In Crisis, Prosecutors Put Aside Turf Wars
By BENJAMIN WEISER and BEN WHITE
Published: October 30, 2008
On Sept. 25, as the world financial crisis escalated, two of New York‟s most
powerful lawyers met for lunch in a restaurant near Wall Street with a name
that recalled happier times: Bull Run.
They were Michael J. Garcia, the United States attorney in Manhattan, and
Andrew M. Cuomo, the state attorney general. Both men‟s offices have histories
of moving aggressively against financial fraud, and of vigorously defending their
turf when other prosecutors try to compete for their cases.
But over lunch, Mr. Garcia and Mr. Cuomo reached an unusual agreement: to
investigate jointly the shadowy world of credit-default swaps, the $55 trillion
market in unregulated financial instruments at the center of the meltdown.
Soon, both men‟s top aides were hammering out details of the cooperation in an
eighth floor conference room in Mr. Garcia‟s office in Lower Manhattan.
First came the bust; now comes the inevitable flood of investigations and
possible prosecutions. State and federal prosecutors are looking at a range of
companies, from Fannie Mae and Freddie Mac, the mortgage finance companies
that were effectively nationalized in September, to Lehman Brothers, the Wall
Street bank that collapsed last month in the largest bankruptcy in United States
history.
But the crisis is so widespread that there has been another phenomenon —
cooperation among prosecutors, especially in New York, where in the past they
have not been shy about bumping elbows and sometimes had to resolve
conflicts at the highest level of the Justice Department.
“The competitive racing of fellow offices of the Department of Justice in the
same subject matter always made me pull my hair out,” said Alan Vinegrad, a
former United States attorney in Brooklyn. “It‟s not a race,” he added, calling
the Garcia-Cuomo alliance “a welcome development.”
In the investigation of the collapse of Lehman Brothers, United States attorneys
in three different jurisdictions — Manhattan, Brooklyn and New Jersey — have
issued nearly two dozen subpoenas. Recipients include the chief executive,
Richard S. Fuld Jr., and other top executives as well as Wall Street banks that
provided research coverage on Lehman, like Merrill Lynch, and funds that
invested in it.
Two people familiar with the Lehman investigations said the case had been
divided among the three offices because there were too many avenues of inquiry
for any one office to handle. These people spoke on the condition of anonymity
because the inquiries were at an early stage and no conclusions of wrongdoing
had been drawn. Press officers in all three prosecutors‟ offices declined to
comment.
The degree of cooperation, if any, in the wide array of other known inquiries
spawned by the crisis is not clear:
¶Fannie Mae and Freddie Mac have said they received grand jury subpoenas in
September from Mr. Garcia‟s office for documents related to accounting,
disclosure and corporate governance.
¶The United States attorney in Brooklyn, Benton J. Campbell, announced
criminal charges in June against two former hedge fund managers at Bear
Stearns, and more charges against the two managers could follow, the office has
said.
¶The American International Group, the giant insurer bailed out by the federal
government in September, has disclosed receiving requests for information
from the Justice Department and the Securities and Exchange Commission
regarding valuations of some of its credit-default-swap portfolios.
¶The federal prosecutor in Washington State has announced an investigation
into the collapse of Washington Mutual, which was forced into an emergency
sale to JPMorgan Chase in late September.
¶Mr. Cuomo‟s office has also demanded data from banks receiving federal
money on what they plan to pay executives this year.
The decision to cooperate can be advantageous to prosecutors. Under the
arrangement in the swaps investigation between Mr. Garcia and Mr. Cuomo, for
example, some of Mr. Cuomo‟s lawyers would be designated as “special” federal
prosecutors to enable them to participate in secret grand jury proceedings.
“Extraordinary problems require extraordinary solutions,” Mr. Cuomo said in a
phone interview this week. “We can be helpful to each other; it‟s that simple.”
Mr. Garcia‟s office has said it is looking into whether federal laws were violated,
while Mr. Cuomo, with a broader mandate as the state‟s attorney general, can
seek industry reforms, legislation, civil settlements and other remedies. But
with so many investigations, some lawyers, including former prosecutors,
cautioned against a rush to judgment, particularly given the tenor of the
political season.
Mary Jo White, who served as United States attorney for the Southern District
of New York from 1993-2002 and is now in private practice, said there were
risks of intense public pressure “to put the scalps on the wall — „How could
something as bad as this happen if nobody did something wrong?‟ ”
“You have to distinguish between arguably bad risk-taking,” she said, “and
someone who has actually violated the law.”
The election Tuesday could also change the legal landscape, as new presidents
traditionally appoint their own United States attorneys. But for now, the public
cooperation between prosecutors, notably Mr. Garcia and Mr. Cuomo, has
caught the attention of the legal community, largely because of the history of
turf battles involving the United States attorney for the Southern District.
I don‟t know how that marriage came about — and it‟s unusual,” said Paul L.
Shechtman, a lawyer who once had a role in a high-level squabble. “One
normally thinks of this as the „Sovereign District of New York,‟ and it doesn‟t
necessary play well with others.” In 1997, for example, Ms. White, then the
United States attorney, allowed one of Mr. Shechtman‟s clients, who had been
charged in a securities case by Robert M. Morgenthau, the Manhattan district
attorney, to plead guilty to federal charges. That effectively stopped Mr.
Morgenthau from pursuing his case. Mr. Morgenthau‟s office complained, but
Ms. White responded that to prosecute the crimes “under only state law
diminishes their seriousness.”
It was Mr. Morgenthau, when he was United States attorney under President
John F. Kennedy, who created the office‟s securities fraud unit after his
appointment in 1961. “I just thought there was a lot of corruption out there,” he
said this week, “and New York was the financial capital of the world, and we
wanted people to feel safe investing in it.”
In more recent years, the Southern District has competed to win control of
prosecutions involving WorldCom, Adelphia Communications and Frank P.
Quattrone, the former Credit Suisse banker. (That last tussle was with Mr.
Cuomo‟s predecessor, Eliot Spitzer. Federal charges were eventually dropped
after Mr. Quattrone‟s conviction was reversed.)
In the current Lehman investigation, the unusual division of tasks has allowed
three different federal prosecutors offices to move forward, at least for now, said
the people familiar with the inquiry.
Mr. Garcia‟s office is focusing on the valuations Lehman put on its large
commercial real estate holdings. One subpoena has gone to Mark A. Walsh, who
headed Lehman‟s commercial real estate operations. A lawyer for Mr. Walsh
declined to comment.
In Newark, the office of Christopher J. Christie, the United States attorney for
New Jersey, is looking at statements made to investors who took part in a $6
billion capital raise announced by Lehman on June 9 as the bank announced a
$2.8 billion second-quarter loss. Mr. Christie has subpoenaed the New Jersey
Division of Investment, which took part in the offering.
And the United States attorney in Brooklyn, Mr. Campbell, is examining
statements made to investors and analysts in a Sept. 10 conference call
discussing Lehman‟s financial position and its plans for survival. The call came
just five days before Lehman‟s bankruptcy filing. Ian T. Lowitt, Lehman‟s
former chief financial officer, who took part in the call, has also received a
subpoena.
Outside experts said prosecutors would be gathering internal documents to
determine whether public statements about the bank‟s health and the value of
its assets differed from internal assessments, and whether deliberate efforts
were made to obscure the truth.
In public comments, Mr. Fuld, Lehman‟s chief, has said all of his statements to
investors were based on information he had available at the time, that he never
intended to mislead anyone and that he always believed in the company‟s ability
to succeed.
A spokesman for Lehman executives declined to comment.