UNITEDSTATESBANKRUPTCYCOURT

SOUTHERNDISTRICTOFNEWYORK

x
:

Inre
:

:
LEHMANBROTHERSHOLDINGSINC.,
:
etal.,
:

Debtors.
:
x

Chapter11CaseNo.

0813555(JMP)

(JointlyAdministered)

REPORTOF
ANTONR.VALUKAS,EXAMINER

March11,2010

Jenner&BlockLLP
353N.ClarkStreet
Chicago,IL606543456
3122229350

919ThirdAvenue
37thFloor
NewYork,NY100223908
2128911600

CounseltotheExaminer

VOLUME5OF9
Section III.B: Avoidance Actions
Section III.C: Barclays Transaction


EXAMINERSREPORT
TABLEOFCONTENTS
(SHORTFORM)
VOLUME1

Introduction,SectionsI&II:ExecutiveSummary&ProceduralBackground

Introduction...................................................................................................................................2
I. ExecutiveSummaryoftheExaminersConclusions ......................................................15
A. WhyDidLehmanFail?AreThereColorableCausesofActionThat
AriseFromItsFinancialConditionandFailure?.....................................................15
B. AreThereAdministrativeClaimsorColorableClaimsForPreferencesor
VoidableTransfers?......................................................................................................24
C. DoColorableClaimsAriseFromTransfersofLBHIAffiliateAssetsTo
Barclays,orFromtheLehmanALITransaction? ....................................................26
II. ProceduralBackgroundandNatureoftheExamination ..............................................28
A. TheExaminersAuthority ...........................................................................................28
B. DocumentCollectionandReview..............................................................................30
C. SystemsAccess..............................................................................................................33
D. WitnessInterviewProcess...........................................................................................35
E. CooperationandCoordinationWiththeGovernmentandParties ......................37

SectionIII.A.1:Risk

III. ExaminersConclusions......................................................................................................43
A. WhyDidLehmanFail?AreThereColorableCausesofActionThat
AriseFromItsFinancialConditionandFailure?.....................................................43
1. BusinessandRiskManagement..........................................................................43
a) ExecutiveSummary .......................................................................................43
i


b) Facts..................................................................................................................58
c) Analysis .........................................................................................................163
VOLUME2

SectionIII.A.2:Valuation
2. Valuation ..............................................................................................................203
a) ExecutiveSummary .....................................................................................203
b) OverviewofValuationofLehmansCommercialRealEstate
Portfolio .........................................................................................................215
c) SeniorManagementsInvolvementinValuation....................................241
d) ExaminersAnalysisoftheValuationofLehmansCommercial
Book................................................................................................................266
e) ExaminersAnalysisoftheValuationofLehmansPrincipal
TransactionsGroup......................................................................................285
f) ExaminersAnalysisoftheValuationofLehmansArchstone
Positions.........................................................................................................356
g) ExaminersAnalysisoftheValuationofLehmansResidential
WholeLoansPortfolio .................................................................................494
h) ExaminersAnalysisoftheValuationofLehmansRMBS
Portfolio .........................................................................................................527
i) ExaminersAnalysisoftheValuationofLehmansCDOs ....................538
j) ExaminersAnalysisoftheValuationofLehmansDerivatives
Positions.........................................................................................................568
k) ExaminersAnalysisoftheValuationofLehmansCorporate
DebtPositions ...............................................................................................583
l) ExaminersAnalysisoftheValuationofLehmansCorporate
EquitiesPositions .........................................................................................594

ii

SectionIII.A.3:Survival
3. LehmansSurvivalStrategiesandEfforts........................................................609
a) IntroductiontoLehmansSurvivalStrategiesandEfforts.....................609
b) LehmansActionsin2008PriortotheNearCollapseofBear
Stearns............................................................................................................622
c) ActionsandEffortsFollowingtheNearCollapseofBearStearns .......631

VOLUME3

SectionIII.A.4:Repo105
4. Repo105................................................................................................................732
a) Repo105ExecutiveSummary.................................................................732
b) Introduction ..................................................................................................750
c) WhytheExaminerInvestigatedLehmansUseofRepo105
Transactions ..................................................................................................764
d) ATypicalRepo105Transaction ................................................................765
e) ManagingBalanceSheetandLeverage ....................................................800
f) ThePurposeofLehmansRepo105ProgramWastoReverse
EngineerPubliclyReportedFinancialResults.........................................853
g) TheMaterialityofLehmansRepo105Practice ......................................884
h) KnowledgeofLehmansRepo105ProgramattheHighestLevels
oftheFirm .....................................................................................................914
i) Ernst&YoungsKnowledgeofLehmansRepo105Program..............948
j) TheExaminersConclusions ......................................................................962

iii


VOLUME4

SectionIII.A.5:SecuredLenders
5. PotentialClaimsAgainstLehmansSecuredLenders .................................1066
a) IntroductionandExecutiveSummary ....................................................1066
b) LehmansDealingsWithJPMorgan ........................................................1084
c) LehmansDealingsWithCitigroup.........................................................1224
d) LehmansDealingsWithHSBC ...............................................................1303
e) LehmansDealingsWithBankofAmerica ............................................1375
f) LehmansDealingsWithBankofNewYorkMellon............................1376
g) LehmansDealingsWithStandardBank................................................1382
h) LehmansDealingsWiththeFederalReserveBankofNewYork .....1385
i) LehmansLiquidityPool...........................................................................1401

SectionIII.A.6:Government
6. TheInteractionBetweenLehmanandtheGovernment..............................1482
a) Introduction ................................................................................................1482
b) TheSECsOversightofLehman ..............................................................1484
c) TheFRBNYsOversightofLehman ........................................................1494
d) TheFederalReservesOversightofLehman .........................................1502
e) TheTreasuryDepartmentsOversightofLehman ...............................1505
f) TheRelationshipoftheSECandFRBNYinMonitoring
LehmansLiquidity....................................................................................1507
g) TheGovernmentsPreparationfortheLehmanWeekend
MeetingsattheFRBNY .............................................................................1516

iv


h) OntheEveningofFriday,September12,2008,theGovernment
ConvenedaMeetingoftheMajorWallStreetFirmsinan
AttempttoFacilitatetheRescueofLehman ..........................................1523
i) LehmansBankruptcyFiling ....................................................................1535
VOLUME5

SectionIII.B:AvoidanceActions
B. AreThereAdministrativeClaimsorColorableClaimsforPreferencesor
VoidableTransfers....................................................................................................1544
1. ExecutiveSummary ..........................................................................................1544
2. ExaminersInvestigationofPossibleAdministrativeClaimsAgainst
LBHI(FirstBullet) .............................................................................................1546
3. ExaminersInvestigationofPossibleAvoidanceActions(Third,
FourthandEighthBullets)...............................................................................1570
4. ExaminersInvestigationofPossibleBreachesofFiduciaryDutyby
LBHIAffiliateDirectorsandOfficers(FifthBullet) .....................................1894
5. ExaminersAnalysisofLehmansForeignExchangeTransactions
(SecondBullet) ...................................................................................................1912
6. ExaminersReviewofIntercompanyTransactionsWithinThirty
DaysofLBHIsBankruptcyFiling(SeventhBullet).....................................1938
7. ExaminersAnalysisofLehmansDebttoFreddieMac..............................1951

SectionIII.C:BarclaysTransaction
C. DoColorableClaimsAriseFromTransfersofLBHIAffiliateAssetsto
Barclays,orFromtheLehmanALITransaction? ................................................1961
1. ExecutiveSummary ..........................................................................................1961
2. Facts .....................................................................................................................1965
3. WhetherAssetsofLBHIAffiliatesWereTransferredtoBarclays .............1997
4. LehmanALITransaction..................................................................................2055
v


5. Conclusions ........................................................................................................2063
6. BarclaysTransaction .........................................................................................2103

vi


UNITEDSTATESBANKRUPTCYCOURT
SOUTHERNDISTRICTOFNEWYORK

x
:

Inre
:

:
LEHMANBROTHERSHOLDINGSINC.,
:
etal.,
:

Debtors.
:
x

Chapter11CaseNo.

