Barclays and Lehman reach $1.3bn settlement

August 2015 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

Following years of negotiation, Barclays Plc has finally reached a settlement in its long running lawsuit with the trustee liquidating Lehman Brothers Holdings Inc’s brokerage unit.

The outstanding litigation arose from the bank’s purchase of much of Lehman’s brokerage unit at the height of the 2008 global financial crisis.

According to the terms of the agreement the unit, Lehman Brothers Inc, will pay Barclays around $1.28bn, largely representing the value of margin assets not previously paid to the British bank, plus interest. The money, which is related to the assets that went to Barclays when it bought Lehman’s US brokerage out of bankruptcy in September 2008, was a key issue in a 34-day trial between the two firms back in 2010.

Furthermore, under the agreement reached between Barclays and James W. Giddens, the trustee unwinding Lehman’s brokerage business, the two parties will drop any existing and future litigation against one another.

“It has always been our duty to prudently and diligently pursue every avenue of recovery for assets we believe belong to the estate, and we did so on behalf of creditors by taking the Barclays litigation all the way to the Supreme Court,” said Mr Giddens in a statement regarding the deal. “This agreement ends years of litigation and achieves the best result under the circumstances as winding-down and closing out the estate continues in earnest.”

The deal will mean that Barclays will have received all but $80m of the $1.1bn of the bank’s disputed assets, the UK bank said in a statement. “Following implementation of the settlement, Barclays will have received all of the assets it claimed in the litigation with the exception of this $80m and approximately $255m of margin for exchange-traded derivatives (exclusive of interest) still owing but expected from third parties,” it added.

However the case is not settled as yet. The agreement requires the ratification of US bankruptcy Judge Shelley Chapman, who has overseen the liquidations of the brokerage and its former parent company, which had been Wall Street’s fourth-largest investment bank at the time of its collapse.

Barclays won the approval of the bankruptcy court to buy the majority of the brokerage unit in September 2008, just four days after the unit’s parent company filed for Chapter 11 bankruptcy protection. Lehman’s collapse was the largest Chapter 11 bankruptcy in US history; the firm had assets of $639bn at the time of its demise.

The settlement will bring to an end the protracted legal battle between the two parties, and provide a number of other advantages to the bank. Barclays will receive a much needed $750m boost to its pre-tax profits. The bank has noted that the gain will be factored into its second quarter results. The boost will provide some relief to Barclays’ investors, many of whom are likely still mindful of the onerous $2.38bn enforcement penalty levied against the firm for rigging the FOREX and other markets.

“Barclays fought hard and responsibly through six years of litigation to secure approximately $8bn of purchased yet disputed assets, and today’s settlement brings that effort to a successful completion,” said Jonathan Schiller of Boies Schiller & Flexner LLP, a lawyer who represented Barclays in the dispute.

Since July 2014, around 111,000 former customers of the brokerage have received payments totalling more than $106bn. The unit’s senior creditors have been paid in full. Lehman’s liquidating trustee has also distributed approximately $5.9bn to the unit’s unsecured general creditors, a figure which represents a 27 percent distribution on general creditor claims, according to Mr Giddens. The settlement will allow the distribution of more than $600m to Lehman’s general estate going forward. Lehman initially set aside around $1.87bn to settle the dispute.

Richard Summerfield