Lehman Preferred Series "J" Preferred (fka LEHJQ)

[mik1]

Lehman Brothers Inc. Europe

says the trustee winding down its U.S. counterpart could try to block European creditors from recovering $8.9 billion. But allowing such a claim has the potential to dilute recoveries for U.S. customers of Lehman Brothers Holdings Inc.'s brokerage.

In papers filed Monday with the U.S. Bankruptcy Court in Manhattan, the European entity said it "defies explanation" as to why James W. Giddens, the trustee winding down Lehman's U.S. broker-dealer, could determine that Lehman Brothers Europe claims should not receive the same treatment as other customers of the U.S. brokerage.

Giddens has determined that the European entity could "never" be entitled to a customer claim because it's a Lehman affiliate, court papers said.

"The trustee has simply created a purported exclusion out of whole cloth," attorneys for Lehman Brothers Europe said in court papers. U.S. laws governing the wind down of a brokerage "contains no exclusion for affiliates of the debtor."

The trustee's decision--which the European unit is seeking to overturn--could have a significant impact on the both U.S. customers and the European brokerage, which is also being wound down.

If the European claim is treated the same as other customer claims, that unit would share in a sizable recovery. If instead the claim is relegated to general unsecured status, the European entity, and therefore its general creditors, may see nothing at all.

Full allowance, however, of the disputed claim would soak up a significant portion of the remaining funds in the U.S. brokerage's estate--setting up the possibility for a rare occurrence: customers of a regulated U.S. broker-dealer receiving less than a full recovery.

The Securities Investor Protection Corp., the brokerage regulator, says under its watch 99% of all customers have received a full recovery.

As of April, Lehman's U.S. brokerage had $22.8 billion in assets and had allowed about $10 billion claims. Some $42 billion remained unresolved, including the European claim. The trustee is expected to release updated figures next week.

The $8.9 billion claim is the largest still pending against the U.S. brokerage. Giddens has already allowed a separate $8.3 billion claim from Lehman Brothers Europe for the benefit of its customers.

The Lehman brokerages on each side of the Atlantic served as clients and clearinghouses for one another, processing trades for the other in their respective territories.

At the time of Lehman's collapse in September 2008, Lehman Brothers Europe said its U.S. counterpart held billions of dollars worth of securities and cash that was both it and its customer's property.

The trustee in the U.S. has conceded that the customer assets should be returned but balked at the same treatment for the European unit's "house" claim.

That claim consists of assets the European unit placed in the U.S. brokerage on its own account and on behalf of certain customers who had turned over title to their securities to Lehman Brothers Europe.

"We are studying the objection and expect to file a response on September 30," Giddens's office said in a statement Tuesday.

A proposed schedule to litigate the dispute with the European brokerage was filed with the court last week, the trustee said.

That schedule, which has not yet been made public, could extend the fight into 2013.

Giddens is winding down Lehman's U.S. broker-dealer business under SIPC's authority. His team has transferred some 110,000 brokerage accounts with a value of more than $92 billion out of Lehman Brothers following the investment bank's collapse in 2008. The bulk of the Lehman customer accounts were transferred to Barclays PLC (BCS).

The broker-dealer's bankruptcy case is being administered separately from Lehman Brothers Holdings' Chapter 11 proceeding.

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