0813555(JMP)

(JointlyAdministered)

REPORTOF
EXAMINERANTONR.VALUKAS

SectionIII.B:AvoidanceActions

TABLEOFCONTENTS
B. AreThereAdministrativeClaimsorColorableClaimsforPreferencesor
VoidableTransfers....................................................................................................1544
1.

ExecutiveSummary ..........................................................................................1544

2.

ExaminersInvestigationofPossibleAdministrativeClaimsAgainst
LBHI(FirstBullet) .............................................................................................1546
a) Summary .....................................................................................................1546
b) Introduction ................................................................................................1547
c)

LehmansCashManagementSystem .....................................................1549
(1) LBHIsRoleasCentralBanker..........................................................1550
(2) GlobalCashandCollateralManagement .......................................1551
(3) LehmansExternalandVirtualBankAccounts..............................1554
(4) BankAccountReconciliations...........................................................1560

d) EffectoftheBankruptcyontheCashManagementSystem................1562
e) CashTransfersGivingRisetoAdministrativeClaims.........................1564
(1) CashTransfersfromLBHIAffiliatestoLBHI.................................1565
(2) CashReceivedbyLBHIonBehalfofLBHIAffiliates....................1566
(3) OtherRelevantTransactions .............................................................1568
3.

ExaminersInvestigationofPossibleAvoidanceActions(Third,
FourthandEighthBullets)...............................................................................1570
a) Summary .....................................................................................................1570
b) LBHISolvencyAnalysis............................................................................1570
(1) Introduction .........................................................................................1570
(2) MarketBasedValuationAnalysis ....................................................1573
(a) BasisforUtilizationofaMarketBasedValuation
Analysis ........................................................................................ 1573
(b) MarketValueofAssetsApproach ........................................... 1577
(i)

ImpliedAssetValue.......................................................... 1578

(ii)

SmallEquityCushion ....................................................... 1580

(iii) LimitationsoftheMarketBasedApproach .................. 1581

a.

ApplicationofRetrojection....................................... 1583

b. TheApplicationofCurrentAwareness.............. 1584
(3) Conclusion ...........................................................................................1587
c)

LBHIAffiliateSolvencyAnalysis ............................................................1587
1537

(1) Summary ..............................................................................................1587

(2) DescriptionoftheExaminersAnalysis...........................................1595
(3) DebtorbyDebtorAnalysis ...............................................................1610
(a) LehmanCommercialPaperInc. ............................................... 1610
(b) CESAviation,CESAviationVLLC,CESAviationIX .......... 1615
(c) LBSpecialFinancing .................................................................. 1618
(d) LBCommodityServices............................................................. 1622
(e) LuxembourgResidentialPropertiesLoanFinance
S.A.R.L. ......................................................................................... 1627
(f) LBOTCDerivatives.................................................................... 1628
(g) LB745LLC................................................................................... 1629
(h) LBDerivativeProducts .............................................................. 1631
(i) LBFinancialProducts ................................................................ 1633
(j) LBCommercialCorporation ..................................................... 1635
(k) BNCMortgageLLC.................................................................... 1638
(l) EastDoverLimited..................................................................... 1638
(m) LehmanScottishFinance ........................................................... 1640
(n) PAMIStatlerArms ..................................................................... 1641
d) UnreasonablySmallCapital .....................................................................1642
(1) Summary ..............................................................................................1645
(2) AnalysisoftheUnreasonablySmallCapitalTest ......................1648
(a) SummaryofLegalStandard ..................................................... 1648
(b) LehmansCountercyclicalStrategy.......................................... 1650
(c) LehmansRepoBookandLiquidityRisk................................ 1654
(i)

BearStearnsDemonstratestheLiquidityRisk
AssociatedwithRepoFinancing..................................... 1656

(ii)

QualityandTenorofLehmansRepoBook .................. 1658

(d) DeleveragingtoWinBackMarketConfidence .................. 1662

(e) BeginningintheThirdQuarterof2008,LehmanCould
HaveReasonablyAnticipatedaLossofConfidence
WhichWouldHaveTriggeredItsLiquidityRisk.................. 1665
(f) LehmanWasNotSufficientlyPreparedtoAbsorba
LiquidityCrisisMarkedbyaSuddenLossofNon
Government,NonAgencyRepoFunding.............................. 1674

1538

(i)

LehmansLiquidityPool.................................................. 1675

(ii)

LiquidityStressTests........................................................ 1678

(iii) OtherCapitalAdequacyMetrics .................................... 1687

a.

CashCapitalSurplus ................................................. 1687

b. EquityAdequacyFramework .................................. 1688

c.

CSECapitalRatio ....................................................... 1690

(g) LBHIAffiliateUnreasonablySmallCapitalAnalysis ....... 1692

e) InsiderPreferencesAgainstLBHI(ThirdBullet) ..................................1694
(1) Summary ..............................................................................................1694
(2) LegalSummary ...................................................................................1696
(3) SourcesofPotentialPreferentialActivity........................................1698
(4) DeterminationsandAssumptionsonSection547(b)
Elements ...............................................................................................1705
(5) ScopeofDefensesUnderSection547(c) ..........................................1710
(6) FindingsforLBSF................................................................................1713
(7) FindingsforLBCS ...............................................................................1718
(8) FindingsforLCPI................................................................................1722
f)

PreferencesAgainstNonLBHILehmanAffiliates(FourthBullet) ....1730

g) AvoidanceAnalysisofLBHIandLBHIAffiliatesAgainst
FinancialParticipantsandPreChapter11Lenders(Fourthand
EighthBullets) ............................................................................................1731
(1) Summary ..............................................................................................1731
(2) APBAnalysis .......................................................................................1734
(3) CashDisbursementAnalysis ............................................................1737
(4) PledgedCollateralAccountsAnalysis.............................................1738
(5) AvoidanceAnalysisforCertainPreChapter11Lendersand
FinancialParticipants .........................................................................1739
(a) JPMorganAvoidanceAnalysis ................................................. 1739
(i)

Background ........................................................................ 1739

(ii)

AvoidabilityoftheSeptemberAgreementsand
TransfersinConnectionwiththeSeptember
Agreements ........................................................................ 1742
a.

AvoidabilityoftheSeptemberGuarantyasa
ConstructiveFraudulentObligation ....................... 1743

1539

1.

ThereIsEvidenceToSupportAFinding
ThatLBHIIncurredanObligationWithin
theApplicableLookBackPeriodsWhenit
ExecutedtheSeptemberGuaranty................... 1743

2.

