Lehman May Pursue $11 Billion Barclays ‘Windfall’ (Update2)
April 09, 2010, 1:45 PM EDT
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By Linda Sandler
April 9 (Bloomberg) -- A bankruptcy judge rejected a bid by Barclays Plc to throw out Lehman Brothers Holdings Inc.’s motion to recover an $11 billion “windfall” the bank allegedly made on the purchase of the firm’s North American brokerage.
Barclays argued that if the judge reopened the sale contract he previously approved, buyers of distressed bank assets will become scarce. Lehman, which filed the biggest bankruptcy in U.S. history in 2008, said new evidence from 60 depositions and 100,000 documents on the sale justify forcing Barclays to give back its gains.
“The court was never told of the $11 billion gain for Barclays which was known before the sale hearing,” said Lehman lawyer Robert Gaffey at today’s hearing in U.S. Bankruptcy Court in Manhattan. “Barclays sat silent in court while Lehman’s lawyers described the deal to the court as a wash.”
A court victory for New York-based Lehman would add money for creditors with claims estimated at $260 billion, augmenting the $50 billion that Chief Executive Officer Bryan Marsal has said he aims to raise within five years.
The fight pits creditors and customers of Lehman, which before it failed used accounting methods that concealed billions of dollars of risks, according to an examiner’s report, against Britain’s second-biggest bank. Barclays more than doubled its profit last year and reported a $4 billion gain on the brokerage in 2008.
Opening Arguments
At the outset of today’s hearing, U.S. Bankruptcy Judge James Peck threw out Barclays request, instead declaring that he would immediately hear opening arguments on the case and conduct the remainder of the hearing April 26.
Gaffey, of the New York office of Jones Day, told Peck that “relief from the sale order is warranted by law whether there was an innocent mistake or deliberate concealment or fraud on the court.”
In an e-mailed statement today, Barclays spokesman Michael O’Looney said there is “no basis” for the claims.
“More than a year after the terms were agreed upon and contrary to well-established federal law the creditors seek to change the terms of the sale,” O’Looney said in the statement.
When Peck approved the Barclays purchase, he said the deal would help stabilize financial markets. Lehman, its creditors and the brokerage’s trustee, James Giddens, sued Barclays last November as the markets rebounded, saying it made too much money on the brokerage. Barclays said it is still owed $3 billion, which Giddens is withholding.
‘Sale Order’ Protection
“The judge has to somehow protect the idea of a sale order,” Lynn LoPucki, a law professor at the University of California, Los Angeles, said in an interview. The ruling by Peck may mean that “General Motors or Chrysler could come in and set aside the sales that made them into post-bankruptcy companies. You’re messing with the primal forces of nature.”
Lawyers for Barclays said in an April 5 filing in U.S. Bankruptcy Court in New York that “institutions that both had capital and were prepared to invest it had many opportunities to make substantial returns if -- and it was a big if -- the financial system recovered.”
The London-based bank’s acquisition may become costly if it loses or settles the lawsuits. Aside from amounts it might have to pay, its reported gain on the brokerage included the $3 billion it wants from Giddens, according to filings.
Marsal Benefit
Marsal would also benefit from a Lehman victory. His Alvarez & Marsal LLC restructuring firm, paid $247 million in 17 months to liquidate Lehman, will earn a 0.175 percent bonus on all further amounts recovered for unsecured creditors, according to court filings.
Giddens wants $6.7 billion from Barclays to pay brokerage clients. That includes the $3 billion in assets that he’s holding. The trustee has said that after transferring $92 billion owed to 110,000 customers in December, he may not have enough for hedge funds, banks and individuals trying to prove they have a right to be paid.
“The trustee is simply seeking relief from the sale order to the extent that it could be construed as entitling Barclays to the disputed assets and the excess value in question,” he said in a March 18 filing.
Peck will consider three lawsuits in all against Barclays, including one from creditors who have said they endorse efforts by the company and the trustee to get money from Barclays.
The Sole Bidder
Barclays, the sole bidder for Lehman’s brokerage, wouldn’t have closed a deal that failed to give it “maximum downside protection and substantial upside potential,” the bank said in the April 5 filing.
“If the trustee had wanted a different contract, he could have asked for it,” Barclays said. “It would violate contract law and the Constitution to retroactively override the sale of assets to a third party in order to remedy a subsequently discovered shortfall in customer property.”
Giddens, with Lehman’s advisers and creditors, agreed to the sale terms in a purchase agreement, sale order and so-called clarification letter, which gave 72,000 customers access to $40 billion in assets frozen in the bankruptcy, Barclays said.
Peck approved the sale, knowing that further details of the transaction would be spelled out later in the clarification letter, Barclays has said.
Lehman has accused Barclays of a “grab for billions in additional assets.”
A ‘Wash’
While Lehman directors were told the deal would be a “wash” for Barclays, which would take assets and liabilities of similar value, Lehman executives seeking jobs at Barclays gave the bank a secret $5 billion discount, Lehman said in a March 18 filing.
Before the sale closed, a similar amount of assets was added without telling the court, Lehman said, adding that these facts “could support a finding of bad faith or breach of fiduciary duty, or fraud on the court.”
Barclays has said all the terms of the transaction were known by Lehman’s advisers at the time of the sale.
At today’s hearing, Lehman lawyer Gaffey said the bankrupt firm didn’t know of the “windfall” because discounts and gains on the brokerage purchase were reached in secret by Lehman negotiators looking to jump to Barclays.
Gaffey also showed the court e-mails he said showed that Barclays officials knew the brokerage deal would reap them significant, undisclosed gains.
Lehman, once the fourth-largest investment bank, sought court protection with assets of $639 billion and has been in bankruptcy for more than 18 months.
Repeatedly Shut Out
A lawyer for Lehman creditors said at the hearing that they were repeatedly shut out from information on the purchase and weren’t able to reconcile changed data on asset transfers even after the sale.
There is an imperative for disclosure in bankruptcy sales, said creditor lawyer Susheel Kirpalani, yet Barclays “adopted a position that silence was golden.”
Peck nodded when Kirpalani, a New York lawyer with Los Angeles-based Quinn Emanuel Urquhart & Sullivan LLP, reminded the judge that he had previously stated that a $500 million discrepancy would be material to questioning the brokerage sale.
The cases are In re Lehman Brothers Holdings Inc., 08- 13555, and James W. Giddens v. Barclays Capital Inc., 09-01732, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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