By Joseph Checkler
NEW YORK--The trustee unwinding Lehman Brothers Holdings Inc.'s
brokerage continued his fight with Barclays PLC (BCS, BARC.LN) over
more than $2 billion Wednesday, with judges grilling lawyers on
both sides over a key document that governed the British bank's
purchase of Lehman's key assets on the hectic September 2008
weekend that presaged the financial crisis.
The definition of "cash" was a focal point, as three judges from
the U.S. Second Circuit Court of Appeals in New York tried to
determine if a bankruptcy judge properly approved a so-called
clarification letter that has repeatedly proved a sticking point in
the case.
Trustee James W. Giddens is appealing a 2012 U.S. District Court
decision handing Barclays most of the money in a "margin" account.
The ruling was a win for Barclays in what was part of a larger
battle over whether Barclays negotiated a "secret discount" when it
bought Lehman, a dispute also won by Barclays in a 2010 bankruptcy
court trial.
While Mr. Giddens's appeal was of the 2012 decision by U.S.
District Judge Katherine Forrest, the judges focused almost
entirely on the original bankruptcy-court decision.
Mr. Giddens, who is in charge of paying back Lehman's customers,
said U.S. Bankruptcy Judge James Peck strictly ordered "no cash"
should go to Barclays from Lehman in the 2008 sale. The judge
approved the sale at a hearing on Sept. 19, 2008, a Friday, and
told Lehman and Barclays to hash out the details over the
weekend.
Those details included, among other things, Lehman giving
Barclays exchange-traded derivatives and the cash tied to them. The
clarification letter depicted those assets and other transactions,
but was never expressly approved by Judge Peck.
Judge Gerard E. Lynch of the Court of Appeals said Judge Peck
seemed to give a mixed message regarding the letter.
"It's clear that [Peck] is enforcing the clarification letter,"
said Barclays's lawyer David Boies, of Boies Schiller & Flexner
LLP. Mr. Boies said that "no cash" really meant "no unencumbered
cash," meaning cash tied to the margin account would be eligible to
go to Barclays.
He said the deal depicted in the letter was the "same deal"
approved by Judge Peck, pointing out that representatives for
Barclays, Lehman and the trustee all signed the document, and that
the parties could have objected to it if they wanted.
William R. Maguire, a Hughes Hubbard & Reed LLP lawyer
representing Mr. Giddens, said the clarification later clearly
stated that no cash would go to Barclays from Lehman in the
transaction, and Judge Peck did as well.
"All Lehman cash was excluded from the deal," Mr. Maguire
said.
Judge Ralph K. Winter Jr. asked Mr. Maguire several questions
about the exchange-traded derivative accounts that were transferred
to Barclays, saying it would have been an "economic coup" for
Lehman to transfer those accounts without also transferring the
cash tied to them. Mr. Maguire responded, "You don't need a
seller's cash to buy a business."
Other lawyers arguing on behalf of Mr. Giddens said a ruling in
favor of Barclays would violate the spirit of the Bankruptcy Code's
rules regarding asset sales.
"It creates uncertainty for future bankruptcies and threatens
investor protection," said Kenneth J. Caputo, a lawyer for the
Securities Investor Protection Corp. Mr. Giddens is unwinding
Lehman in accordance with SIPC, which governs the liquidation of
brokerages.
In 2010, Lehman sued Barclays for billions of dollars, accusing
the British bank of negotiating a discount that wasn't adequately
disclosed to the court when it bought Lehman's broker-dealer unit
in 2008. Lehman sought to recover what it called more than $11
billion in ill-gotten gains by Barclays.
Barclays argued in the months-long trial that both sides
negotiated in good faith, and the deal, approved by Judge Peck just
days after the investment bank collapsed into bankruptcy, was
Lehman's best option.
In his ruling, Judge Peck, the bankruptcy judge, wrote at
several points about the clarification letter, emphasizing he had
never approved the actual letter.
But the judge agreed with a key Barclays argument about the
letter, saying, "While not expressly approved in so many words, the
clarification letter is deemed approved" by the fact that it was
known that it would be drafted, and that no party objected to it in
court.
While Lehman lost on its claims of a negotiated discount, the
trustee won on his dispute regarding the margin account and other
accounts. That prompted Barclays to appeal, and last June a U.S.
District Court judge agreed with the British bank.
Mr. Giddens is reserving more than $5 billion in case of an
unfavorable ruling on the dispute with Barclays. High-level
employees of several large hedge-fund managers, including Paulson
& Co., attended Wednesday's hearing. Those hedge funds are
creditors of Lehman and various subsidiaries and stand to get more
money back if Mr. Giddens wins his appeal.
Some 110,000 individual retail customers of Lehman's U.S.
brokerage have also received all their money back, $92.3 billion in
all. Mr. Giddens is now working to pay back the hedge funds and
other investors who had prime brokerage and other accounts with the
firm.
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 firm Alvarez & Marsal and the wind-down 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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