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Tuesday, April 20, 2010

Ex-SEC Chief Cox says SEC could bring Lehman Case

A bankruptcy examiner's report showing that Lehman Brothers may have filed misleading financial reports could lead to U.S. Securities and Exchange Commission charges, the former head of the SEC said on Tuesday.

Christopher Cox, who was chairman of the SEC when Lehman declared bankruptcy in September 2008, also said that neither the SEC or the Federal Reserve was aware that Lehman used so-called "Repo 105" transactions to artificially reduce its apparent leverage, as alleged in the report.

"The examiner's report of evidence that Lehman filed misleading financial reports and failed to disclose material accounting information... may provide the basis for SEC law enforcement action in that case," Cox said in testimony prepared for the U.S. House of Representative's Financial Services Committee.

Cox did not clarify whether he believes the SEC may be able to charge the firm or individuals.

Former Lehman Chief Executive Richard Fuld said in prepared remarks for the same hearing that he only learned of the firm's use of Repo 105, a controversial accounting technique, a year after the investment bank filed for bankruptcy.

The committee is exploring the public policy implications of investment bank Lehman's failure and the findings of the bankruptcy examiner.

Cox, whose agency was the primary supervisor for Lehman and other investment banks, did not appear in person, but submitted eight pages of testimony.

He said international bank capital standards at the time were not adequate to protect Lehman and other firms from shocks to the financial system.

Cox said he is concerned new stricter capital and liquidity rules are not yet in place.

"In my view, it remains a matter of the utmost urgency, in particular for commercial bank holding companies, whose ranks now include not only such large and systemically important entities such as Citigroup and Bank of America, but also the nation's largest investment banks," he said.

He also said that in the final days before Lehman filed for bankruptcy, it was still not clear to top government officials and Wall Street executives whether there would be federal support for Lehman.

"The lack of such clarity may have contributed to the demise of Lehman in September 2008," Cox said.