An explosive report by a court-appointed examiner on the collapse of Lehman Brothers

The 2,200-page report could lay the groundwork for felony charges under securities fraud laws, the Sarbanes-Oxley Act or New York's Martin Act, which is more expansive than federal securities laws, the experts say.

I think there are definitely criminal liability issues here -- especially for at least the handful of executives who sent emails making clear they knew they were helping Lehman hide its liabilities, said Elizabeth Nowicki, a former lawyer with the Securities and Exchange Commission and now a visiting professor at Boston University School of Law.

Even with a roadmap, getting to a place where a criminal case can be brought will be difficult. The bar is high, as prosecutors must be able to prove intent. And while Lehman may have been at the epicenter of the financial quake, it was not the only failure during the financial crisis.

That may explain why, a year and a half after the Lehman bankruptcy, no criminal cases have yet been announced.

Still, a dozen former Lehman executives, including former CEO Richard Fuld, have been subpoenaed in federal grand jury investigations. Representatives for both the U.S. attorney in Manhattan and the U.S. attorney in Brooklyn declined to comment on Friday.

The report by the examiner, Anton Valukas, a former prosecutor and chairman of the law firm Jenner & Block, points to one direction prosecutors may take -- accounting tricks.

The report details how Lehman used an accounting gimmick to move $50 billion in assets off its balance sheet, making the now-bankrupt banking firm appear financially healthier than it was.

The report said the use of the accounting device was materially misleading and done for the sole purpose of balance sheet manipulation.

In finding that there may be colorable claims against senior officers who oversaw and certified misleading financial statements, the report virtually invited prosecutors to bring claims under Sarbanes-Oxley, which imposes criminal penalties on CEOs and CFOs who knowingly attest to misleading statements.

What Sarbanes-Oxley tried to do was eliminate the old 'blind, deaf and dumb' defense of CEOs, said Terry Connelly, dean of the Edward S. Ageno School of Business at Golden Gate University and a former executive at Salomon Brothers.

The question is whether the treatment of these accounting transactions was material and misleading. Did it matter to the market? The answer is, of course, yes. The relevant question is whether they were misleading, and the facts there, I think, speak for themselves.

In a statement on Thursday evening, a lawyer for Fuld said the former chief executive did not know what those transactions were -- he didn't structure or negotiate them, nor was he aware of their accounting treatment.

Connelly called that response very much like the old deaf, dumb and blind defense.

You could get away with that before Sarbanes-Oxley. I'm not sure you can get away with that now, he said.

To make it appear that it was reducing its debt levels in 2008, Lehman employed an accounting device called Repo 105, a kind of repurchase agreement.

Lehman did not disclose the Repo 105 transactions to the investing public and a top Lehman executive, global financial controller Martin Kelly, believed there was no substance to the transactions, according to the examiner's report.

These transactions were undertaken for no legitimate economic purpose, said Bill Black, a criminologist at the University of Missouri-Kansas City and a former savings and loan regulator. They were done to game the numbers.

To the extent investors were kept in the dark, you have all the elements here of felony securities fraud, he added.

Black said criminal culpability could reach Fuld if prosecutors proceed up the chain, first targeting those responsible for the accounting chicanery and flipping them to obtain their testimony against higher-ups.

It's pretty hard to conceive that prosecutors would not go after them. And those guys are going to point the finger at the chief financial officers, who will point the finger at the CEO, he said.

Dan Richman, a law professor at Columbia University, said Valukas had produced a thorough and intensive report that could prove invaluable to prosecutors and civil enforcement agencies like the Securities and Exchange Commission.

It certainly provides a very major assist to prosecutors trying to understand particularly complex transactions over a long period of time, Richman said.

Several legal experts speculated that New York Attorney General Andrew Cuomo, who has not been shy about going after Wall Street and is widely expected to run for governor, may be the first law enforcement official to jump in. With New York's Martin Act, Cuomo has an especially potent tool at his disposal to combat financial fraud.

The once-dormant law, which was enacted in 1921, was used by New York Attorney General Eliot Spitzer in bringing cases, both civil and criminal, in investigations of Wall Street research, mutual fund market timing and insurance brokers.

Cuomo has deployed the law recently in pursuing a lawsuit against Bank of America Corp and its former chief executive, Kenneth Lewis, and former chief financial officer, Joe Price, accusing them of misleading shareholders about the bank's acquisition of Merrill Lynch & Co.

A spokesman for Cuomo's office did not respond to a request for comment on Friday.

I think prosecutors are going to have a very difficult time not moving forward with criminal charges, Nowicki, of Boston University, said.

The reality is that this report, after experts and the media start going through and commenting on it, is going to stir up some level of public outrage that I don't think the SEC or the Department of Justice is going to want to ignore.

(Reporting by Dan Margolies; Editing by Gary Hill)

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