Lehman Brokerage Payout Nearer After $38 Billion Pact

Defunct brokerage Lehman Brothers Inc., which hasn’t paid hedge funds after four years in liquidation, is nearer to making them whole after reaching a “critical milestone” in settling a $38 billion dispute with an affiliate, the trustee said.

Brokerage trustee James Giddens, who is facing payment demands by New York hedge fund Elliott Management Corp., said the brokerage approved a $7.5 billion customer claim by Lehman Brothers International Europe, plus income of $600 million, with another approved claim of $500 million by the affiliate. The brokerage will get a general claim against LBIE of $4 billion, he said in a statement yesterday.

“This is a critical milestone for customers because, if approved by the court, the agreement sets the stage for distributions that will provide for 100 percent recovery of customer property,” he said. “The agreement resolves tens of billions in claims from LBI’s largest single customer claimant and will allow for customer and creditor distributions much sooner than if LBIE’s claims involving hundreds of thousands of transactions were litigated.”

The brokerage and its parent, Lehman Brothers Holdings Inc., have been disputing for years the claims filed against them, with some of the largest coming from former affiliates. Giddens has said that LBIE, the Lehman parent and the Swiss affiliate had the largest claims against the brokerage.

The Lehman brokerage will settle a $6 billion claim by the Swiss affiliate, granting a $190 million customer claim and a $360 million unsecured creditor claim, Giddens said in a federal court filing in Manhattan on Oct. 3. The settlement with Lehman Brothers Finance AG will help the brokerage trustee to pay hedge funds and banks “as soon as possible,” he said.

First Payment

The Lehman parent made its first payment of $22.5 billion to creditors last April, about 3 1/2 years after filing the biggest U.S. bankruptcy in history on Sept. 15, 2008, and a second payment this month of $10.2 billion. The brokerage collapsed four days after the parent and is being separately liquidated by Giddens.

Elliott demanded in June that Giddens pay an initial $3.2 billion soon. Giddens responded by saying Elliott is a “claims trader,” or buyer of claims in the secondary market, and doesn’t share other customers’ interests. Last month, two creditor groups sided with Elliott, with an unofficial group in favor of giving Giddens just 60 days to resolve claims with the European affiliate. The official group didn’t set a deadline.

LBIE originally wanted $15.1 billion for customers and $8.9 billion for itself, according to Giddens. The brokerage is giving up an unsecured claim against LBIE of $13.8 billion, he said.

Paid in Full

Customers, including banks and hedge funds, would be paid in full, he said.

Jake Sargent, a Giddens spokesman, wouldn’t say if the trustee had set a date for the first payment or how big it would be. “The size and timing of distributions depend on finalizing this agreement in principle, due process for all parties and court approval. The trustee is focused on moving efficiently through this legal process to clear the way for distributions,” he said by e-mail. Giddens transferred most of the brokerage’s retail accounts to Barclays Plc (BARC) in 2008.

The Lehman brokerage liquidation is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The parent’s 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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