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Here Comes Lehmangate: Bankrupt Lehman Estate Gets Sellers Remorse; Are Criminal Charges Forthcoming?

Tyler Durden's picture


In a stunning development in the case of bankrupt Lehman Brothers, Jones Day today filed a statement in which it is essentially demanding over $5 billion from its "savior" Barclays, which ended up purchasing Lehman's North American brokerage, after the law firm and LBHI have allegedly uncovered massive behind the scenes machinations, whose sole purposes was to lower the cost price for the brokerage (and in the process impair Lehman equity and credit stakeholders) and to increase the amount of money transfered to Barclays.

Yet, the remedy proposed by Lehman is borderline ludicrous: in essence the firm is asking for well over $5 billion dollars back.

To right the wrong that resulted, it is not necessary for the Court to undo the sale. Rather, the Court needs only to require Barclays to return to the Sellers' estates the value it took in excess of what the Sellers were entitled to convey based on the record before the Court. That will require modification of the Sale Order, including the elimination of the reference to the so-called "Clarification Letter." Never submitted to the Court for approval, the Clarification Letter purported to significantly alter the Asset Purchase Agreement.

Jones Day's "brilliant" argument, which was evident all along, and which Zero Hedge discussed in February, most likely has only to do with the fact that the market has ramped an unprecedented amount since its low, and the lawyers together with the Estate have now, finally decided to extract a pound of flesh for a deal that so many claimed from the beginning was a gift to Barclays:

The deal was actually structured to give Barclays an immediate and enormous windfall profit. Certain Lehman executives agreed to give Barclays an undisclosed $5 billion discount off the book value of securities transferred to Barclays, and later agreed to give billions more in so-called "additional value" that Barclays demanded, but the Court never approved. This immediate windfall to Barclays (i) was not disclosed to the boards of LBHI and LBI, (ii) was not revealed in the agreement the Court was asked to approve, and (iii) was never disclosed to the Court until now...Lehman executives agreed to turn over an additional $5 billion in
assets to Barclays. These assets consisted of approximately $800
million in so-called "15c3-3 assets" and at least $1.9 billion worth of
unencumbered assets contained in so-called "clearance boxes." In
addition, by inserting various clauses in the post-hearing
Clarification Letter, additional assets, worth approximately $2.3
billion more, supposedly were transferred to Barclays, also without
consideration, disclosure or the Court's approval.

And here is where the Attorney General should focus, as the filing expressly highlights potential conflicted and likely criminal wrongdoing by select Lehman executives in those harried days after Lehman's bankruptcy, when it seemed that Barclays could get away with anything:

The tumultuous circumstances that led to the Sale Transaction also cannot explain away the manipulation of the numbers or the fact that everyone other than a few "negotiators" was kept in the dark about material aspects of the transaction. Whether these executives acted under mistake or inadvertence, or actually knew what they were doing, the result is the same: an undisclosed, unwarranted and inequitable loss to the Sellers' estates of many billions of dollars, and a huge windfall for Barclays...Pursuant to Section 559, upon Barclays' liquidation of the Repurchase Agreement, the "excess of the market prices" of the assets subject to the Repurchase Agreement over the "stater repurchase prices" for those same securities should have been "deemed property of the estate."

Some of the Lehman and Barclays negotiators, however, attempted to make this Section 559 problem disappear after the Sale Order was entered by (i) purporting to "rescind" the Notice of Termination retroactively (as if it never had existed), (ii) changing the definition of "Purchase Assets" in the Asset Purchase Agreement to substantiate the assets subject to the Repurchase Agreement, (iii) declaring that Barclays would purportedly "have no further obligations" under the Repo Agreement, and then (iv) "terminating" the Repo Agreement, all presumably to avoid the mandate of Section 559.

The foregoing is exacerbated by the fact that many of the Lehman decision-makers who "negotiated" the transaction with Barclays had at the same time been offered lucrative Barclays employment contracts conditioned on the closing of the Sale Transaction. This not only calls into serious question the arms length nature of the transaction but evidences that the circumstances surrounding the Sale Order mandate a thorough review of the record on which it was based.

