Barclays Plc is set to defend itself against Lehman Brothers Holdings Inc.’s claim that it should pay as much as $11 billion after allegedly making an undisclosed “windfall” on its purchase of bankrupt Lehman’s brokerage.
The bench trial resuming today before U.S. Bankruptcy Judge James Peck in Manhattan after a summer holiday pits the U.K.’s third-biggest bank, represented by lawyer David Boies, against Lehman, which filed the biggest bankruptcy in U.S. history in September 2008 and wants money from Barclays to pay creditors.
The money would help Lehman creditors, who may recoup only 15 cents to 44 cents on the dollar, Lehman has said, and hurt Barclays, which made 2.4 billion pounds ($3.7 billion) in the first half. The judge may encourage a settlement to avoid undoing a sale he approved, with Barclays paying less than it risks in a court-ordered judgment, contract experts said.
“Peck might signal to Lehman and Barclays that he very much wants this settled,” said bankruptcy-law professor Lynn LoPucki, who teaches at Harvard Law School. “Judges have ways of pressuring lawyers and litigants to settle.”
Under U.S. Bankruptcy Judge Arthur Gonzalez, Enron Corp. creditors seeking $20 billion from Citigroup Inc. settled for $1.7 billion in 2008; Citigroup also waived claims on Enron.
Peck approved the brokerage deal within a week of Lehman’s Sept. 15, 2008, Chapter 11 filing as the subprime meltdown threatened credit markets. Lehman, its creditors and the brokerage trustee James Giddens sued Barclays last November as markets rebounded.
Lawyers for Lehman spent three weeks questioning witnesses including Barclays Chief Executive Officer John Varley in an effort to show that the bank raided Lehman’s assets before the deal closed and didn’t tell the judge.
Lehman said Barclays made $5 billion of “secret” profit on a portfolio of securities it took on with the brokerage, and another $6 billion by writing up business assets, skimping on promised payments and “grabbing” money in margin accounts and clearance boxes.
Barclays said Lehman’s advisers signed all the documents disclosing the transfers and didn’t object at the time. The trial broke off June 25.
Barclays will call witnesses who worked on the Lehman deal: Mark Shapiro, a Lehman restructuring expert now with Barclays; Stephen King, a former Barclays trading executive; Gary Romain, an accounting specialist at Barclays, and lawyers from Cleary Gottlieb Steen & Hamilton LLP.
If Lehman needs prodding to settle, Peck might “signal” to its lawyers that their fees might not all be approved, LoPucki said. Lehman paid its lawyers, advisers and managers $44.5 million in July, bringing the total fees to $917.6 million for 22 1/2 months in bankruptcy, a regulatory filing shows.
More Than Enron
That topped the $757 million that energy trader Enron’s three years of bankruptcy cost, according to data compiled by LoPucki.
To pressure Barclays to settle, LoPucki said Peck might “make things difficult” for the bank’s lawyers or for key witnesses.
Peck has sometimes done that. When Boies said it was up to Lehman’s advisers to disclose details of the deal, as his client had no “speaking role” at the 2008 sale hearing, Peck said, “I was here and you weren’t. Barclays had very much of a speaking role.”
Peck called Barclays President Robert Diamond “evasive,” telling a Lehman lawyer, “This is a witness that needs to be kept on a very tight leash.”
Paid to Review
Boies showed in May that the brokerage trustee charged $12,600 for reviewing documents detailing assets Barclays would get when it bought the brokerage, including a $4 billion margin account.
“I don’t know if we knew it was in there when we signed it,” Giddens’s lawyer said.
Lehman CEO Bryan Marsal testified that he hadn’t seen e- mails and documents sent to him or his firm, or hadn’t focused on them or had been confused by them.
So-called 363 bankruptcy sales, used by Lehman to save brokerage customers and by General Motors to rescue its best assets, are final under law. If Peck undoes the sale, future potential buyers of distressed assets might offer to pay less because of the risk the deal would be unwound, said George Kuney, a University of Tennessee College of Law professor who teaches bankruptcy and contract law.
“Especially in a large transaction, a judge would be reticent to overturn the sale order absent a clear showing of fraud or other impermissible action,” he said.
The cases are In re Lehman Brothers Holdings Inc., 08- 13555, and Giddens v. Barclays Capital Inc., 09-01732, U.S. Bankruptcy Court, Southern District of New York (Manhattan).