Barclays Plc protected itself when it bought Lehman Brothers Holdings Inc.’s defunct brokerage by focusing on the “maximum exposure” it was taking on in the falling markets of September 2008, a bank executive said.
“Markets were very depressed and going one way, downward,” Rich Ricci, co-chief executive of Barclays’s corporate and investment bank, told a bankruptcy judge in New York today. “We wanted to make sure we had protection in case things went wrong.”
Ricci testified today in a trial of Lehman’s claim that Barclays should pay it as much as $11 billion for an allegedly undisclosed “windfall” on the brokerage. The deal closed a week after Lehman’s September 15, 2008, bankruptcy, the biggest in U.S. history.
The fight in U.S. Bankruptcy Court in Manhattan before Judge James Peck pits the U.K.’s third-biggest bank against Lehman, which wants money to pay off creditors and brokerage customers. The brokerage’s trustee, James Giddens, seeks $6.7 billion from Barclays to pay hedge funds and other institutional clients.
Ricci was responding to questions from Lehman lawyer Robert Gaffey about “parameters” Barclays’s board had set him as lead negotiator on the deal.
“We certainly intended to have a gain,” Ricci said. “The board wanted us to protect the bank’s capital.” At the same time, he said, “We were looking to pay fair value” for Lehman’s assets.
Lehman and its creditors claimed in lawsuits they found new evidence of an asset “raid” by Barclays that wasn’t disclosed to Lehman’s advisers or the court. Barclays, which announced a gain on its purchase on Sept. 17, 2008, is trying to prove the Lehman advisers knew all the terms of the deal at the time and could have told the judge.
Gaffey, of Jones Day, asked Ricci, “What steps did you take to ensure that the contents of the press release were reported in this court?”
Ricci said he had been in the U.K., complying with U.K. law. “I was assured by our attorneys that everything that was needed to be disclosed to the court had been disclosed to the court,” he said.
Lehman has accused Barclays of overstating liabilities it was taking on, to improve its gain on the transaction. Gaffey asked Ricci if the bank had “maximized” compensation obligations, which started out at $2.25 billion and later dropped to $1.5 billion.
“There were wide estimates,” Ricci said. “We didn’t have time to do a precise estimate of what it might cost us. We were looking for the maximum exposure. I don’t think we would have tried to maximize a number” to mislead anyone.
Earlier today, an adviser to Lehman creditors said he and his clients knew in September 2008 the U.K. bank would profit on the deal.
“We had a conversation about whether we ought to sue Barclays,” Saul Burian, a managing director at investment bank Houlihan Lokey, said in court. “It was a premise of the deal that Barclays was making out like bandits on the broker-dealer business.”
Burian was asked by Barclays’s lawyer David Boies if he had read Barclays’s Sept. 17, 2008, announcement that it would make a gain on the brokerage purchase.
“I saw and partly read it,” he said. “At the time it wasn’t something I looked into or took seriously.”
Boies, of Boies Schiller & Flexner LLP, asked if anybody from the creditors’ committee “asked you whether you had any explanation of how Barclays was announcing this immediate gain on the acquisition?”
“I’m sure it came up in conversations,” Burian said. “I wouldn’t be surprised if someone asked me to look into it.”
“Before the closing, had you given advice to the committee on whether Barclays would have an economic gain on all the assets being purchased?” Boies asked.
Burian said “it was a given” that the brokerage would be highly profitable. Liabilities Barclays took on might offset that, he said.
“Looking at the entire transaction, Barclays was going to have an economic gain?” Boies asked. “You believed and the committee understood that?”
“Yes,” Burian said.
Along with the brokerage, Barclays took on a portfolio of securities that produced part of the disputed gain.
Boies showed that Burian was copied in on a Sept. 21, 2008, e-mail from a representative of the creditors’ committee, discussing the Barclays gain. “We will make sure this is considered in the Lehman proceeding,” the e-mail said, referring to the court.
“Was this information brought to the attention of the court” at any time in 2008? Boies asked.
“I don’t recall,” Burian said.
Barclays has said it owes Lehman nothing and has demanded from Giddens $3 billion, which it says he is withholding.
In an e-mailed statement today, the trustee said the bank’s demand for assets “amounts to an undisclosed and unauthorized windfall.”
“Barclays’ math does not add up and its interpretation of the sale order and the parties’ agreements would substantially alter the economics of the deal presented to and approved by the court,” the trustee said.
Peck is concluding the second week of a four-week trial that will resume in the summer and fall.
Lehman, which spent $731.6 million on bankruptcy advisers and managers through March 31, is liquidating to pay creditors. It has said it will spend five years selling assets to pay unsecured creditors as little as 14.7 cents on the dollar.
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).