Lehman may have grounds to sue Goldman

NEW YORK: Lehman Brothers Holdings Inc. may have grounds to sue Goldman Sachs Group Inc. and Barclays Plc after they demanded $1.2 billion in additional margin to assume trading positions auctioned by a Chicago exchange, bankruptcy examiner Anton Valukas said.

Goldman Sachs was the high bidder for Lehman's equity derivatives at options and futures exchange CME Group Inc., and took $445 million of those assets at a private auction in September 2008, according to previously censored details of Valukas's March 11 report. Barclays was the high bidder for Lehman's energy derivatives and took $707 million in assets from CME.

DRW Trading was the highest bidder for Lehman's foreign exchange, agricultural and interest-rate derivatives, Valukas said. The transfer of $2 billion in Lehman deposits for its proprietary trades at the CME cost the defunct investment bank $1.2 billion, Valukas said, adding that CME also may be sued.

"The examiner concludes that an argument can be made that the transfers at issue were fraudulent transfers," Valukas said in the report, released in its unredacted form today. Under bankruptcy law, Lehman may be able to undo the auction, he said.

Part of Valukas's job was to explore Lehman's grounds for suing companies that contributed to, or benefitted unfairly from, the demise of the investment bank and its affiliates including the brokerage Lehman Brothers Inc., and to say which kinds of lawsuits are most likely to succeed and what the possible defenses are.

Colorable Claim

"Thus, LBI may have a colorable claim against CME, or any of the firms that bought LBI's positions at a steep discount during the liquidation ordered by the CME, for the losses that LBI sustained as a result of the forced sale of house positions held for the benefit of LBI and its affiliates.

CME could defend itself using the Commodity Exchange Act that gave it power to regulate its exchanges, Valukas said. Goldman and Barclays could use the same act to challenge bankruptcy law, Valukas said. Bankruptcy law also has provisions that might prevent Lehman from clawing back money, he said.

U.S. Bankruptcy Court Judge James M. Peck today agreed to allow previously redacted portions of the report to be unsealed to test the fairness of the auction process. CME had sought to keep the documents confidential.

Weak Claims

"The claims of confidentiality are weak," Peck said. "The arguments concerning potential future harm to events that may never occur are so speculative as to be discounted close to zero."
The $1.2 billion loss to New York-based Lehman came from additional cash that Goldman, Barclays and Chicago-based DRW Trading demanded to offset the risk of taking on the failed firm's trading positions, said Craig Pirrong, a finance professor at the University of Houston.
Goldman, which assumed natural gas trades as well as stock index trades, required $140 million in additional margin from Lehman for those positions, and $450 million more margin to back equity index trades, according to the report. London-based Barclays required $335 million in additional cash for the energy trades it took on.

Interest Rate Positions

DRW Trading required an extra $240 million for interest rate positions, $6 million for currency trades and $57 million for agricultural positions, according to the report.

The natural gas trades New York-based Goldman took over included options that were valued as being out of the money by $482 million, according to the report. Goldman knew it may lose all of that and more, so it demanded the additional $140 million in collateral from Lehman, said Darrell Duffie, a finance professor at Stanford University in California.

"The more they went into the money, the more Goldman Sachs would lose," Duffie said.
Michael O'Looney, a Barclays spokesman, and Michael DuVally, a Goldman spokesman, declined to comment. DRW Trading strategist Lou Brien declined to comment on the potential lawsuit, referring to a statement on its Web site saying it was "pleased that we were able to provide competitive pricing for these very large, complex and risky portfolios."

CME spokesman Allan Schoenberg declined to comment.

Natural Gas

The margin CME had required of Lehman to back the natural gas options position was $129 million, the report said.

Lehman, which filed for bankruptcy with debt of $613 billion, has had 66,000 claims for payment totaling $899 billion, lawyers told the judge at the hearing. Lehman has said allowable claims may be as low as $260 billion. It is due to update that number today in a disclosure statement explaining its proposed liquidation plan.

Peck asked Valukas why his report hadn't mentioned Hudson Castle, a Lehman affiliate that allowed the investment bank to move $1 billion in risky investments off its balance sheet, according to a report yesterday in the New York Times.

"Hudson Capital to our knowledge had become independent of Lehman as of 2004," Valukas said. His 2,200-page report focused on 2006 and forward, he said.

At the hearing, Peck approved Lehman's plan to settle disputes over payments on $600 million of swap agreements with Metavante Corp. and said it could use mediation to handle quarrels with creditors over claims.

The case is In re Lehman Brothers Holdings Inc., 08-13555, US Bankruptcy Court, Southern District of New York (Manhattan).