ThereIsEvidenceToSupportAFinding
ThatLBHIReceivedLessThanReasonably
EquivalentValueorDidNotReceiveFair
ConsiderationinExchangeforGranting
JPMorgantheSeptemberGuaranty ................. 1744

3.

InsolvencyasofSeptember10,2008 ................ 1757

4.

UndercapitalizationasofSeptember10,
2008 ....................................................................... 1758

b. DefensestoAvoidabilityoftheSeptember
Guaranty...................................................................... 1758

c.

1.

ApplicabilityoftheGoodFaithDefenseof
Section548(c)oftheBankruptcyCodeand
Section279oftheN.Y.DebtorCreditor
LawtotheSeptemberGuaranty....................... 1758

2.

ApplicabilityoftheSafeHarborProvisions
oftheBankruptcyCodetotheSeptember
Guaranty .............................................................. 1762

AvoidabilityofTransfersofCollateralin
ConnectionwiththeSeptemberGuaranty............. 1767
1.

LBHIsCollateralTransfersandPost
PetitionSetoffs..................................................... 1767

2.

ApplicationoftheSafeHarborstothe$8.6
BillionCashCollateralTransfers ...................... 1776

3.

ThereIsEvidencetoSupportPotential
StateLawClaimsAvailabletoLBHI
PursuanttoSection541toAvoidthe
TransfersInConnectionwiththe
SeptemberGuaranty........................................... 1781

4.

TotheExtenttheSeptemberGuaranty
ProvidedforaGuarantyofNonProtected
ContractObligations,ortotheExtent
JPMorganLiquidatedCollateralPursuant
toNonProtectedContractExposure,a

1540

ColorableBasisExistsThattheSafeHarbor
ProvisionsAreNotApplicable ......................... 1787
(iii) AvoidabilityoftheAugustAgreementsand
TransfersinConnectionWiththeAugust
Agreements ........................................................................ 1794
a.

AvoidabilityoftheAugustGuarantyasa
ConstructiveFraudulentObligation ....................... 1794
1.

LBHIIncurredanObligationWithinthe
ApplicableLookBackPeriodsWhenit
ExecutedtheAugustGuaranty ........................ 1794

2.

ThereIsEvidenceThatLBHIReceived
LessThanReasonablyEquivalentValueor
DidNotReceiveFairConsiderationin
ExchangeforGrantingJPMorganthe
AugustGuaranty ................................................ 1795

3.

InsolvencyasofAugust29,2008...................... 1797

4.

UndercapitalizationandInabilitytoPay
DebtsasTheyComeDueasofAugust29,
2008 ....................................................................... 1797

b. DefensestoAvoidabilityoftheAugust
Guaranty...................................................................... 1797
c.

AvoidabilityofTransfersofCollateralin
ConnectionWiththeAugustGuaranty.................. 1798

(iv) AvoidabilityoftheAugustandtheSeptember
SecurityAgreementsAndCollateralTransfers
PursuanttoSection548(a)(1)(A) ..................................... 1801
(v)

AvoidabilityoftheTransfersofCollateralin
ConnectionwiththeSeptemberGuarantyPursuant
toSection547(b)oftheBankruptcyCode ..................... 1806

(vi) AvoidabilityofObligationsofLBHItoFunds
ManagedbyJPMorgan..................................................... 1813
(b) CitiAvoidanceAnalysis ............................................................ 1817
(i)

Background ........................................................................ 1817

(ii)

Avoidabilityofthe$2BillionDeposit............................ 1821

(iii) AvoidabilityoftheAmendedGuaranty........................ 1821

(iv) Avoidabilityofthe$500MillionTransferFroman
LBHIAccounttoanLBIAccount ................................... 1827
1541

(c) FRBNYAvoidanceAnalysis ..................................................... 1829

(d) HSBCAvoidanceAnalysis ........................................................ 1830
(i)

Background ........................................................................ 1830

(ii)

TheU.K.CashDeedTransactions .................................. 1832

(iii) TheHongKongCashDepositTransactions ................. 1833

(iv) September9,2009Stipulation ......................................... 1834
(v)

AvoidabilityoftheJanuary4,2008Guaranty .............. 1835

(vi) AvoidabilityoftheHongKongCashDeed
Transactions ....................................................................... 1836
(vii) AvoidabilityoftheU.K.CashDeed ............................... 1836
(viii) AvoidabilityoftheTransferoftheRemaining
Collateral ............................................................................ 1837
(e) StandardBankAvoidanceAnalysis......................................... 1837
(f) BNYMAvoidanceAnalysis....................................................... 1839
(g) BofAAvoidanceAnalysis.......................................................... 1840
(h) CMEAvoidanceAnalysis.......................................................... 1841
(i)

Summary ............................................................................ 1841

(ii)

Background ........................................................................ 1843

a.

EnergyDerivatives .................................................... 1851

b. FXDerivatives ............................................................ 1852

c.

InterestRateDerivatives........................................... 1852

d. EquityDerivatives ..................................................... 1853

e.

AgriculturalDerivatives ........................................... 1854

(iii) DefensestoAvoidabilityofClaims ................................ 1855

a.

ApplicabilityofCEAPreemption............................ 1855

b. ApplicabilityofSelfRegulatoryOrganization
Immunity..................................................................... 1862
c.

ApplicabilityoftheSafeHarborProvisionsof
theBankruptcyCode................................................. 1870

h) AvoidanceAnalysisofLBHIAffiliatePaymentstoInsider
Employees(FourthBullet) ........................................................................1871
(1) Summary ..............................................................................................1871
(2) Methodology........................................................................................1873
(3) ApplicableLegalStandards...............................................................1874

1542

(4) Findings ................................................................................................1882

(a) LBHIAffiliateSeverancePayments ......................................... 1882
(b) LBHIAffiliateBonusPayments................................................ 1887
(c) LBHIsAssumptionsofLimitedPartnershipInterests ......... 1889
4.

ExaminersInvestigationofPossibleBreachesofFiduciaryDutyby
LBHIAffiliateDirectorsandOfficers(FifthBullet) .....................................1894
a) FiduciaryDutyStandardforaWhollyOwnedAffiliate
SubsidiaryunderDelawareLaw .............................................................1896
b) FiduciaryDutyStandardforaWhollyOwnedAffiliate
SubsidiaryunderNewYorkLaw ............................................................1902
(1) LCPIsBackgroundandOfficersandDirectors ............................1905
(a) DutyofCare ................................................................................ 1907
(b) DutytoMonitor .......................................................................... 1909
c)

5.

BreachofFiduciaryDutyforAidingorAbettingUnder
DelawareLaw .............................................................................................1911

ExaminersAnalysisofLehmansForeignExchangeTransactions
(SecondBullet) ...................................................................................................1912
a) Summary .....................................................................................................1912
b) ForeignExchangeatLehman ...................................................................1913
c)

6.

ForeignExchangeTransactionsDuringtheStubPeriod .....................1923

ExaminersReviewofIntercompanyTransactionsWithinThirty
DaysofLBHIsBankruptcyFiling(SeventhBullet).....................................1938
a) Summary .....................................................................................................1938
b) Discussion....................................................................................................1939
c)

Analysis .......................................................................................................1942

d) AnalysisofOverallNetIntercompanyDataforthe2007and
2008PeriodsofAnalysis ...........................................................................1942
(1) LBHI ......................................................................................................1942
(2) LBIE.......................................................................................................1945
(3) LBSF ......................................................................................................1947
e) AnalysisofNetDailyIntercompanyDataforthe2007and2008
PeriodsofAnalysis ....................................................................................1949
7.