Whether or not this is market-timing dependent, the fundamental truth is that Barclays most likely ended up getting well over what was disclosed in the Lehman Asset Purchase Agreement, and if indeed there were behind the scenes arrangements, criminal indictments should be sure to follow. The Jones Day argument makes it fully clear why Bob Diamond was so reluctant to acquire the entire Lehman estate (with its toxic cesspool of assets which are now stuck in limbo), but jumped at the opportunity to structure a deal which (i) made the firm come out as a saviour, not in the least due to wifebeating Judge Peck's repeated claims certifying the fact, but (ii) was a major cash cow, once all is said and down, and which allowed Barclays to report stunning earnings as a result of this daylight robbery. It does not, however, explain why Jones Day did not carefully pore over the APA and any related documents. Of course, Jones Day has already pocketed tens of millions in legal fees, so one wonders where they were in those harried days just after the Lehman filing, and why they did not actually do their homework before signing off on the Barclays transaction.

One can only hope that the perpetrators of this bad-will and less than "arms-length" transaction are swiftly brought to justice. However, in a banana republic such as the US, where the judicial and the regulatory system have both been corrupted beyond repair, with the sole purpose of making sure the market ramps up no matter what the cost, it is likely that this will also end up as some settlement formality. In the meantime, recoveries to Lehman bondholders, who may have been able to sell their bonds much higher had all this been evident a year ago, will not change, and impaired stakeholders will never get any retribution, even as Jones Day manages to clock hundreds of thousands of more hours, trying to now unwind what they were so fervently pushing in the days after September 15, 2008.



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Tue, 09/15/2009 - 15:38 | Link to Comment Bubby BankenStein
Bubby BankenStein's picture

Off topic:


There was a historic rally Saturday September 12 in Washington DC.
Yes this was another Tea Party, but was more than a collection of fringe activists:
Despite mainstream media attempts to characterize turnout as in the thousands, a spokesman for the National Park Service, Dan Bana, is quoted as saying "It is a record.... We believe it is the largest event held in Washington, D.C., ever."
It is estimated that from 1.2 to 2 million participants were there in Washington by way of their own time and money.
Here is video coverage of this event provided by C-SPAN,  A must watch!


Tue, 09/15/2009 - 16:14 | Link to Comment Anonymous
Tue, 09/15/2009 - 19:29 | Link to Comment Anonymous
Tue, 09/15/2009 - 16:17 | Link to Comment Anonymous
Tue, 09/15/2009 - 17:26 | Link to Comment clotario
clotario's picture

The photo I saw claiming "thousands" were protesting actually showed a crowd about ten people deep.


...and how much did the insurance industry pay to get them there?

Tue, 09/15/2009 - 20:57 | Link to Comment Bubby BankenStein
Bubby BankenStein's picture

70152 & 70162:

So what if 10,000 or 2,000,000 people were there.  They exercised their right to free assembly.

70162 - Most of the people at the Tea Party are taxpayers who have every right to use public space in a legal manner as has been done.

Do you get the message, or are you sitting on an Acorn waiting for something to happen?

Wed, 09/16/2009 - 00:13 | Link to Comment Anonymous
Tue, 09/15/2009 - 19:02 | Link to Comment AN0NYM0US
AN0NYM0US's picture

the official USA today Crowd estimating tool for Washington DC



Wed, 09/16/2009 - 00:14 | Link to Comment Anonymous
Wed, 09/16/2009 - 06:44 | Link to Comment Anonymous
Tue, 09/15/2009 - 15:39 | Link to Comment Project Mayhem
Project Mayhem's picture

haha wtf

Tue, 09/15/2009 - 15:41 | Link to Comment buzzsaw99
buzzsaw99's picture

The bonuses will be enormous!

Tue, 09/15/2009 - 15:48 | Link to Comment cougar_w
cougar_w's picture

This whole business was an example of picking the meat off the carcass. Anyone thinks these sorts of things proceed either in the open, or in a controlled manner, is not paying attention.

To complicate things, the managers overseeing the dismemberment of their own enterprise in turn expect a new job with the profiteers whom they assisted, not coincidentally managing the pot of money they helped loot.

And if not themselves (as that might lead to criminal indictments later) then certainly their buddies, who in turn will scratch their back in return of a favor at a later time, winkwink.

This is how the rich loot not only a single company that lands on the rocks, but an entire economy. They just do what comes naturally to them and don't stop to worry about either the legal ramifications nor the ethical implications, because they are both immune and blind to both.

It's just money. Just move the money around some more. Keep that money moving.


Tue, 09/15/2009 - 15:49 | Link to Comment agrotera
agrotera's picture

This is the exact equal and opposite of the BAC/MER transaction where the deal extracted money from the buyer for the bought...and somewhere in the very middle there might have been justice.  But, from the start, the Lehman collapse didn't have to happen...hank held up their request for bank holding status and ben refused them the 6billion bridge loan---oh, it's hank and ben again, what do you know?

