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By PHRED DVORAK And ATSUKO FUKASE in TokyoAnd ERIC BELLMAN in Sendai

Agence France-Presse/Getty Images

Japanese sailors rescue Hiromitsu Shinkawa Sunday, two days after the 60-year-old was washed to sea on the roof of his Minamisoma home by a tsunami caused by a powerful earthquake. Thousands are feared dead.

Japan’s quake-ravaged northern communities continued to be pinched by food and water shortages Monday, while even cities far from the damage experienced “aftershocks” as the effects from Friday’s disaster rippled through the economy and markets.

Rescue workers struggled to bring supplies to thousands of residents of towns along the northeast coast, hardest hit by the 8.9-magnitude quake and tsunami on Friday. Survivors appeared on television, saying they didn’t have power and were running out of food and water. People atop one building had written a huge Chinese character for “water” on the roof, so it could be seen by rescue helicopters.

Residents are dealing with a lack of rations in Northern Japan, as transportation equipment is hampered in the aftermath of Friday’s quake. WSJ’s Eric Bellman reports from Sendai.

The official death toll continued to climb, reaching around 1,800 by Monday afternoon. National broadcaster NHK reported that more than 450,000 people had moved to temporary shelters in the affected areas.

Miyoko Sugiyama, who lived a few blocks from the beach near the hard-hit city of Sendai, said she was happy to escape with her husband and 14-year-old dog. “There were 2,700 homes” in her neighborhood, she said. “Now there are only a few left.”

Troubles continued to mount at the nuclear-power site in Fukushima Prefecture, where there was an explosion over the weekend. On Monday, an explosion occurred in the building housing a second reactor at the site, while the cooling system for a third reactor also failed, authorities said.

And in Tokyo, financial markets and commuters alike were pounded on the first working day after the quake.

Tokyo shares plunged, logging losses not seen since the first months of the global financial crisis. The Nikkei Stock Average closed at 9620.49, down 633.94 points or 6.2%—its sharpest single-day percentage loss since December 2008. The Topix index of all the Tokyo Stock Exchange First Section issues slid 68.55 points, or 7.5%, to 846.96, its heaviest loss since October 2008.

To prevent a cash crunch, the Bank of Japan injected a record 18 trillion yen (about $220 billion) into the short-term money markets and doubled the size of its asset-purchase program.

Ruined Homes and Radiation

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Aly Song/Reuters

Emiko Ohta, 52, can’t bear to look at the debris that was her home in Kuji, Iwate prefecture.

Confusion reigned at Tokyo Electric Power Company, which said it would conduct rolling outages during the day in order to conserve power, then reversed course at the last minute when it saw energy demand was lower than usual. But Tepco’s plans caused Tokyo’s train companies to drastically cut back service, leaving thousands of commuters without a way to get to work.

“I was really confused about both the power cuts and the train services,” said Nobuyoshi Takashimaya, a 56 year old employee at an insurance firm in Tokyo. He said he had to walk one hour from home to reach his office because his train wasn’t running.

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DOW JONES NEWSWIRES

MOSCOW — BP PLC on Saturday rejected a proposal that its Russian joint venture TNK-BP Ltd. join an alliance with state oil producer OAO Rosneft, while its Russian partners in TNK-BP rejected a compromise offer by the U.K. oil major, as pressure grows on BP to resolve a dispute that jeopardizes what Russian top officials have labeled a “historic deal.”

TNK-BP Ltd.–half-owned by BP–said Saturday it can no longer proceed with its plan to join an alliance between BP and Russian state oil champion Rosneft because its BP-nominated directors voted against the proposal at a board meeting.

BP announced in …

BY NEIL SHAH

While all eyes are trained on Japan’s effort to overcome its biggest earthquake on record and the radiation threat from a damaged nuclear plant, some investors are raising eyebrows over the yen’s recent strength.

On Friday the Japanese currency appreciated sharply against the dollar after the massive earthquake sparked speculation that companies from the world’s third-biggest economy could start shifting funds back home from the U.S. and elsewhere to help pay to rebuild — something that happened after Japan’s last major earthquake in 1995.

But this knee-jerk response may prove short-lived, several investors and analysts say.

For starters, worries are …

By CHARLES FORELLE And STEPHEN FIDLER

BRUSSELS—European leaders agreed in the wee hours Saturday on a program of long-term economic overhauls to the 17-member euro zone, and authorized a beefing-up of the bloc’s bailout fund for troubled countries.

But the meeting here was marked by several bitter disputes. Ireland, which sought better terms on the €67.5 billion ($93.8 billion) bailout it received last year, was rebuffed after refusing to contemplate raising its low corporate tax rate.

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Associated Press

German Chancellor Angela Merkel with French President Nicolas Sarkozy during the EU summit in Brussels.

European Central Bank President Jean-Claude Trichet pleaded with France and Germany to permit the bailout fund to buy some of the bonds of weak countries that the central bank has been accumulating during the crisis; he too was rebuffed.

The leaders formally agreed, as expected, to increase the amount the EU’s current, temporary bailout facilities can lend, to a total of €500 billion. They also agreed to create a new, permanent fund of the same size in 2013, when the temporary fund expires.