ExaminersAnalysisofLehmansDebttoFreddieMac..............................1951

1543

B. AreThereAdministrativeClaimsorColorableClaimsforPreferencesor
VoidableTransfers
1.

ExecutiveSummary

ThisSectionoftheReportaddressesthefirst,second,third,fourth,seventhand
eighthbulletpointsoftheExaminerOrder.TheExaminersfindingsareasfollows:
Administrative Claims (First Bullet). The Examiner concludes that LBHI
Affiliates may have administrative claims against LBHI related to cash sweeps
totalingapproximately$60million.
Transfers in Respect of Foreign Exchange Transactions (Second Bullet). The
Examiner identified foreign exchange (FX) transaction settlements involving LBHI
Affiliates that took place between September 15, 2008 and the date upon which each
applicableLBHIAffiliatecommenceditsChapter11case.TheExaminerconcludesthat,
(1)asaresultofLBHIsbankruptcy,LBCCdidnothavesufficientfundstomeetallof
its obligations to its FX counterparties, and (2) operational disruption impacted
whether,andinwhatorder,counterpartieswerepaid.
PreferenceClaims AgainstLBHI (Third Bullet).The Examiner concludes that
LBSFandLBCShavecolorablepreferenceclaimsagainstLBHIunderSection547(b)of
the Bankruptcy Code, but there is also evidence to support LBHIs assertion of new
valueandordinarycoursedefenses.
PotentiallyVoidableTransfersorIncurrencesofDebtClaims(FourthBullet).
The Examiner has not identified any fraudulent transfers under Section 548 of the

1544

Bankruptcy Code or under state law based on the methodologies employed by the
Examinersfinancialadvisors.TheExaminersfinancialadvisorsreviewedtheDebtors
expansive trading databases, SOFAs, and general ledger. Ultimately, the Examiner
identifiedseveraltransfersintheDebtorstradingdatabasesthatmaywarrantfurther
investigation,butanysuchpotentialclaimsbelongtoLBI.TheSIPATrusteehasbeen
contacted about these transfers. As for the other analytical approaches, the Examiner
has not been able to complete his analyses because the Debtors have not been able to
providebackupmaterialforcertaintransfersofinterest.
Intercompany Accounts and Transfers Thirty Days Prior to the Petition Date
(Seventh Bullet). The Examiner has investigated and catalogued intercompany
fundingtransfersnotinvolvingcollateralbetweenLBHIandcertainLBHIAffiliatesthat
took place between August 1, 2008 and September 12, 2008, as well as for the
correspondingtimeperiodin2007.
Avoidance Transactions (Eighth Bullet). The Examiner reviewed various
guaranties entered into by LBHI shortly before its bankruptcy filing and transfers of
collateral inconnectionwith thoseguaranties.TheExaminerconcludes that there are
colorable claims against JPMorgan and Citi to avoid the guaranties that they received
from LBHI and to avoid certain of the transfers made in connection with those
guaranties under Sections 547(b), 548 and 544 of the Bankruptcy Code and state law.
Suchclaims,however,aresubjecttosubstantialdefensesincludingthatthetransfersof

1545

collateraltoJPMorganorCitiareprotectedfromavoidancebaseduponthesafeharbor
provisionsoftheBankruptcyCode.TheExaminerconcludesthattheevidencedoesnot
support the existence of colorable claims against FRBNY, BNYM, HSBC and the CME
Group (CME). The Examiner elected not to examine the BofA transactions for
purposes of determining whether colorable claims exist with respect to such
transactions because they are the subject of ongoing litigation. The Examiner was
unable to reach a conclusion with respect to a $200 million collateral transfer to
StandardBankbecauseofthelackofinformationshowingwhetheraLehmanChapter
11debtorwasthesourceofthiscollateraltransfer.5997
2.

ExaminersInvestigationofPossibleAdministrativeClaimsAgainst
LBHI(FirstBullet)
a) Summary

The Examiner investigated and identified cash transfers constituting post

petition extensions of credit that may give rise to administrative claims by LBHI
Affiliates.SuchtransfersincludethosefromLBHIAffiliatestoLBHI,aswellasreceipts
of cash by LBHI for the benefit of LBHI Affiliates. The Examiner concludes that cash
transfersinatotalamountofapproximately$60millionmaygiverisetoadministrative
claims.

5997TheExaminernotesthattheclaimsanalyzedhereinarisingunderSections547(b),548and544ofthe

BankruptcyCodeandstatelawaredependentuponananalysisofLehmansfinancialconditionasofthe
time of these transfers. Because the Examiner was directed only to determine if these claims were
colorable,theExaminersfinancialadvisorshavelimitedtheiranalysistoadeterminationastowhether
evidenceexiststosupportafindingoftherequisitefinancialcondition.

1546

b) Introduction
This Section of the Report examines whether LBCC or any other entity that
currentlyisanLBHIChapter11debtorsubsidiaryoraffiliate(LBHIAffiliate(s))has
any administrative claims against LBHI resulting from LBHIs cash sweeps of cash
balances,ifany,from September15,2008,the commencementdate of LBHIs Chapter
11case,throughthedatethatsuchapplicableLBHIAffiliatecommenceditsChapter11
case.5998
Neither the Examiner Order nor the Bankruptcy Code define the term cash
sweep. However, in seeking authority to continue its prepetition cash management
system after the LBHI petition date, the Debtors described their practice of collecting,
concentratinganddisbursingcash,includingintercompanyfundingandthesweeping
of excess cash.5999 In a Cash Management Order, the Bankruptcy Court thereafter
approved the Debtors postbankruptcy continuation of its cash management system,
including intercompany funding, and provided that any postpetition intercompany
cash sweep by the Debtors was a postpetition extension of credit entitled to
superpriority status.6000 Specifically, the Court ordered that from and after the

5998ExaminerOrderatp.3,firstbullet.
5999See Debtors Motion Pursuant to Sections 105(a), 345(b), 363(b), 363(c) and 364(a) of the Bankruptcy

Code and Bankruptcy Rules 6003 and 6004 (A) for Authorization to (i) Continue Using Existing
CentralizedCashManagementSystem,asModified(CashManagementMotion),atpp.67,Docket
No.669,InreLehmanBrothersHoldingsInc.,No.0813555(Bankr.S.D.N.Y.Oct.3,2008).
6000FinalOrderPursuanttoSections105(a),345(b),363(b),363(c)and364(a)oftheBankruptcyCodeand
Bankruptcy Rules 6003 and 6004 (A) Authorizing the Debtors to (i) Continue to Use Existing Cash

1547

CommencementDate,(i)thetransferofcashtoorforthebenefitofanyDebtordirectly
or indirectly from any Debtor or nonDebtor affiliate shall entitle the transferring
affiliate to an allowed claim in the recipient Debtors Chapter 11 case, under Sections
364(c)(1) and 507(b) of the Bankruptcy Code, having priority over any and all
administrative expenses of the kind specified in Sections 503(b) and 507(b) of the
Bankruptcy Code.6001 Section 364(c) of the Bankruptcy Code allows a debtor to
obtaincreditorincurdebtwithpriorityoveradministrativeexpenses.6002
Thus,inlightofthetermsoftheCashManagementOrder,inthisSectionofthe
Report,cash sweeprefers to anycashtransfer that occurred betweenSeptember15,
2008andthedatethattheapplicableLBHIAffiliatecommenceditsChapter11case(in
eachcase,theStubPeriod),from(1)anLBHIAffiliatetoLBHIor(2)athirdpartyto
LBHIforthebenefitofanLBHIAffiliate.Excludedfromthedefinitionofcashsweep
arepostpetitioncash transfersmade inpayment orsettlement of existingobligations;
such transfers would not be postpetition extensions of credit in accordance with
Section364(c)(1)oftheBankruptcyCode.

