Citigroup Says It May Face Claims of Up to $3 Billion From Lehman Brothers

Citigroup Inc. said it may face demands by Lehman Brothers Holdings Inc. and its defunct brokerage for $3 billion in funds it took around the time of Lehman’s September 2008 bankruptcy filing.

The trustee liquidating the remnants of Lehman’s brokerage told Citigroup that he may try to recover $1 billion the bank took as a setoff against the brokerage’s obligations, Citigroup said in its annual report. Lehman may sue for the return of a $2 billion deposit placed with Citibank in June 2008, New York- based Citigroup said in the Feb. 25 filing with the U.S. Securities and Exchange Commission.

Lehman, which unsuccessfully sued Barclays Plc over an alleged $11 billion “windfall” that the U.K. bank realized in buying the bulk of the brokerage, has sued banks including JPMorgan Chase & Co. demanding tens of billions of dollars. The lawsuits follow a report by a bankruptcy examiner, Anton Valukas, into Lehman’s collapse, the largest in U.S. history.

Lehman, once the fourth-largest investment bank, may have grounds to sue JPMorgan and Citigroup because they helped cause its failure by demanding more collateral and changing guarantee agreements, Valukas said in his report last March, filed in U.S. Bankruptcy Court in Manhattan.

Kimberly Macleod, a Lehman spokeswoman, didn’t immediately respond to an e-mail seeking comment. Jake Sargent, a spokesman for brokerage trustee James Giddens, had no immediate comment.

The potential claims were reporter earlier by Reuters.

Citigroup also said the administrators of Lehman Brothers International Europe) have disputed Citigroup’s right to retain $2 billion in assets and cash held by the bank and related parties as custodians.

Reasons to Protect

While encouraging Lehman’s suits, Valukas said lenders had reasons to try to protect themselves as the investment bank’s finances deteriorated, giving them “substantial defenses” against any lawsuit.

JPMorgan, sued for $8.6 billion in collateral plus tens of billions of dollars in damages, has countersued, saying the defunct firm saddled it with securities Lehman employees allegedly described as “goat poo” to back $25 billion in loans.

Citigroup extended intraday credit to Lehman in handling currency trades, taking on “a certain amount” of credit risk under an agreement where the bank had “sole discretion” to lend or not, Valukas said.

In June, Citigroup obtained the $2 billion deposit from Lehman to reduce its intraday risk, he said. In July, Citigroup refused to take securities Lehman proposed as collateral in lieu of the cash deposit because it “questioned whether there was a ready market for them,” he said.

‘Acutely Concerned’

By early September, Citigroup had become “acutely concerned” about its claim on the $2 billion deposit, the Valukas report said.

An amended agreement gave Citigroup “a broad and explicit security interest over cash, securities or other assets held by Citi on behalf of Lehman,” according to the report.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

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