The meeting, which began Friday evening, was a stepping stone to a final deal that the leaders have promised will be concluded by March 25. Time is short. Tensions mounted in Greece after a weak budget report Friday and in Portugal after markets frowned on a bid for further fiscal cuts.

The leaders approved two other changes. First, the bailout funds will be able to buy bonds directly from euro-zone countries, presumably during regular debt auctions. Now, the fund can only make loans. Second, the bailout fund itself will be financed by at least some capital contributions from countries, instead of the current system of guarantees.

The first change will give the funds somewhat more flexibility, though the details of how purchases would work weren’t spelled out.

The second implies that weaker countries, whose guarantees aren’t as valuable as those of Triple-A-rated nations such as Germany, France and the Netherlands, may have to put up actual cash.

The leaders also agreed that bailout loans should carry lower interest rates, and they agreed that Greece’s rate should be cut by one percentage point. Athens, which received a bailout last spring, had asked for two.

But in a dramatic dispute, the Irish were told they couldn’t have a cut of one percentage point unless they raised their corporate tax rate.

Ireland’s newly seated prime minister, Enda Kenny, said after the meeting that he told the others he “couldn’t contemplate” a change to the tax rate. The Irish say their low corporate taxes—the rate is 12.5%–are central to luring foreign business to their soil and powering any economic recovery. Other countries chafe at this, particularly while writing Ireland billions in bailout checks.

“It wasn’t possible to reach a deal for Ireland this evening,” Mr. Kenny said.

Another major fight developed at the summit between German Chancellor Angela Merkel and French President Nicolas Sarkozy on the one hand and Mr. Trichet on the other, a senior EU official said.

Mr. Trichet wanted the bailout fund to be able to buy existing government bonds—because the ECB holds €77 billion of sovereign bonds it wants to offload.

But the German and French leaders insisted that the bailout funds only be allowed to buy bonds directly from governments. Their view won the day.

Buying existing bonds could sharply enlarge the size of the bailout funds, one reason why lending countries don’t want it to happen.

Herman Van Rompuy, the EU president, said buying existing bonds wasn’t seen as “a core business” of the funds.

Ms. Merkel justified the decision to buy bonds directly from governments, saying: “I don’t think it has such a huge impact.”

Mr. Trichet said the decisions made at the summit “go in the right direction.”

The economic overhauls, originally dubbed a “pact for competitiveness” and renamed a “pact for the euro,” stem from a proposal made by Germany and France more than a month ago. But the version approved Friday during a lengthy dinner is vaguer than the original, and tough provisions have been softened or removed.

—Riva Froymovich, Costas Paris and Patrick McGroarty contributed to this article.

Write to Charles Forelle at charles.forelle@wsj.com

By JEAN EAGLESHAM And LIZ RAPPAPORT

The U.S. government’s investigation into the collapse of Lehman Brothers Holdings Inc. has hit daunting hurdles that could result in no civil or criminal charges ever being filed against the company’s former executives, people familiar with the situation said.

Richard Fuld Jr.

In recent months, Securities and Exchange Commission officials have grown increasingly doubtful they can prove that Lehman violated U.S. laws by using an accounting maneuver to move as much as $50 billion in assets off its balance sheet, which made it appear that the securities firm had reduced its debt levels.

SEC officials also aren’t confident they could win any lawsuit accusing former Lehman employees, including former Lehman Chief Executive Richard Fuld Jr., of failing to adequately mark down the value of the large real-estate portfolio acquired in Lehman’s takeover of apartment developer Archstone-Smith Trust or to disclose the resulting losses to investors, according to people familiar with the matter.

People close to the investigation cautioned that no decision has been reached on whether to bring civil charges, adding that new evidence still could emerge. Investigators are reviewing thousands of documents turned over to the SEC since it began its probe shortly after Lehman tumbled into bankruptcy in September 2008 and was sold off in pieces. Officials also have questioned a number of former Lehman executives, some of them multiple times, the people said.

But after zeroing in last summer on the battered real-estate portfolio and an accounting move known as Repo 105, SEC officials have grown more worried they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn’t necessarily illegal.

In a possible sign that the probe has slowed, the SEC hasn’t issued a Wells notice to Lehman’s longtime auditor, Ernst Young, according to people familiar with the situation. The firm had concluded that the accounting in the Repo 105 transactions was acceptable. Wells notices are a formal signal that the SEC’s enforcement staff has decided it might file civil charges against the recipient.

An SEC spokesman declined to comment. In a statement, Ernst Young said the firm stands “behind our work on the Lehman audit and our opinion that Lehman’s financial statements were fairly stated in accordance with the U.S. accounting standards that existed at the time.”

The snags are the latest sign of trouble for the SEC and other U.S. regulators trying to punish companies and executives at the center of the financial crisis. So far, no high-profile executives have been successfully prosecuted. Last month, a federal criminal investigation of former Countrywide Financial Corp. Chief Executive Angelo Mozilo was closed without charges.