Management System, as Modified (the Cash Management Order), at p. 6, Docket No. 1416, In re
LehmanBrothersHoldingsInc.,No.0813555(Bankr.S.D.N.Y.Nov.6,2008).
6001Id.
6002Section 364(c)(1) of the Bankruptcy Code states, in relevant part, the court may authorize the
obtainingofcreditortheincurringofdebtwithpriorityoveranyoralladministrativeexpensesofthe
kind specified in section 503(b) of this title. 11 U.S.C. 364(c)(1). Section 503(b) of the Bankruptcy
Code states, in relevant part, that there shall be allowed administrative expenses including the
actual,necessarycostsandexpensesofpreservingtheestate.11U.S.C.503(b).

1548

In order to provide the context for identifying cash sweeps giving rise to
administrativeclaims,thisSectionoftheReportbeginswithanoverviewofLehmans
prepetition cash management system, which, as the Bankruptcy Court noted, was
extraordinarily complex and involved the regular movement of vast sums among
affiliatedentities.6003
c)

LehmansCashManagementSystem

Lehmans Global Treasury Group (the Treasury Group) was responsible for
managing the firms liquidity pool, funding the entities business needs and ensuring
effectiveuseofthefirmscapital.6004TheTreasuryGroupwassubdividedintovarious
departments,6005 including the Cash and Collateral Management Group.6006 The Cash
andCollateralManagementGroup,amongotherthings,monitoredthecashpositionof
Lehmanentitiesandmanagedtheirintradayfundingrequirements.

6003MemorandumDecisionDenyingRelieffromtheAutomaticStaytoEffectuateSetoffunder11U.S.C.

553(a),atp.16,DocketNo.3551,InreLehmanBrothersHoldingsInc.,No.0813555(Bankr.S.D.N.Y.May
12,2009).
6004SeeLehman,FSAArrowAssessmentTreasury(Aug.11,2008),atp.2[LBHI_SEC07940_3272979].
6005TheTreasuryGroupwascomprisedofthefollowingdepartments:CashandCollateralManagement,
Asset Liability Management, Financial Planning and Analysis, Creditor Relations, Treasury Controllers
andNetworkManagement.Seeid.
6006Id.AtthetimeoftheLBHIbankruptcyfiling,DanielJ.FlemingwasSeniorVicePresidentandGlobal
HeadoftheCashandCollateralManagementGroup.ExaminersInterviewofDanielJ.Fleming,Apr.22,
2009,atp.1.

1549

(1) LBHIsRoleasCentralBanker
LBHI acted as the central banker for the Lehman entities, controlling the cash
disbursementsandreceivablesforitself,itssubsidiariesanditsaffiliates.6007Inaddition,
through its central banking system, LBHI managed cash globally, allowing Lehman
entitiestousecashefficiently.LBHIscashmanagementsystemwasdesignedtotrack
all cash activity, manage cash, maximize investment opportunities and minimize
costs.6008 The firmwide cash management system also streamlined Lehmans
managementandregulatoryreportingprocess.6009
LBHIs cash management system was not completely integrated, and certain
elements of the system functioned independently.6010 As such, in order to view
Lehmans global cash picture, LBHIs cash management team gathered information
from various financial software management tools,6011 as opposed to retrieving the

6007CashManagementMotion,atp.4(10),DocketNo.669,InreLehmanBrothersHoldingsInc.,No.08

13555(Bankr.S.D.N.Y.Oct.3,2008).NotwithstandingLBHIsroleascentralbanker,LBIpaidexpenses
forthebenefitofmanyU.S.Lehmanentities.However,LBHIwasprimarilyresponsibleforfundingthe
businessoperationsoftheseentities.Id.atpp.4(10),8(21).
6008SeeLehman,GCCMSystemDescription/ProjectOverview[LBEXLL385979];Lehman,Introduction
to GCCM; Concepts and Detail of GCCM Disbursements and Receipts Accounting, at p. 2 [LBEXLL
029285].
6009Whilethecashmanagementsystemwasthesameforregulatedandnonregulatedentities,regulated
entitiesweresubjecttocertainregulatoryrequirementswhich,amongotherthings,causedsuchentities
toaccountforsomeintercompanytransactionsdifferentlyandtoretainmorecashintheirbankaccounts
thantheywouldabsentsuchregulatoryrequirements.ExaminersInterviewofDanielJ.Fleming,Dec.
17,2009,atp.2.
6010ExaminersInterviewofDavidForsyth,Oct.29,2009,atp.2.
6011LBHIusedvariousapplicationsandplatformsincludingtheSummitTreasuryWorkstation(TWS)
tomanageitstreasuryfunctions.Withrespecttocashmanagement,LBHIalsousedavarietyofsoftware
programsinconjunctionwithTWS,includingtheGlobalCashandCollateralManagementsystem,which

1550

informationfromoneintegratedsystem.Becausethesystemwasnotfullyintegrated,
the cash management team could obtain only an approximation of Lehmans cash
positionatanypointintime.6012
(2) GlobalCashandCollateralManagement
In2006,LBHIbegantoimplementtheGlobalCashandCollateralManagement
(GCCM)system,aninhousebankingplatform.GCCMwascreatedto,amongother
things: (1) generate realtime integrated views of cash positions across time zones; (2)
providetransparencyintothegenerationanduseofcash;(3)manageriskbycalculating
realtime unsecured bank credit usage and minimize payment by systematically
releasing payment messages based on credit availability; and (4) forecast and fund
efficientlybyprovidingstartofday,intradayandendofdayprojectedandactualcash
positionsacrossallcurrencies,legalentitiesandbankaccounts.6013
While GCCM was intended by Lehman to facilitate efficient monitoring of the
cashactivityofitsentities,anentitymayhaveusedmultiplesourcesystems6014thatmay
or may not have been integrated into GCCM at the time of the LBHI bankruptcy

functionedasagatewayforcashflowstoandfromthefirm,andLehmansgeneralledgersystem(DBS).
Lehman,FinanceSystemsOverview,pp.8,14[LBEXAM004340].
6012ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.5.
6013Lehman,GCCMSystemDescription/ProjectOverview[LBEXLL385979].
6014Source systems are the applications in which business transactions were recorded, and which
subsequentlytransmittedtransactioninformationtoDBS.AtthetimeoftheLBHIbankruptcypetition,
the source systems integrated with GCCM served various functions, including: (1) clearance, payment
and settlement of trades; (2) loan product administration; (3) employee compensation, benefits and
expenses;(4)cashnettingandwiretransfers;and(5)firmfunding.Examplesofsourcesystemsinclude
(1)ASAP,apaymentandsettlementsystemforfixedincomeandequity;(2)LoanIQ,asourcesystemfor
loan product transactions and; (3) ITS, a multicurrency trade processing, settlement and bookkeeping
system.

