The Work

January 29, 2010 3:48 PM

Deep into the Lehman-Barclays Dispute

Posted by Zach Lowe

Do you have plans for the weekend? If you don't, you might want to consider sifting through the thousands of pages Barclays's lawyers at Boies, Schiller & Flexner filed early today in their effort to convince a judge to dismiss a suit arguing Barclays got a $5 billion sweetheart deal when it purchased Lehman Brothers's North American assets at the height of the financial crisis. They provide a fascinating glimpse into the chaos of September 2008, the kind of glimpse you can only get either when dozens of people are unusually candid or when a lawyer accidentally waives attorney-client privilege and, in the process, opens up a lot of secret stuff to public scrutiny.

The dispute is complicated, and there are dozens of prongs to the Lehman-Barclays transaction, but you can boil the Barclays/Boies Schiller argument down to this: There was no secret agreement to give Barclays a $5 billion windfall in the deal, and Lehman--and its financial advisers as well as its lawyers at Weil, Gotshal & Manges--knew exactly what they were doing when they agreed to the deal in late September 2008, according to court records. (Lawyers on all sides of this conflict declined to comment or didn't return messages seeking comment.) As you'll recall, Lehman's bankrupt estate and special litigation counsel at Jones Day filed a special motion a year after Lehman's collapse asking a bankruptcy judge to reconsider the sale of Lehman's North American assets to Barclays. Under the terms of that deal, Barclays paid about $1.5 billion for the assets and a separate chunk of $45 billion in cash for securities valued at $49.7 billion, according to court records and summaries from Bloomberg and The New York Times

You'll notice that $49.7 billion is larger than $45 billion. At the heart of the dispute is Lehman's claim that higher-ups at both banks conspired to devalue those securities during the deal, and that Barclays has since seen those securities rise in value. In the papers filed this morning--which include a 110-page deposition of Weil bankruptcy guru Harvey Miller--the Barclays side argues (among many, many other things) that the two sides did their best to value the securities accurately, but there was no way to do so precisely with the markets fluctuating wildly. And regardless, the papers say, everyone in the know understood that the agreement was a broad one covering a pile of securities with just a few exceptions. Haggling over individual securities was not going to hold up the deal, which was essential to preserve Lehman's value and avoid a total liquidation, according to Miller's deposition and other records. "The values were fluctuating," Miller testified under questioning from David Boies. "The figures were, I say, not reliable, and it was a deal to buy the business, not a balance sheet deal." Miller testifies several times that insiders felt Lehman was "aggressive" in marking its securities, meaning that Barclays believed Lehman was overvaluing them and wanted their value cut before making the deal.

There "was nothing secret" about those disagreements, Barry Ridings, a Lazard executive who advised Lehman during the bankruptcy, testified in a deposition conducted by Jonathan Schiller. In a separate declaration, James Seery, a partner at Sidley Austin who was a top executive at Lehman in Sept. 2008, claims that the securities in question were likely worth about $45.5 billion--just a hair higher than the amount Barclays paid in cash.

Representatives for Lehman's estate and the estate's trustee released statements today repeating their claim that Barclays received a secret windfall, according to Reuters. The Lehman side argues that the cash for securities exchange was intended to be an even deal. A representative for the estate's trustee (James Giddens of Hughes Hubbard & Reed) said the Barclays papers stem from a "strained" interpretation of the sale terms, Reuters reports.

The Barclays team argues that there was never any agreement that the exchange was to be "a wash," and that Barclays made the deal hoping to make a profit but also risking that the securities could decline in value even further. 

The Miller and Ridings depositions are among the centerpieces of the massive Barclays filing today. Both are lengthy, and both go to the question of how Lehman's key advisers understood the deal. Beyond that, they provide vivid windows into the moment at which modern capitalism nearly collapsed. You almost feel you need to be eating popcorn while you read them. Miller talks about the hundreds of people swarming Lehman's headquarters, and remembers worrying about the lack of security and rumors that reporters from The Wall Street Journal had sneaked in. He recalls how his partner at Weil, Lori Fife, had to explain to hundreds of lawyers gathered in court on Friday, Sept. 19, the details of a document that slightly amended the terms of the Barclays sale. The document wasn't finished, so Fife relied on some scribblings on a legal pad to give an oral presentation while the judge, James Peck, took a break, Miller testifies. The courtroom erupted in applause when Peck finally approved the deal--something Miller could never remember seeing before. 

The filings also contain dozens of confidential Weil e-mails formerly protected by attorney-client privilege. But as we reported earlier, the Boies Schiller team argued that the Lehman side inadvertently waived the privilege when it raised the possibility that Weil's lawyers weren't aware of the alleged secret windfall. 

Objections to the Barclays motion are due March 4.

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