If these injustices dont get righted, we can be assurred of our country's banana republic status.

Tue, 09/15/2009 - 15:59 | Link to Comment cougar_w
cougar_w's picture

As I recall the explanation at the time, Lehman was destroyed by the other banks as punishment for earlier acts not becoming of an oligarch, having to do with their non-playing-by-the-rules regarding LTCM back in 1998. It's an interesting idea that appeals to my sense that Machiavellian intrigue at this level operates over decades.

Tue, 09/15/2009 - 17:32 | Link to Comment Hephasteus
Hephasteus's picture

It does. When the 2nd czar of russia helped the US they got put on the central bank payback list that took decades to take off.

Wed, 09/16/2009 - 00:19 | Link to Comment Anonymous
Wed, 09/16/2009 - 02:52 | Link to Comment theadr
theadr's picture

Kinda like Sadaam w/ the Dick & Don Show.

Tue, 09/15/2009 - 15:53 | Link to Comment Anonymous
Tue, 09/15/2009 - 15:54 | Link to Comment Anonymous
Tue, 09/15/2009 - 15:56 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

The mind is overwhelmed by the level of thieving to date. No need for masks or guns because the powers-that-be are on the take.

Silly me, I thought this only happened during Al Capone's rein in Chicago.

Tue, 09/15/2009 - 16:08 | Link to Comment cougar_w
cougar_w's picture

Latter-day mobsters have relearned the fine art of operations "sub rosa". Though I wonder if as the wheels come off they'll revert to their less refined methods. After all, carefully playing one's cards close to the vest is less an issue if you can just kill everyone else at the table and gather up their chips.

A sudden increase in "suicides" might be expected, though disappearances would work as well. And the sharks cruising off New York harbor won't complain.

Tue, 09/15/2009 - 16:57 | Link to Comment agrotera
agrotera's picture

The privately held Federal Reserve corp, and their ownership of half of the Dow, provides them with the money to buy all elected officials and thus, laws are made to support the criminal activities that have been going on for many years...but the breakdown of Glass-Stegall, the packaging and selling of fraudulently rubberstamped AAA garbage, and the final insult, telling the country that we have to save the blackholebanks because they are "toobigtofail" was a flat out bank heist beyond anything Al Capone had going.

Tue, 09/15/2009 - 15:56 | Link to Comment deadhead
deadhead's picture

"Just don't take the RACERS!"


Tue, 09/15/2009 - 18:02 | Link to Comment Uros Slokar
Uros Slokar's picture

HAHAHAHAHAHA. Seriously, that one sentence tells you all that needs to be known about the reality of how the world operates. It'd be absolutely hilarious if it didn't make me want to poke my eye out.

Tue, 09/15/2009 - 15:57 | Link to Comment Anonymous
Tue, 09/15/2009 - 16:02 | Link to Comment Cursive
Cursive's picture

Ahem.  Perhaps a case of seller's remorse?  LEH shareholders ought to sue the Federal Reserve.  LEH wasn't worth anything, just got put down before Helicopter Ben starting raining the Benjis.

Tue, 09/15/2009 - 16:06 | Link to Comment Anonymous
Tue, 09/15/2009 - 16:17 | Link to Comment cougar_w
cougar_w's picture

Yeah... but why? Doesn't this sort of thing endanger all of them, in the end? Why don't the oligarchs just resolve this behind closed doors to every one's mutual gain? It's not as if any regulators or shareholders will either notice or care.

Makes me think the powerful are flexing their influence and making an end-run. Aiming to gobble up one another until but a few are left standing, the banking equivalent of the imperialist era of the 1800s. I doubt very much that we'll be able to operate very freely in a world controlled by just 3 banks and no independent governments, one bank of which is likely to be Goldman Sachs.


Tue, 09/15/2009 - 16:31 | Link to Comment Anonymous
Tue, 09/15/2009 - 16:09 | Link to Comment Careless Whisper
Careless Whisper's picture


WTF is that all about?

Tue, 09/15/2009 - 16:18 | Link to Comment cougar_w
cougar_w's picture

If we told you that, we'd have to kill you.

Tue, 09/15/2009 - 16:19 | Link to Comment HEHEHE
HEHEHE's picture

I demand the SEC investigate and impose a stiff fine! 

Tue, 09/15/2009 - 16:21 | Link to Comment Anonymous
Tue, 09/15/2009 - 16:23 | Link to Comment Hoi Polloi
Hoi Polloi's picture

Wasn't the Lehman-Barclays deal the "Deal of the Century"?


