Not too long ago, Richard Fuld, the former CEO of Lehman Brothers (Richard Fuld news), was considered the man most likely to face prosecution and perhaps become the Jeff Skilling of the Wall Street meltdown--a symbol of every excess committed in the entire era. And then the argument died down. But thanks to court appointed bank examiner Anton Valukas's damning report on the demise of Lehman Brothers, talk of criminal prosecution has heated up again. And how! 

Simply put, Fuld would have to be in raw denial if he weren't a little worried, and government prosecutors would be in denial if this didn't put the legal ball squarely in their court. 

Harvey Pitt, former chairman of the SEC, laid out Fuld's challenges pretty clearly to Barron's: Fuld has a "daunting task" ahead of him. He "will need to come forward quickly with a very plain, easily understandable explanation of the errors or their defenses." He added: "The most significant consequence is that this may finally prompt the government--in the form of the DOJ and the SEC--to take action. Many are wondering why there hasn't been any action taken, and why the government hasn't reported on the same events itself. Criminal prosecutions are possible, as are SEC civil actions." (Pitt is also talking about Ernst & Young, by the way, and everything in this article could be applied to the firm as well.) 

A simple and clear defense may be a tough call. Fuld has already seemingly adopted, via his spokesperson, the position that he simply did not know about those shocking "Repo 105" transactions, which recall to some the Enron era. The "ignorant CEO" defense has been tried before. But Fuld has given it a new twist, which might be called the Blackberry defense: A footnote in the report noted by the New York Times states that Fuld's lawyer informed the examiner that he did not use a computer and only accessed e-mails on his Blackberry but could not open up attachments, including one that went into the Repo 105 deals in March 2008." 

Will this sort of explanation fly? It's going to be a hard sell because it requires people to believe that a near life-long employee who professed a deep love of the firm and has noted his round-the-clock efforts to save the firm had no idea about the very transaction that indeed kept the firm alive. A logical question would be: How could he not know? So the explanations would be: He's just incredibly detached by nature; he was deceived by other executives; the balance sheet was saved behind his back; he chose not to know to have a defense in the future. None of those are really going to fly. 

So his best bet might be simply attacking the report. He's got to go all out to show that it's shoddy and full of inaccuracies. Either way, he's got a long road ahead of him. This is not going away easily. It's going to get really ugly when prosecutors move to lock in witnesses against him. The report implicated three CFOs: Christopher O'Meara, Erin Callan and Ian Lowitt. They could find themselves under a lot of pressure. - Jim