The U.S. government lost the only crisis-related case to go to trial when former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin were acquitted in November 2009 of criminal charges related to the $1.6 billion collapse of their hedge funds.

If SEC officials decide not to take enforcement action against former Lehman executives, they likely would escape criminal prosecution, too. The Justice Department “tends to follow the SEC’s lead in these complex financial cases, so reluctance to pursue civil charges generally means the federal agencies won’t take a criminal case,” said Elizabeth Nowicki, a former SEC lawyer who is an associate professor at Tulane University School of Law in New Orleans.

A spokeswoman for the Justice Department declined to comment on Lehman. In a statement, she said the agency “will continue to root out financial fraud wherever it exists. When we find credible evidence of criminal conduct—by Wall Street financiers, lawyers, accountants or others—we will aggressively pursue justice. However, we can and will only bring charges when the facts and the law convince us that we can prove a crime beyond a reasonable doubt.”

A year ago, it looked as if the SEC and federal prosecutors had a road map to use against Lehman’s former top executives. Last March, the Repo 105 transactions were condemned by court-appointed examiner Anton R. Valukas, who said in a report that they enabled Lehman to “paint a misleading picture of its financial condition.”

In the transactions, Lehman swapped fixed-income assets for cash shortly before the securities firm reported quarterly results, promising to buy back the securities later. The cash was used to pay down the company’s debts. Emails sent by executives at the company referred to Repo 105 as a “drug” and “basically window dressing.”

Mr. Valukas concluded there were “colorable,” or credible, legal claims against Ernst Young, Mr. Fuld and former finance chiefs Ian Lowitt, Erin Callan and Christopher O’Meara.

All four former Lehman executives have been scrutinized by the SEC, according to people familiar with the matter. Their lawyers didn’t respond to calls seeking comment. They previously have denied any wrongdoing related to Repo 105.

A December lawsuit against Ernst Young by soon-to-depart New York Attorney General Andrew Cuomo drew heavily on Mr. Valukas’s findings. Mr. Cuomo, who became New York’s governor in January, criticized the Repo 105 transactions as a “house-of-cards business model, designed to hide billions in liabilities in the years before Lehman collapsed.”

Mr. Cuomo’s successor, Eric Schneiderman, is “fully committed” to pursuing the case, a spokesman said. Ernst Young has vowed to vigorously defend itself against accusations that the maneuver violated generally accepted accounting procedures.

In contrast, SEC officials generally have concluded that the transactions were consistent with accounting standards, according to people familiar with the situation.

And agency officials aren’t convinced that Lehman shareholders suffered material harm, since executives were trading one type of highly liquid asset for another, these people said. They said the SEC would face a far lower bar if Lehman had converted illiquid or damaged assets, such as Archstone’s real-estate holdings, into cash using Repo 105.

Mr. Fuld and other former executives could face charges of making misleading statements about the company’s health before it sank. That likely would be an uphill battle for the government, according to people familiar with the matter, partly because the executives relied on legal and accounting opinions.

British law firm Linklaters LLP signed off on the Repo 105 transactions, all done through the securities firm’s European arm. Linklaters declined to comment.

SEC investigators also have looked for evidence that Lehman overvalued positions held by Archstone, which it acquired in 2007. SEC officials aren’t convinced, though, that they can build a strong enforcement action around such claims. In his report, Mr. Valukas wrote that he didn’t find “sufficient evidence to support a colorable claim for breach of fiduciary duty in connection with any of Lehman’s valuations.”

It isn’t clear what the Lehman executives have said to SEC officials during the probe. Last year, Mr. Fuld told lawmakers he had “absolutely no recollection whatsoever of hearing anything” about Repo 105 at the time of the transactions. Lehman’s demise was caused by “uncontrollable market forces” and the U.S. government’s unwillingness to rescue the firm, he said.

Beyond the Crisis

Status of enforcement actions against some of the highest-profile names of the financial crisis

Executive and company

SEC

Justice Department

N.Y. Attorney General
Joseph Cassano, American International GroupDecided last year not to file charges Decided last year not to file chargesNo actionFabrice Tourre, Goldman Sachs GroupSecurities fraud charges filed in April 2010No actionNo actionRalph Cioffi and Matthew Tannin, Bear StearnsSecurities fraud charges filed in June 2008Acquitted in Nov. 2009 of criminal chargesNo actionAngelo Mozilo, Countrywide FinancialHe agreed in Oct. 2010 to pay $67.5 million to settle fraud and insider-trading chargesInvestigation closed without filing chargesNo actionKenneth Lewis and Joseph Price, Bank of AmericaNo action against individuals. Bank of America agreed to pay $150 million to settle fraud charges last yearNo actionCivil lawsuits alleging fraud filed Feb. 2010Gary Crittenden and Arthur Tildesley Jr., CitigroupThe two men agreed to pay fines totaling $180,000 to settle fraud charges last yearNo actionNo actionLee Farkas, Taylor, Bean Whitaker MortgageFraud charges filed in June 2010Arrested and charged with fraud in June 2010. Trial starts in April.No action

Write to Liz Rappaport at liz.rappaport@wsj.com