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.