Lehman Preferred Series "J" Preferred (fka LEHJQ)

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NEW YORK (Reuters) - Lehman Brothers Holdings Inc (Other OTC:LEHMQ.PK - News) told a U.S. bankruptcy judge on Friday that Barclays Plc (LSE:BARC.L - News) should be forced to return certain assets it received in its 2008 acquisition of Lehman's core U.S. brokerage, because Barclays arranged a secret $5 billion discount.

In opening arguments at a hearing in U.S. Bankruptcy Court in Manhattan, an attorney for Lehman Brothers claimed that Lehman and Barclays employees had hidden information about the discount from their lawyers and the court, amid intense deal negotiations in the darkest days of the financial crisis.

Lehman filed the largest bankruptcy in history on September 15, 2008, selling its flagship U.S. brokerage business to Barclays for about $1.85 billion less than a week later.

But Lehman is now asking Judge James Peck to make changes to the order that authorized the deal after months of investigation revealed that the sale described to the court was not the sale actually executed.

"Barclays planned on and insisted on the discount and they planned on the liability numbers being inflated," Robert Gaffey, a Jones Day attorney representing Lehman, told the court.

"It was not the wash described to the (Lehman) board, it was not the net benefit described to the estate," he continued, claiming that Barclays received an $11.2 billion immediate windfall profit on the assets it acquired, while the court was told that the sale would actually give Lehman a benefit of about $4 billion in terms of reduced liabilities and cash.

Gaffey showed the court emails from Lehman employees who had been offered new jobs at Barclays, revealing the conflicts they may have had as they were working to arrange the deal.

"They were on their way to new careers, they were serving their new master," Gaffey said.

He said the Lehman employees had arranged for Barclays to get a $5 billion discount on Lehman's $70 billion book of securities -- secretly reducing the values of the assets on Lehman's books, while their lawyers told the court that the markets had forced the change.

"It was not because the markets dropped, it's because the Lehman traders had instructions from Barclays to reduce the values to liquidation value," Gaffey said.

Gaffey said that whether the transfer of assets was a mistake or intentional did not matter, and that Lehman is entitled to the return of assets.

Barclays has argued that the deal was always intended to be positive to Barclays, that it was the best and only alternative for the failed investment bank, and that Lehman and its creditors are simply trying to "re-trade the deal" now that the credit markets improved.

Susheel Kirpalani, an attorney for Lehman's Official Committee of Unsecured Creditors, said in court that Barclay's arguments were "circular."

Lehman also has concerns about whether Barclays inflated liabilities it said it would assume related to Lehman's employees and whether a "clarification letter" tacked on to the deal after the court approved it materially changed the deal.

"This is not a case about seller's remorse," Kirpalani said." There is an even greater public policy issue at play -- that is transparency."

James Giddens, the trustee in charge of liquidating Lehman's brokerage and making sure customers receive their assets, has also joined the dispute against Barclays.

Barclays is expected to make its own arguments in the case later on Friday.

Lehman shares were down 4 percent at 11 cents in the over-the-counter market on Friday, while Barclays shares closed at 356.5 pence on the London Stock Exchange, down 0.2 percent.

The case is In re: Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555.

http://finance.yahoo.com/news/Lehman-to-court-Barclays-rb-2783224255.html?x=0&.v=1