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Lehman Seeks a Total of $11 Billion From Barclays (Update3)March 18, 2010, 4:37 PM EDT
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By Linda Sandler

March 18 (Bloomberg) -- Lehman Brothers Holdings Inc., the investment bank liquidating in bankruptcy, said it was seeking a total of $11 billion from Barclays Plc, including a $5 billion “windfall” allegedly gained by the U.K. bank when it bought Lehman’s North American brokerage.

In a lawsuit filed in November, Lehman said Barclays received a “secret” discount of $5 billion on securities it acquired as part of the purchase, and a $3 billion gain on other assets taken on. New findings since November show that Barclays’s total gain was really $11 billion, according to a court filing today in U.S. Bankruptcy Court in Manhattan.

Lehman seeks to alter the sale agreement struck with Barclays 18 months ago, based on possible “fraud or misrepresentation” because the gains weren’t disclosed to the bankruptcy court, according to the filing. Barclays, Britain’s second-largest bank, denied the windfall and said it was owed $3 billion on the deal.

To allow Lehman to “recut a deal that they wanted when they needed it simply because it has turned out well is not only unfair and legally barred,” said Jonathan Schiller, a lawyer for Barclays at Boies Schiller & Flexner LLP in New York, in a phone interview today. “It would undermine the ability of the federal government and private parties in the future to sell distressed bank assets in order to protect as much as possible depositors, shareholders, creditors, and the government.”

Peck Approved

U.S. Bankruptcy Judge James Peck approved Barclays’ purchase days after Lehman filed the biggest bankruptcy in U.S. history, saying the deal was needed to help stabilize global financial markets. Lehman, its advisers and trustee James Giddens said losses would be in the hundreds of billions of dollars if the sale wasn’t completed, according to court filings.

As the financial markets recovered, separate lawsuits were filed against Barclays in November by Lehman, its creditors and the trustee. Today is the deadline for another round of filings. A bankruptcy court trial is scheduled for April 26.

Absent From Meetings

Lehman said even its financial advisers didn’t understand the Barclays deal. Today’s filing cited testimony from Harvey Miller of Weil Gotshal & Manges LLP, Lehman’s lead bankruptcy lawyer, that no one from his firm was ever told of a $5 billion discount. Lazard Ltd. investment banker Barry Ridings, the key financial adviser on the deal, said in a deposition that he was absent from key meetings and unfamiliar with an e-mail discussing a discount for Barclays.

Barclays, in a January filing, used Miller and Ridings to show that Lehman’s lead advisers were familiar with the discount and approved it anyway. The sale was made just after Lehman declared bankruptcy on Sept. 15, 2008, amid concern that the Lehman Brothers Inc. brokerage faced liquidation.

At Lazard, employees’ e-mails cited by Barclays discussed a discounted price “to reflect the bulk size of the purchase.” Lehman’s restructuring firm, Alvarez & Marsal, told Lehman’s creditors in October 2008 about the “$5 billion reduction,” according to documents cited by Barclays.

‘Bet-the-Ranch’

Barclays’s gain wasn’t assured when financial markets were in disarray, Ridings told Barclays’ law firm in January, according to a transcript included in the bank’s court papers.

“If Barclays had expended this money and the capital markets continued to fall, there was a chance Barclays would then subsequently fail,” he said. “It was a bet-the-ranch transaction for Barclays.”

Miller said he couldn’t immediately comment and Ridings didn’t respond to e-mails seeking comment. Lehman spokeswoman Kimberly Macleod said today’s filing focuses on what was said in September 2008, “not on testimony given many months later.”

Barclays, the only bidder for Lehman’s brokerage, acquired Lehman’s brokerage and real estate for $1.54 billion. As part of the deal, it took on Lehman assets and liabilities. Barclays paid $45 billion for securities valued by Lehman at $49.7 billion, the U.K. bank has said. Brokerage trustee Giddens still has about $3 billion of those securities, it said.

The cases are In re Lehman Brothers Holdings Inc., 08- 13555, and James W. Giddens v. Barclays Capital Inc., 09-01732, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from William Rochelle in New York. Editors: Mary Romano, John Pickering.

To contact the reporter on this story: Linda Sandler in New York at [e-mail].

To contact the editor responsible for this story: David E. Rovella at [e-mail].

http://www.businessweek.com/news/2010-03-18/lehman-shows-auditors-fail-investors-eight-years-after-reforms.html