Star witnesses take stand at Lehman trial
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By Telis Demos and Nicole Bullock in New York
Published: June 20 2010 23:24 | Last updated: June 20 2010 23:24
As Lehman Brothers approaches its third year of bankruptcy, high-profile litigation is a central preoccupation. Starting Monday, John Varley and Bob Diamond, the two top executives at Barclays, will take the stand in Lehman’s lawsuit against the UK bank.
Lehman believes that the bank underpaid by at least $11bn for its North American brokerage.
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Already, Harvey Miller, New York’s best-known bankruptcy attorney, and Bart McDade, former Lehman chief executive, have testified in the trial.
Such star witnesses are evidence of how important Lehman sees litigation for boosting the recovery of assets for its creditors. Lehman says that $50bn-$75bn in value was lost in its chaotic winddown – and it has launched several lawsuits to try to get some of that amount back.
In addition to the Barclays action, Lehman is suing its former clearing agent, JPMorgan Chase, which Lehman argues played a role in its failure, and Nomura, a derivatives counterparty that filed claims with the court related to losses on contracts with Lehman that were terminated upon its bankruptcy.
Lehman says it had $690bn in assets when it fell into bankruptcy amid chaos in the financial markets in September 2008.
Lawsuits abound in wake of bank’s demise
? Lehman unveiled a large and long-anticipated lawsuit against JPMorgan in May.
In allegations denied by JPMorgan, Lehman argues the US bank precipitated its collapse by abusing its role as lead clearing agent. As Lehman weakened, JPMorgan demanded further collateral – $8.6bn cash, plus securities – to continue clearing trades, but Lehman says the move was aimed at covering trading exposure.
? Lehman filed a complaint against Bank of America for improperly seizing $500m of collateral, and has not ruled out suing other clearing agents, including Citigroup. But Lehman is less likely to sue pure clearing agents, such as Bank of New York Mellon, with which it did not also have trading relationships.
? Lehman wants to dispute or settle derivatives claims from many of the 43 large financial institutions that filed them.
In what could be the first in a series of lawsuits in the next few months, Lehman is suing Nomura Global Financial Products for an “egregious inflation by hundreds of millions of dollars”, in what Nomura claimed it is owed by Lehman on derivatives contracts. Nomura is defending the case.
Under a plan presented to the court this year, Alvarez & Marsal, the turnround specialists that are now running Lehman, have estimated pay-outs to some unsecured creditors of the holding company at just 15 per cent or less of their claims.
But if the lawsuits – which seek to recover at least $20bn – succeed, they would represent a significant improvement in return to creditors, a group that includes legacy holders, hedge funds and other distressed debt specialists betting that Lehman’s efforts will work.
“Those estimates don’t include any recovery on account of litigation,” says a source close to the bankruptcy. This person estimated that 15 per cent was a minimum return, and that it could be as much as 22 per cent.
The cost for these lawsuits is the fees paid to lawyers, managers and advisers, a bill that already nears $800m.
Alvarez & Marsal says the costs are in proportion to the complexity and size of the bankruptcy.
“It would be penny wise and pound foolish to shy away from litigation because there are legal expenses associated with it,” says Bryan Marsal, the acting chief executive of Lehman.
“Those expenses are far outweighed by the potential recoveries.”
Kenneth Feinberg, a pay expert who also serves as the Obama administration’s Wall Street compensation tsar, and will be administering BP’s escrow fund, is charged with monitoring fees.
If the fees are reined in, it could damp the recovery efforts.
“The creditors’ committee is obviously trying to assert all the claims they can possibly assert, that’s standard,” says Christopher Panos, a bankruptcy attorney with law firm Craig and Macauley.
“But with the caveat that the dollars they’re spending on litigation are being watched closely.”
This week, top executives at Barclays will be asked whether they structured the purchase of Lehman’s brokerage to produce an immediate, hidden accounting gain, which both have denied in past depositions.
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