Elliott Demands $3.2 Billion Lehman Brokerage Payout

Elliott Management Corp., a hedge fund client of defunct brokerage Lehman Brothers Inc., demanded that trustee James Giddens make an initial payment of $3.2 billion to creditors.

The Lehman brokerage has been in liquidation since September 2008, without paying institutional clients any money. Elliott wants the biggest possible payout “promptly,” after Giddens has sold securities owned by the brokerage, according to a court filing. Giddens could pay almost 26 cents on the dollar of allowed claims totaling $12.2 billion, while still reserving enough money for disputed claims, Elliott said.

Giddens, who also is liquidating the MF Global Inc. broker-dealer, transferred 110,000 mostly retail Lehman accounts containing $90 billion in assets, largely to Barclays Plc, soon after the Lehman parent filed the biggest bankruptcy in U.S. history. Elliott and other customers “were not fortunate enough to participate in that process,” the New York-based firm said.

“For years, the trustee has been aspiring to make an initial, partial distribution to customer claimants in the relatively near term,” Elliott said. “But the aspirational date has slipped further and further into the future, from the first half of 2011,” and now might come as late as the fall, it said in the filing in U.S. Bankruptcy Court in Manhattan yesterday. “It is time to establish a method for distributions.”

Lehman Distribution

A 26 percent payout by the brokerage would dwarf the Lehman parent’s first distribution of 2 cents on the dollar to 6 cents, excluding subordinated claims, Elliott said.

“The trustee has already made retail customers whole,” said Jake Sargent, a Giddens spokesman. “The remaining claims are few in number and relate to Lehman affiliates, large banks and hedge funds.” Giddens is “urgently addressing the significant hurdles that stand in the way” of paying them, he said in an e-mail today.

Peter Truell, an Elliott spokesman, wouldn’t say how much the hedge fund firm is claiming from Giddens. Elliott separately is a member of the creditors committee for the brokerage’s parent, Lehman Brothers Holdings Inc.

Giddens said again in December he planned to start paying the Lehman brokerage’s remaining customers soon, from available assets of $18.3 billion. He didn’t say how much money customers can expect, only that his goal was to make “a significant” payment. Large payouts must await the resolution of remaining disputes over claims filed against the brokerage, he said.

Share Equally

By law, Giddens must share the assets equally among customers. At the time, he had gathered $23.7 billion to pay customers from settlements, litigation and negotiations with banks and other business partners, according to court records. By March 30, Giddens had $25.4 billion of securities in hand, Elliott said.

He was holding $3 billion of the total in reserve for a court fight with London-based Barclays, which in 2008 bought North American businesses of Lehman Brothers Holdings. That fight continues after Giddens appealed a ruling that handed him a second defeat in court.

Billions of dollars more are at stake in Giddens’s disputes with Lehman Brothers Holdings and its London affiliate. The trustee also is hesitating over which assets go to which customers, Elliott said.

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).

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