really think they'll ever end up in jail, and they've been right.
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>> mr. bowen. >> i am very grateful to the commission to be able to give my testimony today. >> the financial crisis inquiry commission thought enough of richard bowen's story to call him as one of its first witnesses, and he turned over more than a thousand pages of documents to the securities and exchange commission. nothing ever came of it. but bowen wasn't the only one to warn citigroup's top officials about its financial weaknesses and breakdowns in the company's internal controls. three months after bowen's email, citigroup's new ceo
vikram pandit received a blistering letter from the office of the comptroller of the currency, its chief regulator. it questioned the valuations that citi had placed on its mortgage securities and found internal controls deeply flawed. the letter stated, among other things, that risk management had "insufficient authority" and risk was "insufficiently evaluated" and that the citibank board had "no effective oversight." yet eight days later, ceo vikram pandit and chief financial officer gary crittenden personally signed the sarbanes-oxley certification. they attested to the bank's financial viability and the effectiveness of its internal controls. the deficiencies cited by the comptroller of the currency were never mentioned. citi said it didn't consider the problems serious enough that they had to be disclosed to investors and says the certifications were entirely appropriate. but nine months later, citigroup would need a $45 billion bailout and $300 billion more in federal
guarantees just to stay in business. >> i don't think wall street senior people really think they'll ever end up in jail, and they've been right. >> frank partnoy, the securities lawyer and expert on sarbanes-oxley law, says the facts about citigroup raise some troubling questions. >> they certainly knew the internal controls were inadequate and that the company was out of control from a reporting perspective. >> and yet they signed the sarbanes-oxley letter saying that everything was fine. >> i'm very surprised that the ceo and cfo would sign those letters. i wouldn't have signed them under those conditions. you're signing them under penalties of potentially 10 years in prison. you're certifying that you designed and implemented effective internal controls in the aftermath of all this news about the company's problems. >> how is that not a violation of sarbanes-oxley? >> i don't know. i think that it might be hard to establish knowledge. that might be what prosecutors are thinking in not bringing the cases.
>> the letter was addressed to vikram pandit, the new ceo of citigroup. >> and he had eight days to think about it, from february 14th, valentine's day, he gets the letter. and then february 22nd, he sits down and signs his name, certifying that financial statements are accurate and that he had designed and evaluated and reported any problems with internal controls. eight days is a long time on wall street. i can't get inside his head, but i would certainly think, as a prosecutor, that this would be something i'd be interested in asking some questions about. >> we wanted to know what assistant attorney general lanny breuer thought about that, and why no prosecutions have been directed at wall street. we also wanted to know why sarbanes-oxley has not been used against big banks like citigroup. >> when you talk about sarbanes-oxley, we have to know that you intended-- intended--had the specific intent to make a false statement. >> they knew there was a problem. not only had they been told that there was a problem by one of their chief underwriters, that the loans that they were buying were not what they claimed, and that the federal government--
that the comptroller of the currency didn't think their internal controls were adequate either. >> if a company is intentionally misrepresenting on its financial statements what it understands to be the financial condition of its company and makes very real representations that are false, we want to know about it. and we're gonna prosecute it. >> do you have cases now that you think that will result in prosecution against major wall street banks? >> we have investigations going on. i won't predict how they're gonna turn out. >> has anybody at treasury or-- or the federal reserve or the white house come to you and said, "look, we need to go easy on the banks, that there are collateral consequences if you bring prosecutions. some of these organizations are still very fragile, and we don't want to push them over the edge"? >> steve, this department of justice is acting absolutely independently. every decision that's being made by our prosecutors around
the country is being made 100% based on the facts of that particular case and the law that we can apply it, and there's been absolutely no interference whatsoever. >> the perception-- i mean, it doesn't seem like you're trying. it doesn't seem like you're making an effort, that the justice department does not have the will to take on these big wall street banks. >> steve, i get it. i find the excessive risk taking to be offensive. i find the greed that was manifested by certpeop be very upsetting. but because i may have an emotional reaction and i may personally share the same frustration that american people all over the country are feeling, that in and of itself doesn't mean we bring a criminal case. >> if you had said two years ago that nobody was gonna be prosecuted on wall street for the subprime mortgage scandal, i think people would think, "it's not possible." >> sometimes it takes a number of years to bring these cases. so i'd say to the american
people, they should have confidence that this is a department that's working hard and we're gonna keep working hard, so stay tuned. >> in august 2012, citigroup agreed to pay $590 million to settle a shareholder lawsuit accusing the company of hiding tens of billions of dollars of toxic mortgage assets. citigroup denied any wrongdoing in agreeing to settle the case. in addition, vikram pandit is no longer ceo of citigroup. he resigned from his position in october 2012. [ticking] coming up: the collapse of a wall street titan. >> did these quarterly reports represent to investors a fair, accurate picture of the company's financial condition? >> in our opinion, they did not. >> i mean, isn't that against the law? >> it certainly, in our opinion, was against civil law, if you will. they were colorable claims that this was a fraud, yes.
