Unsealed Documents Back Claim That Barclays Got Windfall in Lehman Deal

Key former executives of Lehman Bros. have acknowledged selling the failed investment bank's brokerage operations to Barclays PLC for $5 billion less than the unit's book value, according to recently unsealed court documents.

The documents also indicate that several of the Lehman executives who negotiated the deal had received "lucrative" job offers from Barclays during the process.

The documents included deposition transcripts filed as exhibits with Lehman's September motion to modify the sale and recoup the windfall from Barclays. The motion was unsealed Oct. 15.

Among the former Lehman executives who acknowledged the $5 billion "discount" in deposition testimony are CFO Ian Lowitt, treasurer Paolo Tonucci and Martin Kelly, managing director of financing and administration. All three were members of the team that negotiated the sale.

"I was aware that ... Barclays was going to purchase a substantial block of assets for less than the amount we had on our books," Lowitt testified.

The ex-CFO attributed the reduced sale price to both the size of Barclays' purchase and the "inherent volatility in the market."

Tonucci and Kelly also acknowledged that Lehman sold its assets to Barclays for less than book value.

"My understanding was that the negotiated sale price across all those asset portfolios resulted in a $5 billion, approximately $5 billion less to Lehman relative to its marks at that time," Kelly testified.

Lowitt and four other members of the negotiating team were among eight senior Lehman executives who were offered employment contracts by Barclays as a condition of the sale, the unsealed motion says.

According to the depositions, Lowitt, Kelly and Tonucci all joined Barclays after the September 2008 deal.

Lehman filed the largest Chapter 11 bankruptcy ever Sept. 15, 2008.

The 158-year-old bank then immediately resumed previously unsuccessful negotiations to sell Barclays all its North American businesses and operating assets of wholly owned subsidiary Lehman Bros. Inc.

Under the deal approved Sept. 20, 2008, by a federal bankruptcy judge, Barclays paid $250 million for Lehman's North American investment banking and trading businesses and agreed to assume up to $4.25 billion in liabilities.

Among the liabilities were $2 billion in employee bonuses Barclays was to pay Lehman workers who transferred to the British bank following the sale. In addition Barclays undertook an obligation to pay $1.5 billion to cure various outstanding contracts.

Last month Lehman filed its heavily redacted motion to modify the sale agreement with Barclays.

The failed investment bank alleges that under the deal, Barclays paid $45 billion in cash for securities valued at about $50 billion on Lehman's books. Thus, Barclays allegedly got a $5 billion discount that was never disclosed to Lehman's attorneys or the Bankruptcy Court.

In addition Lehman alleges that Barclays only paid a fraction of the contract cure costs and employee bonuses it assumed under the deal.

The motion says these costs were "significantly and intentionally inflated." The British bank only paid $238 million in contract cures. The amount actually paid for the employee bonuses is still redacted from the motion.

Furthermore, the motion says many members of Lehman's negotiating team were offered jobs with Barclays conditioned on the closing of the sale. This "calls into serious question the arm's-length nature of the transaction," Lehman insists.

Barclays said in a statement issued after the September filing that Lehman has brought a "meritless" and "opportunistic" claim, trying to "retrade the deal" now that the economy has "begun to stabilize."

In June U.S. Bankruptcy Judge James M. Peck of the Southern District of New York authorized Lehman to conduct a probe into the sale to Barclays. The request came amid questions regarding the immediate profit claimed by Barclays as a result of its purchase of the Lehman assets.

According to Lehman's motion to modify the sale order, Barclays announced in February that it reaped a $4.2 billion gain in connection with its purchase.

To comment, ask questions or contribute articles, contact West.Andrews.Editor@ThomsonReuters.com.

Robert W. Gaffey, Jayant W. Tambe and William J. Hine of Jones Day in New York represent Lehman.William R. Maguire, James B. Koback Jr. and Sarah L. Cave of Hughes, Hubbard & Reed in New York represent Barclays.