Saturday, October 17, 2009

Barclays May Be Forced to Return the Wealth

Fraudulent Conveyance:
Reuters: Trustee: Lehman Barclays Probe Should Be Unsealed
Forbes: Barclays in New Lehman Scrap
WSJ: Lehman Blasts Barclays “Windfall”

The global transfers of corporate wealth continue in this most recent phase of the financial crisis. Early in the crisis on Sept. 15, 2008, Lehman Brothers filed the largest bankruptcy in U.S. history with assets of $639 billion. Soon thereafter, Barclays Bank (UK) purchased Lehman Brothers’ US assets out of the bankruptcy estate for approximately $1.7 billion, while Nomura bought its European and Asian assets. The trustee of Lehman’s bankruptcy estate, James Giddens, is now demanding that the British company return over $8 billion to the U.S. bankruptcy estate because it amounted to a “windfall” payment from the sale of Lehman’s brokerage business last year.

In June of 2009, U.S. Bankruptcy Judge James Peck gave the Lehman trustee approval to explore whether Barclays got "too good of a deal" from the purchase of Lehman’s broker-dealer business last year, as the British bank was able to immediately book a $4.2 billion gain on its $1.75 billion purchase.

What the trustee is referring to is a fraudulent conveyance. In a U.S. bankruptcy proceeding, the trustee of the bankrupt estate has the power to claw back or recover those transfers of assets from the debtor’s estate that unfairly put the assets beyond the creditors’ reach. Even if there was no intent to commit fraud, the trustee can recover the assets if the transfer was constructively fraudulent—if it involved an exchange for grossly inadequate compensation. Two conditions must be met for the trustee to prevail on a claim of constructive fraudulent conveyance: (1) the seller, in this case Lehman, must have received less than a reasonably equivalent value for the Lehman Brothers U.S. assets it sold to Barclays, and (2) Lehman must have been unable to pay its debts either at the time it sold to Barclays, or as a result of the sale itself.

It is not clear whether the $4.2 billion gain resulted solely from the broker dealer transaction, or whether it stemmed from Barclay’s acquisition of $45 billion in Lehman-held securities which Barclay’s subsequently marked up to $50 billion. Contributing to confusion over the numbers is extensive redacting of Lehman’s filing due to confidentiality agreements. Further, Lehman’s lawyers allege that Lehman executives actually assisted Barclays’ raid on Lehman assets and helped Barclays extract an additional $2.7 billion at the deal closing. According to Lehman’s lawyers, Lehman executives were offered attractive employment agreements conditioned on a successful closing.

Naturally Barclays spokesman Michael O’Looney does not believe that the purchase of Lehman assets was a fraudulent conveyance, and instead suggests that Lehman’s claim is opportunistic and that the Lehman trustee is attempting to retrade the deal only because the economy is showing signs of stabilization. Lehman, on the other hand, feels its argument has merit and is not only requesting that the bankruptcy judge require Barclays to return the assets to the Lehman estate, but it is also hoping that the court will allow it to pursue claims against Barclays for breach of contract, breach of fiduciary duty and unauthorized transfer of assets.

The bankruptcy court is scheduled to hear the argument this week. If it rejects Barclays’ argument, Barclays will have to send the $8 million back to the United States in yet another massive transfer of wealth resulting from the financial crisis.

1. If it is true that Barclays provided $45 million of liquidity to Lehman at a unique time when the market broadly lacked liquidity, then is Barclay’s reported gain reasonable and justified?
2. What is the value of liquidity in a liquidity/credit crunch?

No comments: