By Joseph Checkler
Of DOW JONES DAILY BANKRUPTCY REVIEW
The Securities and Exchange Commission has weighed in on a
dispute between Barclays PLC (BCS) and the trustee unwinding Lehman
Brothers Holdings Inc.'s (LEHMQ) brokerage, saying a bankruptcy
judge was correct in allowing the brokerage to keep more than $1.3
billion if that money is needed to pay customers back.
In a filing last week in Manhattan federal court, the SEC said a
rule that protects brokerage customers was properly honored by the
judge and that a decision allowing the money to unconditionally go
to Barclays would have violated rules. Lehman's bankruptcy judge
has said some money can "conditionally" go to Barclays, but the
trustee said because of a shortfall, it would need the money so it
could pay back customers.
The $3 billion dispute between Barclays and the trustee, James
W. Giddens, stems from the less-followed portion of a February 2011
decision by Judge James Peck of U.S. Bankruptcy Court in Manhattan
in what came to be known as Lehman's "secret discount" lawsuit.
In the more widely followed portion of the February ruling, Peck
rejected most of the Lehman parent company's claims of Barclays
reaping a secret windfall when it bought Lehman's broker-dealer
unit in September 2008.
During the trial, the trustee separately argued that some of the
money that went to Barclays at the time of the transaction should
have actually been given to brokerage customers. Peck agreed,
ordering the British bank to pay $2.054 billion to the trustee, a
decision Barclays is appealing. In yet another part of the
decision, Barclays is said to be entitled to an additional $869
million in so-called "clearance box" assets. Giddens is appealing
that part of the ruling, saying that also belongs to customers.
Essentially, the $2.054 billion is from accounts that the
trustee considers "cash," which it was explicitly said wouldn't be
transferred to Barclays during the tumultuous days of September
2008.
Lehman last year sued Barclays for billions, accusing the
British bank of negotiating a discount not adequately disclosed to
the court when it bought Lehman's broker-dealer unit in 2008.
Barclays argued in the months-long trial that both sides negotiated
in good faith, and the deal, approved by Peck just days after the
investment bank collapsed into bankruptcy, was Lehman's best
option.
Lehman pressed its case that in September 2008, when Barclays
was finalizing its purchase of Lehman's brokerage, Barclays
scrambled for more assets and negotiated with some Lehman
executives a $5 billion discount. Lehman said its bankruptcy
attorney, Weil, Gotshal & Manges partner Harvey Miller, and
other Lehman representatives weren't informed of the discount and
neither was Peck. Lehman sought to recover what it called more than
$11 billion in ill-gotten gains by Barclays.
In his ruling, Peck wrote at several points about the so-called
"clarification letter" that became a focal point of the case, a
letter Peck agreed on at the time of the sale should be drafted to
address several complications and list some assets moving over from
Lehman to Barclays. On several occasions throughout Lehman's
bankruptcy and the Barclays trial, Peck emphasized he had never
approved the actual letter.
But in the ruling, Peck 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.
Earlier this month, Peck signed off on Lehman's $65 billion
creditor-payback plan, which should be put in motion in the coming
few months.
Giddens, the trustee, is winding down Lehman's broker-dealer
business under the authority of the Securities Investor Protection
Corp., which governs the liquidation of failed brokerage firms.
Giddens is also the trustee in charge of unwinding MF Global
Holdings Ltd.'s (MFGLQ) brokerage.
His team quickly 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, with assets of more than $40 billion,
have been transferred to Barclays.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection.)
-By Joseph Checkler, Dow Jones Newswires; 212-416-2152;
joseph.checkler@dowjones.com