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the federal bankruptcy court appointed anton valukas, a prominent chicago lawyer and former united states attorney, to conduct an investigation to determine what happened. in march 2010, the valukas report found there was enough evidence to bring a case against senior lehman officials and one of the nation's top accounting firms for misleading government regulators and investors, yet there have been no prosecutions. in april 2012, valukas sat down with steve kroft to talk about his report for the first time. >> this is the largest bankruptcy in the world. what were the effects? >> the effects were the financial disaster that we are living our way through right now. >> and who got hurt? >> everybody got hurt. the entire economy has suffered from the fall of lehman brothers. >> so the whole world? >> yes, the whole world. >> when lehman brothers collapsed, 26,000 employees lost their jobs, and millions of
investors lost all or almost all of their money, triggering a chain reaction that produced the worst financial crisis and economic downturn in 70 years. anton valukas' job was to provide the bankruptcy court with accurate, reliable information that the judges could use to resolve the claims of creditors picking over lehman's corpse. had you ever done anything like this before? >> i've never done anything like lehman brothers. i don't think anybody else has ever done anything like lehman brothers. >> so your job, i mean, in some ways, your job was to assess blame? >> our job is to determine what actually happened, put the cards face up on the table, and let everybody see what the facts truly are. >> valukas' team spent a year and a half interviewing hundreds of former employees and pouring over 34 million documents. they told of how lehman bought up huge amounts of real estate that it couldn't unload when the market went south, how it had borrowed $44 for every $1 it had in the bank to finance the deals, and how lehman executives
manipulated balance sheets and financial reports when investors began losing confidence and competitors closed in. >> did these quarterly reports represent to investors a fair, accurate picture of the company's financial condition? >> in our opinion, they did not. >> and isn't that against the law? >> it certainly, in our opinion, was against civil law, if you will. there were colorable claims that this was a fraud, yes. >> by colorable claims, valukas means there is sufficient evidence for the justice department or the securities and exchange commission to bring charges against top lehman executives, including ceo richard fuld, for overseeing and certifying misleading financial statements, and against lehman's accountant, ernst and young, for failing to challenge lehman's numbers. >> they'd fudge the numbers. they would move what turned out to be approximately $50 billion of assets from the united states to the united kingdom just before they printed their financial statements. and a week or so after
the financial statements had been distributed to the public, the $50 billion would reappear here in the united states, back on the books in the united states. >> lehman misused an accounting trick called repo 105 to temporarily remove the $50 billion from its ledgers to make it look as though it was reducing its dependency on borrowed money and was drawing down its debt. lehman never told investors or regulators about it. this is really deception to make the company look healthier than it was. >> yes. >> deliberate? >> yes. >> how are you so sure of that? >> because we read the emails in which we observed that people saying that they were doing it. we interviewed the witnesses who wrote those emails, or some of those emails, and asked them why they were doing it, and they told us they were doing it for purposes of affecting the numbers. >> do you think lehman executives knew that this was wrong? >> for some of them, certainly. there was concerns being expressed by--at high levels about whether this is appropriate, what happens if the street finds out about it. so, you know, there was a concern that there's a real
question about whether we can do this, whether this was right or not. >> one of those people was matthew lee, who had been a senior executive at lehman and the accountant responsible for its global balance sheet. lee was one of the first to raise objections inside lehman about the accounting trick known as repo 105. >> it sounded like a rat poison, repo 105, when i first heard it. so i investigated what it was, and i didn't like what i saw. >> was there a point in which you saw the accounting principles employed by lehman brothers change? >> november 30, 2007 was the end of our fiscal year. and i fully expected us, you know, to make a loss that year like everyone else. and when i saw we made money-- it was a record year, in fact-- i thought, "that doesn't sound right." you knew the markets were doing badly, so why wasn't lehman doing badly? and every time i found something and i went to my boss or whoever, no response. >> that was ten months before lehman brothers went bankrupt.
