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Barclays Begins Defense In Lehman 'Secret Discount' Lawsuit

Published Tuesday, 24th August 2010 03:38 am - © 2010 Dow Jones

By Joseph Checkler


NEW YORK -(Dow Jones)- Lehman Brothers Holdings Inc. (LEHMQ) couldn't value its plummeting holdings with any kind of certainty in the days before its broker-dealer business was sold to Barclays PLC (BCS), the former head of Lehman's restructuring group told a bankruptcy court Monday.

Mark Shapiro, who now heads Barclays' restructuring group, said a Sept. 16, 2008, asset purchase agreement estimating the value of Lehman's securities at $70 billion was made at a time when Lehman was getting "blown out of positions" and therefore didn't have an accurate enough depiction of what they were worth to come up with an exact number.

Lehman is suing Barclays in bankruptcy court, alleging that the British bank finagled a "secret" discount price of $45 billion for Lehman broker-dealer assets that were worth about $50.6 billion. The trial reconvened this week in the U.S. Bankruptcy Court in Manhattan after a nearly two-month break.

Lehman contends the agreed-upon $45 billion price for the assets included an embedded $5 billion gain for Barclays that wasn't disclosed to the bankruptcy court. The company is trying to recover more than $11 billion that it says Barclays pocketed in the deal.

Barclays, however, says it was known by all involved in the deal that it would book an immediate gain on the sale and that a cap was never placed on the assets it was buying, some of which were hard to value at the time of the financial crisis.

Barclays attorney David Boies of Boies, Schiller & Flexner LLP asked Shapiro, Barclays' first witness in the case, whether he thought Lehman could have found a better deal. Shapiro said the firm couldn't, as there were no alternative buyers and Lehman's assets were plummeting quickly in value.

Lehman lawyer Robert Gaffey of Jones Day questioned Shapiro about his role in the transaction, asking Shapiro if he had called himself the "quarterback," "architect," and person at the "epicenter" of the deal "trying to steer it to a soft landing."

Shapiro said he probably said those "dramatic" things. While one of his main jobs was to review the purchase agreement between the two firms, Shapiro said he wasn't charged with valuing the securities themselves.

"I was not personally involved in valuing securities," Shapiro said. "That is not the nature of my expertise."

Gaffey went back to a key point in Lehman's case, the so-called clarification letter that finalized the types of assets Lehman sold to Barclays. The letter made many "material changes" to the agreement, Lehman has said, but wasn't presented to the court.

Shapiro said he had never seen the clarification letter and was never asked to review it after it was written. He added that he thinks much of the information mentioned in the clarification letter did come out in court on Sept. 19, 2008, three days after the agreement was signed.

Gaffey also questioned whether the marked value of Lehman's assets was a number Lehman came to by itself or with the help of Barclays. Shapiro said that the word "discount" was never discussed in front of him.

"There's no discount, if you want to call it that, based on the asset size," Shapiro said.

On Monday afternoon, Barclays continued its case by airing video of the January deposition of Lazard Freres & Co. managing director and restructuring chief Barry Ridings, whose firm served as Lehman's investment banker in the deal.

Ridings' testimony included talk of the back-and-forth between Barclays and Lehman about the value of some of the Lehman assets. A key point for Barclays will be to prove that what Lehman calls a "secret discount" wasn't a secret at all, but an agreement on a price made between the two sides based on the plummeting values of Lehman's hard-to-value securities.

In his January deposition aired in court on Monday, Ridings pointed to an email mentioning a 5% to 10% discount off of what Barclays called Lehman's "stale" valuing of its assets, a number that Ridings wasn't aware of at the time of the deal but said in retrospect he would have supported based on the tumultuous days of mid-September 2008.

Ridings said he didn't recall anything "secret" about Barclays' beliefs that Lehman's asset valuations weren't up to date. He said every meeting he remembers from September 2008 included at least one person from Lehman.

Testimony in the case was to continue Tuesday morning. Lehman wrapped up its half of the case in June, after calling witnesses including Barclays President Robert Diamond. Judge James Peck, who is overseeing Lehman's Chapter 11 case, is presiding over the lawsuit.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)

-By Joseph Checkler, Dow Jones Daily Bankruptcy Review; 212-416-2152;

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