Judge OKs Probe Into Sale of Lehman's Brokerage to Barclays

Lehman Bros. Holdings has won court approval to investigate whether British bank Barclays got too much of a bargain when it bought the bankrupt investment firm's brokerage unit last September.

Judge James M. Peck of the U.S. Bankruptcy Court for the Southern District of New York approved Lehman's request to conduct discovery on $2 billion in liabilities stemming from employee bonuses and $1.5 billion in costs to cure certain outstanding contracts that Barclays allegedly agreed to absorb as part of the sale.

Lehman said in its motion seeking approval of its discovery requests that it learned of "apparent material discrepancies" relating to the liabilities, saying they were "significantly overstated" and inaccurate or went unpaid by Barclays.

The failed investment bank said those discrepancies may have caused Barclays to receive a windfall, possibly totaling in the billions of dollars, at the expense of Lehman and its creditors.

Under Judge Peck's order, Barclays must now hand over documents and allow its employees to be interviewed by Lehman's lawyers.

Lehman, once the nation's fourth largest investment bank, filed the largest Chapter 11 bankruptcy ever Sept. 15.

The 158-year-old firm took the action after Bank of America and Barclays reportedly pulled out of talks to rescue it.

Almost immediately after it filed for bankruptcy Lehman resumed negotiations with Barclays, and it reached an agreement Sept. 16 to sell the bank all the North American businesses and operating assets of wholly owned subsidiary Lehman Bros. Inc.

Under the deal approved Sept. 20 by Judge Peck, 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 was $2 billion in employee bonuses Barclays was to pay to those 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.

Barclays later announced that it realized a $3.5 billion gain from the Lehman purchase, leaving Lehman to question whether it received adequate compensation in the deal.

Lehman said it now appears that the expenses on its books for August 2008 for the transferred employees were actually substantially less than anticipated, ranging from $600 million to $700 million.

The failed bank also said its preliminary analysis shows that Barclays paid just slightly more than $200 million in contract-cure costs stemming from the sale.

Lehman filed its motion May 18 seeking permission to investigate what Barclays was actually paid. The request was made under Bankruptcy Rule 2004, which allows interested parties to seek discovery from any entity regarding matters affecting the administration of a debtor's bankruptcy estate.

Barclays countered that Lehman's motion should not be granted because any potential claims over the sale have no merit. The court already has found that Barclays paid fair consideration for the brokerage business, according to the bank's objection.

Furthermore, the sale agreement did not require Barclays to pay any specific amounts for bonuses and cure payments, but rather only provided estimates for those costs, it said. In addition, the pact does not entitle either side to a price adjustment, Barclays said.

Nevertheless, Judge Peck found that Lehman had both a legal and a factual basis for its request.

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Robert W. Gaffey, William J. Hine, Jayant W. Tambe and Benjamin Rosenbaum of Jones Day in New York represent Lehman.Jonathan D. Schiller, Hamish P.M. Hume and Jack G. Stern of Boies, Schiller & Flexner in New York represent Barclays.