Barclays purchase of Lehman unit ruled fair

A US bankruptcy court judge has ruled that Barclays’ purchase of Lehman Brothers’ US broker-dealer was fair and should not be revisited.

The court also ruled that the Lehman estate should turn over nearly $2bn still owed to Barclays as part of the deal.

The defunct investment bank, which went bankrupt in September 2008, had sued Barclays in 2009 to recover some $13bn described by Lehman counsel, the firm Jones Day, as a “buffer” and an “undisclosed windfall gain”.

The Lehman estate claimed the UK banking group had “scrambled” for assets and arranged a hidden, immediate gain on a deal that was described to the court as a “wash”. The alleged result was that Barclays received billions more in assets than the $45bn in cash it gave to Lehman.

Barclays argued that all aspects of the deal were fully disclosed via a clarification letter to the court, and that Lehman’s own counsel, Harvey Miller of Weil Gotshal, signed off on the transaction. Barclays did later book a $4.2bn gain on the transaction, but said it was related to “intangible” accounting value.

The decision is a blow to the Lehman estate as it attempts to recover assets, currently estimated at some $60bn, and also to collect billions through litigation to repay its creditors, most of whom are set to receive less than 25 cents on the dollar for their claims.

Lehman said it was studying the decision. Barclays said in a statement that it was “pleased” with the court’s ruling.

Judge James Peck, of the southern district of New York federal bankruptcy court, made the ruling. He was the same judge who initially approved the deal.

Judge Peck also ruled that Barclays was entitled to $1.9bn in a countersuit against Lehman that claimed that certain assets agreed in the deal were not delivered. He said Barclays was entitled to cash held in a “clearance box” account with the Depository Trust & Clearing Corporation.

However, the judge ruled that $4.8bn in customer assets and margin accounts should be returned by Barclays to Lehman’s trustee, who is in charge of returning cash to Lehman’s clients and had filed a separate suit against Barclays.

‘Today’s ruling upholds our position that $4.8 billion in assets claimed by Barclays are part of the (Lehman) estate and should be available to satisfy customer and other claims,’ said James Giddens, the trustee, in a statement.

Judge Peck wrote in his decision: “Indisputably, facts regarding this ‘buffer’ were not disclosed.” But he said that “the court was not concerned, one way or the other, about the existence of a spread between the value of assets and liabilities”.

He wrote: “These disclosures do not support relief from the sale order because the overall transaction with Barclays, notwithstanding the buffer, provided the means for the most favourable disposition of these assets with the least amount of risk. ... The court did not base its approval of the sale on the concept of a ‘wash’.”

Barclays' counsel, the litigation firm Boies, Schiller & Flexner, also had argued that the deal was the best possible for Lehman amid the ongoing chaos in the financial markets caused by its bankruptcy and the seizure of AIG by the US government.

Judge Peck agreed with that logic. “The sale process may have been imperfect, but it was still adequate under the exceptional circumstances,” he wrote.

Mr Miller and Lehman’s chief executive at the time, Bart McDade, in testimony told “a story of an honest effort to make the best of a very bad situation”, wrote Judge Peck.

Lehman filed for the largest-ever bankruptcy in 2008, with some $690bn in assets. It has also been the most expensive ever to administer. The estate has paid more than $2bn in fees to lawyers and professionals in the US and Europe.

“There is going to be a lot of second-guessing over this suit, and the professionals might feel that when it comes time for final fee applications,” said Stephen Lubben, professor of law at Seton Hall University.