Read it here:

Tue, 09/15/2009 - 16:24 | Link to Comment MinnesotaNice
MinnesotaNice's picture

Can we have Judge Rakoff put on the case... please...

Tue, 09/15/2009 - 18:15 | Link to Comment Uros Slokar
Uros Slokar's picture

Sadly, the entirety of the Honest Branch of the US judiciary is currently all filled up dealing with a little SEC case, in which the wrongdoer is none other than the SEC. YAYYYY America!!!

Tue, 09/15/2009 - 19:10 | Link to Comment MinnesotaNice
MinnesotaNice's picture

Yeah... thanks for pointing that out... it is futile... there is only one Judge Rakoff... and a whole lotta wrongdoing going on around here... kind of like a western movie where the lone law man has to take on every bad guy in the country.

Tue, 09/15/2009 - 20:03 | Link to Comment Uros Slokar
Uros Slokar's picture

I gotta believe there is a "Deep Throat" out there somewhere who is going to help bring it all down. But it will also probably involve more than one good man - here's hoping Rakoff gets a little help. And let's also hope he manages to avoid the Suicide Flu that's been going around of late.

Tue, 09/15/2009 - 21:07 | Link to Comment HEHEHE
HEHEHE's picture

I guess Rakoff doesn't care about making it to the Second Circuit;)

Tue, 09/15/2009 - 16:42 | Link to Comment Anonymous
Tue, 09/15/2009 - 17:12 | Link to Comment John Self
John Self's picture

To be fair the the greenshootsters, I don't recall any of them ever saying that it would save an obsolete business model.

Wed, 09/16/2009 - 03:01 | Link to Comment theadr
theadr's picture

Like brick and mortar banking?

Tue, 09/15/2009 - 16:49 | Link to Comment AR
AR's picture

Accolades to Tyler and staff. This is superb reporting and disclosure. We truly compliment ZH's intensity toward the truth, not only in this Lehman/Barclay matter, but all topics reported and discussed. Please keep up the great work. We know work like this can be exhausting, though rewarding.

Tue, 09/15/2009 - 18:10 | Link to Comment computertrades
computertrades's picture

I hope charges are pressed soon.

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

Tue, 09/15/2009 - 17:03 | Link to Comment Silver Bullet
Silver Bullet's picture

How great would it be to see Madoff, Fuld, Diamond, Lewis and Cox all share the same cell block?

Wed, 09/16/2009 - 02:58 | Link to Comment theadr
theadr's picture

So they can plan their next heist?

Tue, 09/15/2009 - 17:14 | Link to Comment John Self
John Self's picture

But meanwhile, the quick trigger on the Lehman sale has already been cited as precedent for approving the Chrysler [ironically, represented by Jones Day] and GM debacles.  Now after the fact... hey, who would have thought something could go awry when you sell hundreds of billions of dollars on 24 hours of negotiations and no notice to interested parties?

Tue, 09/15/2009 - 21:47 | Link to Comment t0gn (not verified)
Tue, 09/15/2009 - 17:21 | Link to Comment Commander Cody
Commander Cody's picture

Do lawyers ever get prosecuted?

Tue, 09/15/2009 - 17:36 | Link to Comment waterdog
waterdog's picture

"To right the wrong that resulted, it is not necessary for the Court to undo the sale."

Are these people stupid? Do not bring something up in the court if you do not want the court to do anything.

Let me paraphrase- Dear Judge, for you to do your job, just do what we want.

Are these people stupid?

Each day we get closer to the puppet master.

Tue, 09/15/2009 - 18:10 | Link to Comment contrabandista13
contrabandista13's picture

Barclays used to be the corresponding bank for my overseas dodgy tax evading account back in the 80s....  I had three mortgages with them secured by my Swiss bank account.  I lent myself the money that I stoled from customers and I made in my overseas trading accounts, through Barclays.  This way I could bring the money stateside tax free and deduct the interest that I paid to myself on the properties I bought with my ill gotten wealth...  "Those were the days my friend, we thought they'd never end...", apparently it's only gotten better...  


I think that Phil Gramm was a customer of mine back then along with Bunker and Lamar.  As a matter of fact, I think I still have some of the money I took out of their pockets in the form of a Pollock.....  



Tue, 09/15/2009 - 21:47 | Link to Comment t0gn (not verified)
Tue, 09/15/2009 - 22:23 | Link to Comment Anonymous
Tue, 09/15/2009 - 23:05 | Link to Comment Anonymous
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