Creditors sue Lehman, Barclays amid secret sale 'windfall' allegations

By Caroline Salls

Pittsburgh, Nov. 16 - Lehman Brothers Holdings, Inc.'s official committee of unsecured creditors filed a lawsuit Monday against the company, Lehman Brothers Inc., LB 745 LLC and Barclays Capital Inc. in connection with the September 2008 sale of Lehman's assets, according to a filing with the U.S. Bankruptcy Court for the Southern District of New York.

The committee said it is asking the court to declare that some post-bankruptcy transfers of billions of dollars in securities and other assets to Barclays from Lehman were not authorized under the Sept. 19, 2008 sale order.

Specifically, the committee said it is seeking a declaration that a self-styled clarification letter, which it claims was used as the vehicle for Barclays' attempt to transfer billions of dollars in assets in connection with the sale transaction, was never presented to, reviewed by, or approved by the bankruptcy court.

Although it was stated at the sale hearing that the parties were "hoping to finalize and actually present [the clarification letter] to Your Honor whenever it comes down here," the committee said this never occurred, and the court was never asked to approve the final, executed version of the letter.

"The misleadingly titled clarification letter is anything but a clarification to the sale transaction approved by this court," the committee said, as it "significantly altered the structure of the sale transaction from an asset sale to a trade that accomplished the sale of estate assets" through the termination of a previous repurchase agreement.

In addition, the committee said the clarification letter did not just change the mechanics of the sale, but, by setting forth certain buckets of securities, the clarification letter crystallized Barclays' receipt of a secret, undisclosed, $5 billion block discount in the value of the purchased assets."

"In addition to locking in this discount, the clarification letter provided the means to acquiesce to Barclays' harried, post-hearing demands for additional assets by purporting to transfer certain additional assets that were not part of the original asset purchase agreement, were not disclosed to the court, and were not specifically approved under the sale order," the committee said in the complaint.

As a result, the committee said it is asking the court to declare that the clarification letter and the transactions completed under the letter were never approved by the court.

The committee is also seeking an accounting from Barclays related to the assets transferred and liabilities assumed in connection with the sale transaction.

Lehman lawsuit

Additionally, Lehman Brothers Holdings filed a lawsuit against Barclays Monday to avoid and recover unauthorized post-bankruptcy transfers and other amounts owed to Lehman, alleging that the company has learned since the sale closing that "the sale transaction was secretly structured from the outset to give Barclays an immediate and enormous windfall profit."

As previously reported, some Lehman executives knew, but did not reveal to others in Lehman management or to Lehman's attorneys, that Lehman negotiators had agreed to give Barclays an undisclosed $5 billion discount off the book value of the assets transferred to Barclays, and later agreed to undisclosed transfers of billions more in so-called "additional value" that Barclays demanded for no additional consideration.

Lehman said the additional value was not approved by the court.

According to Lehman's complaint, in total, these undisclosed and unapproved features of the sale resulted in an embedded windfall to Barclays at the expense of Lehman of between $5 and $7 billion in excess collateral under the repurchase agreement, $2.7 billion in so-called additional value added to the deal while the sale hearing was in progress and after it had concluded and $2.3 billion in margin deposits purportedly added after the sale hearing ended.

In addition, Lehman said Barclays failed to pay $500 million of the bonuses it had agreed to pay, and paid only about $238 million of the $1.5 billion in cure liabilities that the court had been told it would likely assume.

New York-based Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008. Its Chapter 11 case number is 08-13555.

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