Lehman Brothers Financial Fraud Investigation Dropped by SEC: Report

Federal investigators are reportedly dropping a criminal probe against Lehman Brothers Holdings Inc. and are not expected to file any charges following the 2008 collapse of the investment bank, which was the largest bankruptcy filing in history. 

An internal memo from the U.S. Securities and Exchange Commission (SEC) obtained by Bloomberg News indicates that staffers at the regulatory agency have concluded their investigation into Lehman Brothers’ and will not recommend that charges be filed.

Bloomberg News indicates that SEC officials did not deny the memo, but said that the case is still officially under review at this point.

Even though a bankruptcy examiner determined that Lehman Brothers withheld information about its leverage through accounting tricks, investigators could find little evidence of wrongdoing. The SEC is weighing issuing a report of its investigation that would focus on the company’s questionable actions, even if they were not proven to be illegal.

Much of the belief that Lehman Brothers acted illegally came from Anton Valukas, a court-appointed bankruptcy examiner. Valukas issued a 2010 report that sparked the SEC investigation, calling the actions of Lehman’s CEO Richard Fuld grossly negligent at the very least.

When Lehman Brothers collapsed, other brokerage firms selling their products also came under scrutiny. Many investors have said that the brokerages, like UBS Financial Services, should have known that the investments were riskier than advertised and failed their duty to their clients.

A number of arbitration claims and lawsuits over Lehman Brothers structured notes have been filed on behalf of investors who were sold the products by UBS and other brokerage firms. 

Lehman Brothers structured notes were a hybrid financial instrument, constructed from a combination of stocks, bonds, currencies, commodities and derivatives, which were promoted by many brokers as low-risk investments, even as Lehman Brothers faced substantial financial troubles. However, after the collapse of the bank, the notes were rendered virtually worthless.

A UBS class action lawsuit over Lehman structured notes was filed in 2008 in the U.S. District Court for the Southern District of New York, on behalf of all investors who were sold the investment by the brokerage firm. The complaint alleges that UBS brokers made false and misleading statements about Lehman Brothers Principal Protection Notes that omitted material facts about the risk associated with investing.

Prior to its collapse, Lehman Brothers was the fourth largest investment bank. The September 2008 bankruptcy filing is thought to have played a major role in the global financial crisis that ensued in the following months.