1551

filing.6015 Therefore, the Treasury Group was able to track only a portion of certain
entitiescashactivityusingGCCM.
Lehman also used GCCM to consolidate cash for investment purposes, reduce
the number of bank accounts at other financial institutions and manage its bank
accountsmoreefficiently.6016CashconsolidationwithintheGCCMsystemwasunlikea
traditional cash sweep system in that funds from individual accounts were not
automatically transferred into a consolidation account on a daily basis. Rather, the
TreasuryGroupusedGCCMtomanuallysweepcashfromLBHIAffiliateaccountsto
anLBHIconsolidationaccountonanintradayordailybasis,asneeded.6017
Inotherwords,TreasuryGrouppersonnelmonitoredGCCMonadailybasisto
determine whether affiliate bank accounts had excess cash that was not immediately
needed for the affiliates business operations. If an affiliate had excess cash, the
Treasury Group manually wired such cash to a designated consolidation account of

6015Integration

into GCCM was done on a systembysystem basis, not on an entitybyentity basis.

ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.4.TheExaminerobservedthatLoanIQ,a
global multicurrency system for the processing and administration of bank loan products utilized by
LCPI,hadbeenintegratedintoGCCMatthetimeoftheLBHIbankruptcyfiling,andthereforedatafrom
LoanIQwastransmittedtoGCCM.Ontheotherhand,MTS(MainframeTradingSystem),asecurities
tradingsystemutilizedbyLBCC,hadnotbeenintegratedintoGCCMatthetimeoftheLBHIbankruptcy
filing,andthereforenodatafromMTStradeswasincludedinGCCM.
6016See Lehman, Introduction to GCCM; Concepts and Detail of GCCM Disbursements and Receipts
Accounting,atp.4[LBEXLL029285](discussingLehmansgoalofcreatinganinhousebankmodelto,
amongotherthings,reducethenumberofexternalbankaccounts).
6017CashManagementMotion,atp.5(12),DocketNo.669,InreLehmanBrothersHoldingsInc.,No.08
13555 (Bankr. S.D.N.Y. Oct. 3, 2008). The Treasury Group did not manually transfer cash between the
ExternalBankAccountsofLBHIanditsregulatedsubsidiariesonadailybasis.Rather,LBHIprefunded
theobligationsofitsregulatedsubsidiaries,andsuchsubsidiariesperiodicallytransferredfundstoLBHI
ormadepaymentstothirdpartiesonbehalfofLBHItodecreasetheirintercompanypayable.Seeid.

1552

LBHI.Ontheotherhand,ifanaffiliatehadanegativecashposition,LBHIfundedthe
affiliate by wiring cash from its consolidation account to the affiliates bank account.
ThefollowingdiagramillustratesthepathsofthesecashtransfersamongLBHIandits
affiliates.

As indicated in the diagram above, Lehman entities entered into transactions

withotherLehmanentitiesintheordinarycourseofbusiness.Suchtransactionsmay
have resulted in transfers of cash among Lehman entities. However, in order to
minimizetheneedtotransfercashamongaffiliates,Lehmanestablishedintercompany
relationships in GCCM called funding trees.6018 Lehman entities connected to the
samefundingtreedidnottransfercashtoeachotherinconnectionwithintercompany

6018ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atpp.34.

1553

transactions. Instead, such intercompany transactions were recorded on the books of

theseentitiesasintercompanypayablesandreceivables.6019
Because GCCM was not fully integrated with Lehmans source systems, some
transactions related to cash management took place outside of GCCM. For instance,
certain cash transfers between LBHI and LCPI were recorded in the MTS system,6020
whichwasresponsibleforthetradingoffixedincomesecurities.6021BecauseMTSwasa
trading system that was not designed to record cash transfers, cash transfers were
recordedinMTSassecuritiesrepurchasetransactions.6022
(3) LehmansExternalandVirtualBankAccounts
LBHI maintained accounts at various banking institutions (collectively, the
ExternalBankAccounts).Lehmantrackedthemovementandallocationoffundsin
ExternalBankAccountsusingvirtualaccountswithinGCCM.GCCMmaintainedtwo
types of virtual accounts: (1) Nostro Accounts, which mirrored External Bank
Accounts,6023 and (2) InHouse Accounts, which reflected the cash position,
receivablesanddisbursementsforeachaffiliate.6024

6019Id.atpp.35.
6020InadditiontocashtransfersbetweenLCPIandLBHI,theMTSsystemwasalsousedtorecordcash

transfersbetweenLCPIandotherLehmanentities.Id.atp.7.
6021Id.atpp.67.
6022Id.SeeSectionIII.B.3.e,8ofthisReport,whichdiscussescashtransfersrecordedinMTS.
6023Nostro referred both to the actual accounts maintained at outside financial institutions and a
representationofthoseactualaccountsmaintainedwithintheGCCMsystem.
6024See Lehman, Introduction to GCCM; Concepts and Detail of GCCM Disbursements and Receipts
Accounting,atpp.34[LBEXLL029285].

1554

TheInHouseAccountsdocumentedtheamountofcashinLBHIsExternalBank
Accountallocatedtoaparticularentity.WhenanaffiliatetransferredmoniestoLBHI,
those monies would be recorded with an accounting entry as an intercompany
payablebyLBHIowedtotheaffiliate,andacorrespondingintercompanyreceivable
wouldberecordedonthebooksoftheaffiliate.6025Inthisway,GCCMallowedLBHIto
conduct its funding activity through a small number of External Bank Accounts,
withoutsegregatingaffiliatefunds.
Furthermore, because Nostro Accounts and InHouse Accounts within GCCM
captured cash payment and receipt information, GCCM served as a conduit between
theLehmansourcesystemsandexternalbanks.6026ThetransactionsrecordedinGCCM
were ultimately recorded on the books of the participating Lehman entities via
Lehmansgeneralledgersystem(DBS).6027
GCCM also facilitated the process by which LBHI and its affiliates made and
receivedpaymentsforthebenefitofotheraffiliates.6028Areceiptorpaymentoffunds
by one Lehman entity for the benefitofanother was recordedintheNostro Accounts
and InHouse Accounts within GCCM via an automated realtime process, and was

6025Seeid.atpp.617.Thisrecordingofintercompanypayablesandreceivablesappliedtocashtransfers,

butnotnecessarilytotransactions,suchassecuritiestrades,wherecashisexchangedforitemsofvalue.
6026See Yury Marasanov, Ernst & Young, Accounts Payable / Fixed Assets / NPE / Cash Mgmt. Process
Walkthrough(Nov30,2008),atp.11[EYSECLBHICORPGAMX08056981].
6027JayChan,Lehman,GCCMTrainingManual,atp.5[LBEXLL652833].
6028InlaterSectionsofthisReport,theExaminerreferstoactivitycapturedinGCCMwhenLBHIactedas
central banker for affiliates, therebyreceiving or extending value on their behalf, as quasi
fundingactivity. See Section III.B.3.e of this Report, which discusses insider preferences against LBHI,
andSectionIII.B.6ofthisReport,whichdiscussesactivityoccurringinthethirtydaysbeforebankruptcy.

