Almost five years after Lehman Brothers Holdings filed for bankruptcy and set off the global financial crisis, managers of the bank’s estate are demanding millions of dollars from retirement homes, colleges, and hospitals. As it seeks to collect more money to pay creditors, Lehman now says it was shortchanged by scores of clients, including nonprofits, that were forced to pay to settle derivatives contracts that were unwound after the firm filed for Chapter 11 protection.
The Buck Institute for Research on Aging in Novato, Calif., gave Lehman $2 million in October 2008 to cancel a swap contract used to manage fluctuating interest rates. Lehman says that was much less than the contract was worth. It wants $12.1 million more and has assessed at least an additional $4.7 million in interest, the research center said in its most recent financial statement. The amount Lehman is seeking is more than half of what Buck spent last year researching Alzheimer’s, Parkinson’s, and other diseases. “Lehman is sort of a zombie-like bankruptcy entity: Instead of looking for brains, it’s looking for cash,” says Chip Bowles, a bankruptcy lawyer with Bingham Greenebaum Doll in Louisville who is not involved in any of the cases.
Before the financial crisis, Wall Street banks and insurers peddled financial derivatives known as interest rate swaps to governments and nonprofits as a way to lower the cost of borrowing. When Lehman filed for Chapter 11, many institutions that had swaps and other derivatives with the bank ended their transactions. Depending on the terms, the client either owed Lehman money or was owed money on the date the contract was unwound. Typically, calculating the value of a contract would entail seeking quotes from at least three banks to determine what it would cost to replace the swap. Since the market stopped functioning after Lehman’s collapse, establishing those prices involved guesswork.
Some nonprofits, municipalities, and companies hired financial advisers to calculate how much it would cost to buy a replacement contract. In October 2008, the Buck Institute wired a $2 million termination payment to Lehman with a detailed explanation of the method it used to determine the amount, according to a court filing and Buck’s financial statements. Mary McEachron, Buck’s chief administrative officer and general counsel, declined to comment, except to say the matter hasn’t been settled. Kim Macleod, a spokeswoman for Lehman, declined to comment about the talks.
The disputes are taking place in confidential mediation sessions set up by the bankruptcy court in 2009. Lehman had more than 1.7 million derivative trades with thousands of banks, hedge funds, companies, municipalities, and sovereign nations when it filed for protection from creditors. A derivative is a security whose price is dependent upon one or more underlying assets. Common types include futures contracts, options, and interest rate swaps.
Some of Lehman’s former clients have stopped fighting. Colorado’s Housing and Finance Authority settled a dispute over swaps with Lehman as of March 2012 for an undisclosed sum, according to its most recent financial report. Others, such as Simmons College in Boston and Havenwood-Heritage Heights, which runs a retirement community in Concord, N.H., are balking at Lehman’s demands. Simmons, a 5,000-student liberal arts school, paid Lehman $5.5 million to exit three swaps in January 2009. It held back $800,000 for out-of-pocket expenses, the college reported in its June 30, 2012, financial statement. Lehman disagreed with the amount, and more than three years later notified the college that it wanted to negotiate a settlement through mediation. A spokeswoman for Simmons College declined to comment.
Havenwood-Heritage Heights paid a termination fee of about $420,000 in 2009. The nonprofit disclosed that Lehman wanted another $1.9 million as of Dec. 31. Michael Palmieri, president of Havenwood, didn’t respond to telephone calls requesting comment. Lehman tacks on interest of almost 14 percent annually on what it considers unpaid swap debts, according to Phil Weeber, director of risk management at Chatham Financial, who is advising corporate clients in mediation with the bank’s estate.
Under bankruptcy law, lawyers and managers of a failed company have a responsibility to raise as much money for creditors as they can. Lehman has “a duty to maximize their return to their bankruptcy creditors,” says Bowles. “If you’re Mother Teresa, they’ll go after you.” Lehman exited bankruptcy in March 2012 and is still liquidating. It has distributed about $47.2 billion and wants to pay creditors a total of $65 billion by about 2016, giving them an average of 18¢ on the dollar. “Lehman, from the very beginning, said they were going to use an assertive legal strategy to protect the estate,” says Weeber. “That’s what they’re doing, and they’re very good at it.”