Lehman Bros 7.25% Pref'd Series P (fka LEHPQ)

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Fed Draws Court's Eyes in Lehman Bankruptcy

http://online.wsj.com/article/SB125443891097957691.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

By JEFFREY MCCRACKEN and MICHAEL SPECTOR

A court-appointed examiner investigating Lehman Brothers Holdings Inc.'s bankruptcy has been exploring whether the Federal Reserve improperly cut in front of other creditors owed money in the $613 billion bankruptcy case, records show.

Billing records filed with the court show the examiner is investigating an issue that has angered many Lehman's creditors: how the Federal Reserve and the New York Fed -- which lent Lehman $46 billion in cash and securities before its bankruptcy filing last September -- were paid promptly and in full, while tens of billions of dollars in other debts were left to be sorted out in court. It remains unclear when and how much Lehman creditors will be repaid.

The examiner, Anton Valukas, chairman of law firm Jenner & Block LLP and a former U.S. attorney, said, "I am under a court order not to discuss what we are doing or how we are doing it."
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Fed loans were crucial to propping up Lehman during its final days, and were part of an extraordinary government attempt to stabilize Lehman in the chaotic weeks of mid-September 2008. The government ultimately quashed a rescue of Lehman, which filed for bankruptcy protection. But its earlier steps now are open to scrutiny in bankruptcy court.

Details on the examiner's work remain scant, and it is possible no actions will be brought. Should the examiner determine that the Fed got preferential treatment, bankruptcy administrators could pursue court claims to recover assets for Lehman's creditors from the Fed, on the theory those assets should have remained with Lehman when it filed for bankruptcy last September.

Such a finding would have little legal precedent and could turn politically fraught, bankruptcy lawyers say. Yet it could bring a focus to one of the unresolved questions of the financial crisis: just how much special treatment the federal government receives above private-market players when it becomes a direct participant in the markets.

"We have no knowledge for the basis of any potential claims by the estate against the New York Fed," said Deborah Kilroe, New York Fed spokeswoman. "The New York Fed has fully cooperated with the Lehman examiner."

Many legal experts said bringing claims against the Fed would be an uphill battle, because the Fed would qualify under a long-held standard of sovereign immunity. That concept generally holds that the government can't be held legally accountable for its actions.

But Lehman's estate could have an opening, because by the standards of bankruptcy law, the government isn't supposed to receive immunity, said Richard Levin, a partner at law firm Cravath, Swaine & Moore LLP who helped write the U.S. bankruptcy code. "The Lehman estate could sue the Fed," Mr. Levin said, adding that the Fed would likely argue it can't be held liable.

The examiner's investigation into the Fed was disclosed in descriptions of legal work presented in billing records to the bankruptcy court in August.

Running hundreds of pages, the records are for the first five months of 2009, and touch a gamut of issues. For instance, the May 20 billing records also show research for possible claims against J.P. Morgan Chase & Co., though it remained unclear what actions might be brought against the Wall Street bank. J.P. Morgan declined to comment.

Bryan Marsal, co-head of restructuring firm Alvarez & Marsal that is running the Lehman estate, said he didn't know what the examiner was investigating.

As is typical in complicated bankruptcies, examiners are appointed by the court to investigate matters surrounding a company's Chapter 11 filing. The examiner submits findings to the court in a report, leaving any legal action to others.

As the credit crunch deepened in March 2008, the Fed set up a new lending facility for investment banks. For the first time, these investment houses were able to borrow from the government on much the same terms as commercial banks.

Overall, the New York Fed lent Lehman $46.2 billion in cash and Treasury securities for $50.6 billion in collateral, according to Federal Reserve affidavits filed in bankruptcy court. As a result of Lehman's sale to Barclays PLC following its bankruptcy, the New York Fed was later paid back in cash, with the Treasury securities returned. Lehman's broker-dealer also borrowed tens of billions of dollars from the Fed in the period from Sept. 11 through Sept. 15 last year.

One Lehman creditor said the concern is "whether the government used its power and influence to make sure it got paid back in full, while the rest of us get dimes on the dollar."

The requests for payment show the court examiner researching what are called "preference" claims against the Fed.

Preference claims attempt to claw back assets a company moved shortly before filing for Chapter 11, said Cravath's Mr. Levin. Such moves, if made within 90 days of a bankruptcy filing, are deemed to "prefer" one creditor over others. The bankruptcy code dictates that such value should be moved back to the bankruptcy estate, to be shared among all creditors.

Billing records for Jenner & Block and its financial adviser Duff & Phelps, make numerous references to investigating "possible claims against Federal Government," the Federal Reserve and the New York. Fed. Most of that research relates to "avoidance" claims.

Jenner & Block said that on May 18 it "reviewed background material re possible claims against Federal Government."

There also is a reference in May to time spent to "research case law for proof outline re suit against Fed for avoidance or preference." The billing records also refer to time spent analyzing Fed emails to Lehman, researching the New York Fed and its conflicts of interest and interviewing witnesses at the New York Fed.

Mr. Valukas, in comments to the court seeking more time for his probe, said his team had reviewed over 10 million pages, interviewed 95 witnesses and issued some subpoenas. He expected to interview 60 more witnesses.