1555

subsequently posted to the DBS system via an automated daily batch process.6029
Typically, the receipt of funds by one Lehman entity for the benefit of another was
recordedasfollows:(1)thesourcesystemgeneratedanoticethatareceiptoffundswas
expected,whichwassenttoGCCM;(2)uponreceiptofthisnoticeGCCMtranslatedthe
InHouseaccountinformationassociatedwiththetransactiontotheNostroAccount;(3)
GCCMthennotifiedthebankthatareceiptofcashwasexpected;(4)thebankreceived
the funds in an External Bank Account; (5) the bank transmitted the wires SWIFT
data6030 to GCCM, which provided the details of the transaction; (6) GCCM then
compared the SWIFT data against the notice generated by the source system, and
transmittedanacknowledgementofareceiptoffundstothesourcesystem;and(7)the
transaction information recorded in GCCM and the source system was thereafter
recordedinDBS.6031
The following diagram illustrates the electronic transmissions that took place
betweenthesourcesystems,GCCMandbankinginstitutions,aswellasthesubsequent
recordingofthetransactioninformationinDBSinconnection withthereceiptofcash
byLBHIforthebenefitofanaffiliate.

6029JayChan,Lehman,GCCMTrainingManual,atpp.26[LBEXLL652833].
6030SWIFT

(Society for Worldwide Interbank Financial Telecommunication) is the global standard by

whichbankingcustomersautomateandstandardizefinancialtransactionswithbanks.
6031SeeJayChan,Lehman,GCCMTrainingManual,atpp.35[LBEXLL652833].

1556


ThereceiptofcashbyoneLehmanentityforthebenefitofanotherwasrecorded
with one journal entry in the source system and two journal entries in GCCM, which
subsequentlypostedtoDBS.Thediagramsbelowillustratethejournalentriesmadein
GCCM,thesourcesystemandthegeneralledgerforthereceiptofcashbyLBHIforthe
benefit of LCPI, such as those received in connection with loan payments from third
partiesintheordinarycourseofbusiness.

1557


ReceiptofFundsbyLBHIfortheBenefitofLCPI
GCCMandSourceSystemJournalEntries

Debit

CashLBHI

CashLCPI

ReceivableLCPI

Intercompany
(DuefromLBHI)

Intercompany
(DuetoLCPI)

Total

GCCM

Credit

SourceSystem

Debit
Credit

$100(a)

$100(b)

$100(e)

$100(f)

$100(c)

$100(d)

$200

$200

$100

$100

As shown in the diagram above, the journal entries in GCCM were as follows:
(a)adebittocashforLBHIcorrespondingtothereceiptofcashinLBHIsExternalBank
Account;(b)acredittocashforLCPIcorrespondingtotheallocationofcashtoLCPIs
InHouseAccount;(c)adebittoanintercompanyreceivabletoLCPIfromLBHIforcash
receivedbyLBHI;and(d)acredittoanintercompanypayablefromLBHItoLCPIfor
thecashowedbyLBHItoLCPI.
The diagram above also illustrates the following journal entries in the source
system:(e)adebittocashforLCPIforthereceiptofcashfromthethirdparty;and(f)a
credittoreceivablesforLCPIforareductionofthethirdpartysliabilitytoLCPI.

1558

Thesejournalentriesweresubsequentlyrecordedtothegeneralledgerinadaily
batch process. The diagram below illustrates the recording of these entries for LBHI
andLCPIinthegeneralledger.
ReceiptofFundsbyLBHIfortheBenefitofLCPI
LBHIandLCPIGeneralLedgerEntries

CashLBHI

CashLCPI

ReceivableLCPI

Intercompany
(DuefromLBHI)

Intercompany
(DuetoLCPI)

Total

LBHIGeneralLedger
Activity

Debit
Credit

LCPIGeneralLedger
Activity

Debit
Credit

$100(a)

$100(1)

$100(2)

$100(d)

$100(c)

$100(b)

$100

$100

$200

$200

Thistransactionwasrecordedinthegeneralledgerasfollows:(a)adebittocash
forLBHI,correspondingtothereceiptofcashinanLBHIExternalBankAccount;(b)a
credittoLBHIsintercompanypayablesowedtoLCPI,correspondingtotheallocation
of this cash to LCPIs InHouse Account; (c) a corresponding debit to LCPIs
intercompanyreceivablesreflectinganincreaseinintercompanyreceivablesfromLBHI;

1559

and (d) a credit to LCPIs receivables reflecting the receipt of cash from the third
party.6032
(4) BankAccountReconciliations
Bank account reconciliations were a critical component of LBHIs cash
management system, and were necessary for maintaining complete and accurate cash
records. A bank account reconciliation was performed by matching data from a
financial institution with data recorded in both LBHIs internal cash management
system and source systems to identify any inconsistencies or errors.6033 LBHI used a
thirdpartyvendor bank account reconciliation system, Global Smart Stream
Reconciliations (GSSR), which supplemented GCCM and automated the majority of
thebankreconciliationprocess.6034
GSSRperformedthefollowingtwokeycashreconciliationsonadailybasis:(1)
the reconciliation of Nostro Accounts against External Bank Accounts; and (2) the
reconciliation of InHouse Accounts against source system records.6035 Reconciliations

6032There

is also an entry in the general ledger related to LCPI with corresponding debit and credit
amountsthatoffseteachother.Theseare:(1)adebittocashreflectingthereceiptofcashfromathird
party;and(2)acredittocashreflectingtheallocationofcashheldbyLBHItoLCPIsInHouseAccount.
6033See Yury Marasanov, Ernst & Young, Accounts Payable / Fixed Assets / NPE / Cash Mgmt. Process
Walkthrough(Nov.30,2008),atpp.1213[EYSECLBHICORPGAMX08056981].
6034JimMcMahon,Ernst&Young,BankReconciliationProcessWalkthrough(Nov.30,2008),atpp.912
[EYSECLBHIEEDGAMX08024858].
6035Inaddition,reconciliationsofNostroAccountandInHouseAccountbalancesinGCCMagainstDBS
were performed in GSSR. In some cases, reconciliations of source systems against External Bank
Accounts oragainst other source systems werealso performedin GSSR. SeeYury Marasanov, Ernst &
Young,AccountsPayable/FixedAssets/NPE/CashMgmt.ProcessWalkthrough(Nov.30,2008),atpp.
1213[EYSECLBHICORPGAMX08056981].

1560

of the Nostro Accounts against External Bank Accounts assessed the accuracy of the
balancesinanentitysExternalBankAccountsattheendoftheday.6036Reconciliations
oftheInHouseAccountsagainstsourcesystemrecordssubstantiatedthecashbalances
documentedineachentitysbooksandrecords.Inaddition,reconciliationsofNostro
AccountandInHouseAccountbalancesinGCCMagainstDBSrecordsensuredthatall
entriestoGCCMwerecorrect,servingasanadditionalsafeguardagainstinaccuracies
intheInHouseAccountandNostroAccountreconciliations.
As part of the reconciliation process, GSSR identified inconsistencies, or
breaks, between the data reported by financial institutions and the data reported in
LBHIscashmanagementsystem.6037Breakswerenotanunusualoccurrence.Abreak
report was created when listed items from either the bank system or GCCM did not
have a corresponding match in the other system.6038 Each break was investigated and
resolved by Treasury Group personnel.6039 For example, if an External Bank Account
receivedawiretransferfromathirdparty,butthecorrespondingdeposithadnotbeen
recordedinthecorrespondingNostroAccountwithinGCCMpriortothereconciliation,
thistransactionwaslistedonthebreakreport.Likewise,ifapaymenttoathirdparty
was recorded in a Nostro Account within GCCM, but the bank did not complete the

6036Seeid.atp.13.
6037Seeid.atp.12.
6038Seeid.
6039Seeid.atp.13.

