It has been revealed by court-appointed examiner Anton Valukas, who conducted a year-long investigation into the failure of the financial institution, that the SEC knew in June 2008 that Lehman Brothers was overestimating the amount of liquid assets on its balance sheet.
However, it took no action and the bank collapsed three months later.
At the time, the SEC was focused on maintaining the stability of the financial system rather than highlighting potential problems â a policy that John Coffee, a securities law professor from Colombia University, said compromised the regulator's actions.
"It looks like the SEC was â¦ trying to avoid public disclosure of information which could encourage either raids, short selling, or possibly a run on the bank," Mr Coffee told Bloomberg.
Last week's report by Mr Valukas also revealed that a $50 billion "accounting gimmick" had been used by Lehman Brothers' executives in order to hide debt from the company's balance sheet in the first half of 2008.
By Gary Cooper