Lehman sues Citibank, seeks return of billions in transferred funds

By Caroline Salls

Pittsburgh, Feb. 8 - Lehman Brothers Holdings Inc. filed a lawsuit Wednesday in an effort to recover $2.5 billion in cash transferred to Citibank in the months leading up to Lehman's Chapter 11 filing and hundreds of millions of dollars owed by Citibank, as well as to reduce or disallow more than $2 billion of allegedly inflated and legally unsupported claims filed by Citibank against the Lehman estates.

The lawsuit was filed in the U.S. Bankruptcy Court for the Southern District of New York against Citibank, NA, Citigroup Global Markets Ltd., Citigroup Financial Products Inc., Citigroup Energy Inc. and Citi Canyon Ltd.

Lehman said in the lawsuit that "Citibank is wrongfully withholding $2 billion of LBHI cash and has taken the position that it may set off and apply that $2 billion to pay itself dollar-for-dollar on billions of dollars in claims that would otherwise be unsecured - all in violation of the Bankruptcy Code, state law and the parties' understanding regarding the allowed purpose and usage of those funds."

Lehman alleged that the claims filed by Citibank and the other defendants are overstated and invalid, including more than $2 billion of miscalculated claims arising from derivatives contracts.

In addition, Lehman said the defendants have refused to return $500 million of the company's cash transferred to the account of its broker-dealer subsidiary at Citibank hours before the Lehman bankruptcy filing, refused to pay hundreds of millions of dollars owed to Lehman under the derivatives contracts and refused to pay more than $200 million owed under a clearance agreement.

According to the lawsuit, Citibank made a rushed demand in June 2008 that Lehman transfer $3 billion to $5 billion into an account held at Citibank to give the bank assurance that the funds would be available in its system to cover potential overdrafts that might be incurred in the trading accounts of some Lehman subsidiaries using Citibank's clearing and settlement services.

Lehman said it subsequently agreed to segregate $2 billion from its general purpose account at Citibank and transfer it to a separate, special purpose account at Citibank.

However, Lehman said it agreed to make the transfer only on the condition that Citibank would have no setoff rights, nor any lien or other security interest on the $2 billion.

Lehman said Citibank demanded on Sept. 9, 2008 that the company execute an amendment to a guaranty that allegedly gave Citibank the right to apply all or a portion of the $2 billion to the clearance-related obligations of the Lehman subsidiaries.

After Citibank allegedly reduced Lehman's credit lines dramatically and threatened to cease clearing Lehman's trades altogether, the company said it had no choice but to execute the amendment.

As a result, Lehman transferred $500 million to a Lehman Brothers, Inc. account held at Citibank.

Lehman said Citibank set off $1 billion of the Lehman Brothers, Inc. obligations, including the $500 million transferred by the holding company.

After its bankruptcy filing, Lehman said it asked Citibank to return the $2 billion so it could be available for creditors, but Citibank refused and locked down the funds for itself, claiming that Citibank could now use them to pay itself dollar-for-dollar on any and all claims against Lehman.

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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