Lehman sued for misappropriation of $450 million of cash collateral

By Caroline Salls

Pittsburgh, Jan. 26 - Lehman Brothers Holdings Inc. has been accused of misappropriation of cash collateral in a lawsuit filed Wednesday by Pulsar Re, Ltd. in the U.S. Bankruptcy Court for the Southern District of New York.

Lehman Commercial Paper Inc. is also named as a defendant in the lawsuit.

According to the complaint, Pulsar pledged $450 million to Lehman's Bermuda reinsurance affiliate Lehman Re Ltd. to collateralize Pulsar's reinsurance obligations to Lehman Re.

However, Pulsar alleged that "Lehman misappropriated all of these funds as part of its plan to provide financing to [Lehman Brothers Holdings] in its attempt to improve its balance sheet by moving illiquid assets to subsidiaries and other affiliates."

Pulsar is asking the court to impose a constructive trust against the Lehman entities.

"The Pulsar cash collateral is not part of the Lehman estate and should be placed in trust for Pulsar," the lawsuit said.

Pulsar said it entered into a series of agreements with Lehman Re under which Lehman Re ceded about $1 billion in reinsurance risk to the plaintiff.

Under these agreements, Pulsar pledged the $450 million in cash to Lehman Re to secure its reinsurance obligations.

Pulsar said the parties agreed that the pledge would be held in a segregated custodial account in cash and not be converted into any other assets. Any unused portion was to be periodically returned to Pulsar.

However, Pulsar said in the lawsuit that Lehman Re never even opened a custodial account for the cash collateral.

Instead, Pulsar said it learned after Lehman's bankruptcy filing that Lehman Re was forced into liquidation and "all of the Pulsar cash collateral was misappropriated by Lehman through a one-sided repurchase transaction backed by illiquid and materially overvalued assets."

New York-based Lehman Brothers Holdings 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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