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Lehman Brokerage Sale Was Good for U.S., Lawyer Says (Correct)

(Corrects to attribute comment to creditors’ adviser in 12th paragraph of story published yesterday.)

Lehman Brothers Holdings Inc.’s sale of its brokerage to Barclays Plc following the securities firm’s collapse in 2008 saved jobs and helped the country, its lead bankruptcy lawyer said.

Harvey Miller, a partner at Weil Gotshal & Manges LLP, was Lehman’s first witness today in a trial over whether Barclays should pay as much as $11 billion to Lehman for an alleged “windfall” the bank received when it bought the brokerage.

Miller was asked by Barclays’s lawyer Jonathan Schiller if he felt the brokerage sale had accomplished what he had hoped when he advised the judge to approve it on Sept. 19, 2008.

“Generally the transaction did accomplish that,” Miller said. “It was of enormous benefit to the nation. We saved a business that would have put 10,000 people out of work if it hadn’t been sold. So I am very proud of what happened.”

The fight in U.S. Bankruptcy Court in Manhattan before Judge James Peck pits the U.K.’s second-biggest bank, which more than doubled its profit last year, against Lehman, which wants money to pay off creditors and brokerage customers. Lehman said its advisers didn’t know how much money Barclays would make on the deal, which was sealed in the wake of Lehman’s 2008 bankruptcy, the biggest in U.S. history.

Schiller, of New York-based Boies Schiller & Flexner LLP, asked Miller about Barclays’ announcement that it expected to record billions of dollars in profit on the purchase.

Making Money

“It wouldn’t be inconsistent,” Miller said. “We live in an era of financial engineering.” People buy assets and expect to make money from them, he said.

While Lehman creditors have said Barclays failed to disclose such information to the court, Miller said he himself “probably wouldn’t” consider that such an accounting gain should be brought to the judge’s attention, as it was already public and “didn’t go to the substance of the transaction.”

Barclays’s accounting gains on goodwill or reduced contract obligations weren’t significant, because the deal was considered as the transfer of a business, Miller said.

Schiller asked Miller if he agreed with Lehman creditors who said it was a mistake not to bring all the sale documents, including a so-called “clarification letter,” back to the court.

Miller said the conclusion was “there was no material change” in the deal that required disclosure to the court.

The creditors’ committee’s adviser told him, ‘If it’s okay with you guys, it’s fine with us,’ Miller said.

No Planning

The clarification letter was filed in court on Monday Sept. 22, 2008, describing final changes to the deal.

Earlier today Miller said Lehman’s bankruptcy was “preceded by no planning whatsoever” and the sale of its brokerage was negotiated amid pressure from regulators to stabilize financial markets,

“This was not normal merger and acquisition activity, this was very unusual,” said Miller, testifying on the third day of the trial. He described the brokerage assets in September 2008 as “a melting ice cube” that would quickly have lost value if not swiftly transferred to a buyer.

“Values were plummeting,” Miller said. Lehman executives Richard Fuld, Herbert “Bart” McDade and Steven Berkenfeld were concerned about how to preserve some of the brokerage’s value, he said.

Moving Target

Miller’s testimony partly explained why parts of the sale documents were never scrutinized by the court. He said he had explained in court at the sale hearing as “objections were coming in and Blackberries were wearing out” that the deal was “a moving target.”

Peck approved the deal in unfinished form because he “said he didn’t see any other realistic alternative,” Miller said, apologizing to the judge for paraphrasing him.

Lehman lawyer Robert Gaffey of Jones Day has said he will show Lehman executives seeking jobs at Barclays gave the bank a “secret” discount on its purchase of the brokerage that was never disclosed to Lehman’s advisers or the judge.

Lehman’s second witness today was Martin Kelly, formerly Lehman’s global financial controller and now chief financial officer for Barclays Capital in the U.S.

Gaffey described Kelly’s compensation agreement with Barclays, including a $700,000 “special cash bonus” and another bonus of more than $1 million.

Reason for Bonus

“Did you ever ask why you should be getting this bonus?” Gaffey asked. Kelly said he hadn’t asked.

While he was present at negotiations for the sale, “I wasn’t negotiating,” Kelly said. “I was not making decisions around what was being sold or the values assigned to them.”

Gaffey referred to e-mails from Ian Lowitt, Lehman’s former chief financial officer, and former Lehman treasurer Paulo Tonucci, congratulating him on the Barclays deal.

“Did you ask anyone why they were congratulating you?” Gaffey said. Kelly said it was probably just “relief” that the sale had gone through.

Peck said during the questioning, “This witness has a serious credibility issue with the court.”

As Gaffey tried to get Kelly to say Lehman’s assets had been marked down to reflect the negotiated sale price, Peck said to Kelly, “Answer him, yes or no.”

Kelly answered yes, the assets had to be brought into line with the market values.

Secret Profit

Lehman, its creditors and the brokerage trustee sued Barclays last November as the markets rebounded, saying the bank made too much money on the purchase. Lehman accuses Barclays of taking a $5 billion “secret” profit on the portfolio of securities it took on with the brokerage, and of making another $6 billion by writing up business assets, skimping on promised payments and “grabbing” more financial assets belonging to Lehman.

Barclays has said the terms of the deal were all known before the sale. It says it is still owed $3 billion on the transaction.

Peck is handling three lawsuits against Barclays, including one by the Lehman brokerage’s trustee, James Giddens, and one by creditors.

The cases are In re Lehman Brothers Holdings Inc., 08- 13555, and James W. Giddens v. Barclays Capital Inc., 09-01732, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Linda Sandler in U.S. Bankruptcy Court in New York at lsandler@bloomberg.net and;

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