lee's position required him to sign off on the accuracy of the firm's accounting practices every quarter. but in november of 2007, he declined to do it. by refusing to sign it, you were saying that you didn't believe the numbers. >> correct. >> that this wasn't a fair and accurate representation of the financial condition of lehman brothers. >> right. "something's up here. why can't people answer my questions?" you know, "why has repo 105 doubled? give me an answer." you know, nothing was said. >> lee continued to press people for more information, but nothing changed, and four months before lehman collapsed, he sent this letter to lehman's top executives. >> "i've been telling you all year. i've been banging my head against the wall. i'm now putting it in writing." >> it says, "it requires me to bring to the attention of management conduct and actions on the part of the firm that i consider to be possibly unethical and unlawful." >> yeah. >> what were you talking about specifically? >> well, in that particular
letter, i was general. there were so many specifics. i could have written laundry lists. >> what kind of a response did you get from this letter? >> it's like throwing a grenade. i wanted to wake somebody up, at least to address the topics. >> it worked. six days after he sent that letter, matthew lee was downsized, let go after 14 years. but lehman executives couldn't ignore the letter and asked their accountants from ernst and young to interview matthew lee. >> and in those interviews, we have the notes, which are part of the report. he says very specifically $50 billion, repo transactions, moving money off the balance sheet at quarter end. so our conclusion was ernst and young certainly knew it as of that time and did nothing with it. [ticking] >> coming up: where were the government regulators? >> how closely was the s.e.c. monitoring lehman brothers during this time? >> they were on premises. they were talking to the lehman people daily. they officed there.
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>> anton valukas says ernst and young was legally bound to make sure that lehman's audit committee and its board of directors knew about matthew lee's allegations of unethical and unlawful accounting practices, but they never did. did the audit committee know? >> no. >> did the board of directors know? >> no. >> did dick fuld know? >> did dick fuld know? well, he says no. >> the only place lehman's ceo, richard fuld, has publicly answered questions about his firm's bankruptcy has been in front of congress. >> i have absolutely no recollection whatsoever of hearing anything about or seeing documents related to repo 105 transactions while i was the ceo of lehman. >> he said the same thing to me face-to-face. >> do you believe him? >> there was evidence which would show that that's not accurate. the president of lehman brothers told us that in fact he had conversations with dick fuld about this and documents were shared with him which would reflect the repo 105 transactions and how they were
being used. richard fuld's view on that was that he has no knowledge of it. you have other evidence that he did. a jury would have to decide who's telling the truth. >> but so far, there's been no jury to hear the evidence. despite valukas' findings-- and the supporting documents and testimony to back them up-- the securities and exchange commission has not brought any charges of any kind against former lehman executives. we've made numerous requests to interview the s.e.c.'s head of enforcement. all of those requests have been declined. the securities and exchange commission has not brought a case. >> no, they have not. >> does that bother you? >> i'm not permitted to be bothered by that. you know, my job was to set out the facts, lay it out. they have to make their own prosecutive decisions. >> as it turns out, some of lehman's most egregious accounting shenanigans took place right under the noses of government regulators. how closely was the s.e.c. monitoring lehman brothers during this time? >> they were on premises.
they were talking to the lehman people daily. they officed there. >> it was not widely known at the time, but during the last six months of lehman's existence, teams of officials from the s.e.c. and the federal reserve took up residence inside the firm to monitor its precarious financial situation. they were inside the building when matthew lee wrote his letter to lehman executives alleging unlawful accounting practices, and they were there when the practices took place. valukas says the s.e.c. also knew that lehman was being less than truthful when it said that it had enough assets to survive the crisis. but that and other damaging information was never disclosed to investors who continued to pump billions of dollars into the firm. >> should it have been disclosed? >> absolutely. >> isn't the government, the s.e.c. in this case, the people who were supposed to protect the investors... >> yes. >> aren't they charged with informing investors? >> yes. >> why didn't they do it? >> they may not have had the expertise necessary to
understand the material they were receiving. they were getting the material. whether they understood it is another question. >> the very fact that government regulators were inside the company with access to its books and records would complicate any prosecution of lehman officials. until january 2012, david kotz was the s.e.c.'s inspector general. over the previous four years, he'd issued more than 100 reports about major deficiencies in the way the s.e.c. did its job. if the s.e.c. knew about some of these problems at lehman brothers and they weren't disclosed, doesn't that make it difficult for the s.e.c. enforcement division to come back and bring action against lehman brothers? they were there; they saw it. >> yeah, i think that that's definitely an impediment to a potential case. and, certainly, if you go before a jury, the defense lawyers can make a big point about the fact that, "you were there. you knew about it. why didn't you do anything at the time? now you're coming after them." >> in fact, former lehman ceo richard fuld seemed too be trying out that defense when he testified before congress
in 2008. >> throughout 2008, the s.e.c. and the federal reserve conducted regular and, at times, daily oversight of our business and our balance sheet. they saw what we saw in real time. >> let's just assume for a moment that anton valukas' findings are true. i mean, isn't this just a free ticket for executives to say, "well, look. you know, lehman did so-and-so, and nothing happened to them." >> right, no, i think absolutely, that's a serious problem. i mean, obviously, there has been a tremendous financial crisis. the people who engaged in improper behavior need to be punished. i think it's critical for the s.e.c. to go after not just companies, but also individuals, where they have the evidence to do so. >> when lehman's bankruptcy was finally settled, there were claims against it for $370 billion. the creditors settled for about 20 cents on the dollar. former ceo richard fuld lost most of his fortune, but is still a wealthy man.