The Impact of White Collar Crime on the Society

A Lehman Brothers Case Study

Marjana Bouazza

October 2017

White collar crime is one of the biggest problems that society has to deal with in present times. Despite the fact that there are a lot of legitimate ways to make money and enhance business profitability, some businesses and their employees will always look for legal and procedural loopholes to exploit for financial gains. Lehman Brothers is a good case to analyze when it comes to white collar crime, the legal loopholes that have always undermined the ability to ensure justice, and their impacts on the society.

A Lehman Brothers Case Study

Starting from the year 2001, Lehman Brothers began to engage in repurchase agreements known as “repos”, with the aim of portraying a false image of stability to its investors. According to Henning (2010), repos are considered to be short-term loans which involve exchanging collateral for cash and unwinding the trade at the end of the day. Therefore, repos are neither illegal nor morally questionable, provided that they are properly accounted for. However, in the case of Lehman Brothers, the company went ahead to have collateral exchange worth 105% of the cash received under the repo. It also introduced “105” in its nomenclature in order to turn the repo into a sale for accounting purposes. In that case, it gained the ability to move the assets it exchanged under the repo off its balance sheet. During the last quarter of the year 2007, the company shuffled tens of billions of dollars in assets to appear more financially stable. Unfortunately, this practice could not be sustained for long. According to Ryder et al. (2017), Lehman Brothers managed to reduce its leverage by $38.6 Billion in fourth quarter of 2007, $49.1 Billion in the first quarter of 2008 and $50.4 Billion in the second quarter of 2008. However, it did not get to the end of the third quarter of 2008; the company filed for bankruptcy in September 2008.

The collapse of the Lehman Brothers, which at that time was the world’s fourth largest investment bank, impacted negatively on the society, creating an economic crisis. First, the collapse of Lehman Brothers led to the loss of 26,000 jobs and saw millions of investors lose most of their money. During 2010, the federal bankruptcy court appointed Anton Valukas, a former United States Attorney and a prominent lawyer, to conduct investigations regarding the case. According to Henning (2010), Valukas presented a 2, 200 page document that showed there was sufficient evidence to bring a case against the executives of Lehman Brothers for having had engaged in securities fraud. This report then leads to the question; why is it that prosecutors never investigated and charged the Lehman Brothers executives for the securities fraud? The answer to this question is explained by Henning (2010) who complains of the paucity of convictions in financial crime cases and argues that the U.S Criminal Law and its enforcers have failed to bring the financial institutions and individuals who commit corporate and white collar crimes into books.

According to Valukas (2010), the company’s executives misled the investors by claiming that the firm had adequate liquidity to cope with the collapsing market in the year 2008. As a matter of fact, the liquidity that was purported included investments that were far from liquid and assets that could not be easily tapped. In addition, evidence obtained from e-mail communications showed that Lehman Brothers executives were aware of the repo “105” and its financial implications. Although Carney (2010) argues that the Lehman executives should not be criminally prosecuted because the expert opinions provided by Ernst & Young (Lehman’s outside auditor) and Linklaters (a British law firm) under the British Law showed that the repo 105 transactions were sales and not financial arrangements, there is need to investigate the legal loophole that was being relied on. Carney (2010) further argues that the expert opinions provided by the two firms undermined the ability to prove that the public statements that were made by the firm’s executives were meant to mislead or defraud the investors. When a defendant relies on expert opinion in a criminal defence, it undermines the ability of the prosecutor to prove defraud, intent or the defendant’s knowledge that statements were false or misleading as seen in other prosecutions.

Bearing in mind that the collapse of the Lehman Brothers led to a 7-year economic downturn and massive loss of jobs, as per information provided by Valukas (2010), it can be said that such cases of white collar crime affect the economic welfare of the society negatively. In addition, the crime committed by Lehman executives points to legal loopholes and a culture of impunity. For instance, although there was adequate evidence obtained from email conversations between Lehman executives showing their knowledge about the existence of the repo 105, it was considered insufficient for a prosecutor to rely on when making a case. This is because electronic communications are rarely precise and inferring knowledge from email conversations is difficult. The impact of this factor can be seen from the trial of two former Bear Stearns hedge fund managers for white collar crime, which ended up in acquittal due to the challenge for prosecutors to prove the case based on electronic evidence. Therefore, there is need for more effective laws to be enacted to address this problem surrounding electronic evidence. In addition, the report produced by Valukas showed that Lehman Brothers had adopted a culture that rewarded analysts for hiking its ratings. In this case, it can be argued that white collar crime nurtures a culture of impunity in the society by rewarding unethical practices.

In conclusion, the case of Lehman Brothers points to legal loopholes when it comes to relying on electronic evidence to make a case. In addition, it shows that white collar crime has severe impacts on society, which include potential economic crises and breeding of a culture of impunity.