By Joseph Checkler
NEW YORK--A judge on Tuesday approved three measures that will
together allow billions of dollars to be returned to customers of
Lehman Brothers Holdings Inc.'s collapsed brokerage, and soon.
Judge James Peck of U.S. Bankruptcy Court in Manhattan said
James W. Giddens, the trustee unwinding the brokerage, could
allocate $15.2 billion to a fund that would pay back customers,
mostly big banks and hedge funds that didn't receive their money
when Lehman collapsed.
That money was only freed up after Mr. Giddens' historic
settlements last year with both its parent company as well as the
bank's U.K. affiliate, Lehman Brothers International Europe, both
of which were also approved by the judge on Tuesday.
"I want to congratulate everyone involved in this truly
extraordinary process," Judge Peck said in approving the
settlements and allocation of money. The judge called the
settlements "one of the most complex matters to ever be resolved,
in history, at least in a commercial sense." Some money is being
held back at least initially, in case Lehman loses in its
long-running fight against Barclays PLC (BCS) over disputed assets
surrounding Barclays' purchase of Lehman's brokerage in bankruptcy
court in September 2008.
Hughes Hubbard & Reed LLP's James B. Kobak Jr., a lawyer for
Mr. Giddens, called the deals approved Tuesday "probably the most
important in the history" of any case under the Securities Investor
Protection Act, which governs the liquidation of failed brokerages.
In a statement released after the hearing, Mr. Giddens called the
settlements "a milestone for customer protection" and said he
expects distributions to begin once the court's order is entered
and the agreements are effective. That could happen soon after a
May 1 hearing in the U.K. over the settlements.
The 110,000 individual retail customers of Lehman 's brokerage
received all their money back, $92.3 billion in all, soon after the
bank's September 2008 collapse. But the nonretail customers have
had to wait as Mr. Giddens sorted out billions of dollars of claims
from both the Lehman parent company and the U.K. arm.
Now, 400 or so customers, mostly institutions and prime
brokerage customers of the U.S. brokerage, are set to be paid in
full. Lawyers for Lehman Brothers Holdings and its creditors
supported the approvals, partly because it avoids costly litigation
and partly because some of the general creditors will also receive
money from Mr. Giddens.
Under the settlements, Lehman Brothers ' holding company will
cut its customer claim against the brokerage to $2.3 billion from
$19.9 billion and reduce its "general" claim to $14 billion from
$22 billion.
That $14 billion claim will be paid in accordance with Lehman's
historic creditor payback plan approved by a judge late in 2011.
Creditors of the holding company are getting more than 20 cents on
the dollar for their claims while those with claims against
affiliates in many cases will receive even more.
The distinction between a "customer" claim versus a "general"
claim is crucial in a situation like the Lehman case, governed by
SIPA. Customer claims are paid 100 cents on the dollar from Mr.
Giddens ' coffers.
The money held by Mr. Giddens will also be distributed to some
holders of the "general" claims, who will get paid back in
accordance with the Lehman parent's payback plan, but not at 100%
satisfaction. Lehman has made a total of $47 billion in
distributions so far, with the most recent one taking place earlier
this month.
Lehman collapsed in September 2008, becoming a symbol of one of
the great financial crises in the country's history. Its U.S.
brokerage business was quickly sold to Barclays, but the remnants
of the rest of Lehman still exist in billions of dollars of assets
being overseen by Alvarez & Marsal and the winddown of the
brokerage business under Mr. Giddens 's guidance.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Joseph Checkler at joseph.checkler@dowjones.com
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