Defunct brokerage Lehman Brothers Inc., which hasn’t paid institutional creditors a dime of its $25 billion hoard after four years in liquidation, is facing louder demands to settle fights with affiliates and pay up.
The brokerage’s parent, Lehman Brothers Holdings Inc., 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 four years ago today on Sept. 15, 2008. The brokerage went into liquidation four days later.
Elliott Management Corp., a New York hedge fund, demanded in June that brokerage trustee James Giddens sell securities and pay an initial $3.2 billion soon. Giddens responded this week, saying Elliott is a “claims trader” and doesn’t share other customers’ interests. On Sept. 13, two creditor groups sided with Elliott, with an unofficial group in favor of giving Giddens just 60 days to resolve claims with a European affiliate. The official group didn’t set a deadline.
Elliott’s plan would benefit all creditors of the brokerage, “and is, thus, in the best interests of these debtors’ estates and creditors,” the official creditors committee of the Lehman parent, once the fourth-largest investment bank, said in a bankruptcy court filing in Manhattan.
By March 30, Giddens had $25.4 billion of securities in hand, Elliott said. By selling securities, he could pay almost 26 cents on the dollar of allowed claims totaling $12.2 billion, while still reserving enough money for disputed claims, the hedge fund said.
Goldman Sachs Group Inc. disagreed, saying customers should get the securities in their accounts, which may be worth more than money poured from a cash pool.
Giddens shouldn’t be treating traders differently from other customers, said Joseph Sarachek, managing director of claims trading at CRT Capital Group LLC, which buys and sells distressed debt.
“There is really no basis in law,” he said. “In the long run, this will hurt liquidity in the marketplace.”
Giddens, who also is liquidating the MF Global Inc. brokerage, is in talks to settle disputes with Lehman Brothers International (Europe), according to both creditor groups. The European affiliate said last year its clients were owed $8.3 billion by the brokerage. Adding the affiliate’s own claims, the total may be $30 billion, the official creditor group said.
LBIE’s claims are “the largest unresolved contingency” in the brokerage liquidation, Giddens has said. The official creditor group said it was “sympathetic” to Elliott’s request, because the delay is causing problems for creditors including the Lehman parent company, also a claimant against the brokerage.
Both creditor groups asked U.S. Bankruptcy Judge James Peck to postpone a ruling on Elliott’s demand, due to be heard Sept. 19, on concern that he will reject it amid the settlement talks. The Lehman parent says its claims on the brokerage also must be settled before Giddens hands out money.
Giddens said in December -- not for the first time -- that he planned to start paying brokerage customers soon. In April, he reported that the liquidation had cost about $733.5 million, including fees for himself and his firm of $202.3 million.
Soon after the brokerage collapsed four years ago, London-based Barclays Plc took over most of its retail accounts, along with the Lehman’s parent’s other North American businesses.
Giddens “is urgently working toward a resolution” of the remaining claims held by Lehman affiliates, large banks and hedge funds, said Jake Sargent, a Giddens spokesman, in an e-mail yesterday. A bankruptcy judge must approve “any ultimate distribution,” he said.
Peter Truell, an Elliott spokesman, has declined to say how much the hedge fund is claiming from Giddens.
The Lehman parent, overseen by a new board since its exit from bankruptcy in March, is due to make its next payment to creditors on Oct. 1. The target is to pay 18 cents on the dollar on average by 2016 or so, according to filings. More than $1.7 billion has been spent by the Lehman parent on managers’ and advisers’ fees so far.
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).