1561

wire transfer until after the account reconciliation, the transaction would be listed on
thebreakreport.
d) EffectoftheBankruptcyontheCashManagementSystem
JustpriortotheLBHIbankruptcyfiling,financialinstitutionsincludingCitibank
and JPMorgan froze LBHIs bank accounts.6040 As a result, immediately following
LBHIs bankruptcy filing: (1) funds could not be withdrawn from these accounts; (2)
payments could not be made using funds in these accounts;6041 and (3) the Treasury
Group was unable to retrieve realtime account information. Nonetheless, the banks
continuedtoacceptpaymentsmadetotheseaccounts.
Because LBHIs bank accounts were frozen, the cash management processes of
LBHI affiliates were also disrupted. Funds were no longer transferred from LBHIs
External Bank Accounts to the External Bank Accounts of its subsidiaries and
affiliates.6042 In addition, LBHI stopped manually transferring cash from affiliate bank
accounts to its accounts, as it had done prior to the bankruptcy petition.6043 On
September19,2008,Lehmanregainedaccesstoitsbankaccounts.

6040Examiners

Interview of David Forsyth, Oct. 29, 2009, at p. 3; Citigroup, Written Responses to

ExaminersInquiry(Jan.12,2010),atp.3.
6041Anexceptionwasapaymentof$23.5millionbyLBHItoWeilonSeptember15,2008.
6042The notable exception was passthrough principal and interest payments made to LCPI, which is
discussedbelowinthisSectionoftheReport.
6043Prior to the bankruptcy filing, LBHI treasury personnel transferred cash into LBHI accounts either
daily or intraday as needed. See Cash Management Motion, at pp. 67 ( 16), Docket No. 669, In re
LehmanBrothersHoldingsInc.,No.0813555(Bankr.S.D.N.Y.Oct.3,2008).

1562

Following the LBHI bankruptcy filing and the bankruptcy filings of LBHI
Affiliates,Lehmancontinuedtouseitscashmanagementsystem,honoredcertainpre
petition obligations related to the cash management system and maintained and used
certain existing External Bank Accounts.6044 In addition, the Debtors closed certain
External Bank Accounts and established new External Bank Accounts (New
Accounts),transferringcashintotheNewAccounts.Further,theDebtorsmaintained
certainprepetitionExternalBankAccounts(LegacyAccounts)becauseclosingthose
accountsandopeningnewaccountswouldhaverequiredreestablishingtheinterfaces
betweensuchaccountsandthevarioussystemsthatLehmanoperatedprepetition,and
would thus have involved significant costs. To the extent Legacy Accounts were not
maintained, monies slated for deposit into such accounts were redirected to New
Accounts. The Debtors continue to use New Accounts and Legacy Accounts for all
purposesoftheestate,includingcollectingmoniesandmakingpayments.6045
As an example of the changes described above, prior to September 15, 2008,
LBHIreceivedcertainloanpaymentsforthebenefitofLCPIfromthirdpartyborrowers
intheordinarycourseofbusiness.LBHIthentransferredthesefundsonbehalfofLCPI
directlytothethirdparties,LCPIinvestmentvehiclesorLehmannonDebtoraffiliates

6044See generally Cash Management Order, Docket No. 1416, In re Lehman Brothers Holdings Inc., No. 08

13555(Bankr.S.D.N.Y.Nov.6,2008).
6045LehmanBrothersHoldingsInc.,LBHIOperationalIssuesandChallenges(Nov.3,2008),atpp.1112
[LBEXOTS000866].

1563

that held the loans.6046 After the LBHI bankruptcy filing, funds received by LBHI on
behalf of LCPI could not be transferred because LBHIs External Bank Accounts were
frozen.
Consequently, on September 17, 2008, LCPI established new External Bank
AccountstocollectsuchfundsandLBHInolongerreceivedsuchfundsforthebenefit
of LCPI. LCPI subsequently made payments directly to thirdparty investors in
connectionwithsuchtransactions.OnSeptember18and19,2008,LBHItransferredthe
majorityofthefundsitpreviouslyreceivedforthebenefitofLCPItoanLCPIExternal
BankAccount.6047
e) CashTransfersGivingRisetoAdministrativeClaims
ThemethodologytheExaminerusedtoidentifycashtransfersconstitutingpost
petition extensions of credit that may give rise to administrative claims included a
reviewoftheDebtorsGCCMRecords,StatementsofFinancialAffairs,cashtransaction
reports for Legacy Accounts and New Accounts, bank statement data6048 and general
ledgerreports(collectively,theCashTransactionRecords).Inaddition,theExaminer
conductedinterviewswithcurrentandformerLehmanpersonnel.

6046GCCMIntercompanyReport,Sept.115,2008[LBEXLL2551231LBEXLL2564078].
6047SeeSectionIII.B.2.e.2ofthisReport,whichdiscussesthefundsthatremainintheLBHIExternalBank

Account.
6048Threeseparatedatafilesincluding(1)LegacyAccountdata(2)NewAccountdataand(3)aseparate
datafileforLCPILegacyAccountdatacomprisedthepopulationofbankstatementdata.

1564

Specifically, to identify (1) cash transfers from LBHI Affiliates to LBHI and (2)
cash received by LBHI for the benefit of any LBHI Affiliate, for the period from
September15,2008throughthedatethattheapplicableLBHIAffiliatecommencedits
Chapter 11 case, the Examiner created queries and analyzed reports generated from
Debtor bank statement data and GCCM. Transactions with common characteristics
were analyzed to determine whether such transactions met the definition of cash
sweeps.6049Finally,theExaminerreconciledthecashtransferinformationidentifiedin
the bank statement data against the GCCM funding report and intercompany report
data.
The Examiner analyzed bank statement data for approximately 65 accounts,
constituting the Debtors U.S. and foreign bank accounts.6050 The Examiners findings
basedonthemethodologydescribedaboveareasfollows:
(1) CashTransfersfromLBHIAffiliatestoLBHI
The Examiner has identified a transfer of $58,969,818 from LCPI to LBHI on
October1,2008.6051

6049

See Section III.B.2.b of this Report, which discusses cash sweeps that give rise to administrative
claims.
6050TheDebtorsprovidedbankstatementdatafor:(1)U.S.bankaccountsofLBHI,EastDover,LB745,
LBCC,LBCS,LBDP,LBFP,LBSF,LCPI,LOTCandPAMIStatler;and(2)foreignbankaccountsofLBHI
(UK Branch), LBSF and LBCS. Email from Lauren Sheridan, Lehman, to Heather D. McArn, Jenner &
Block (Jan. 21, 2010) (noting that Lehman has provided the Examiner with the complete universe of all
transaction activity for Debtor entities); email from Lauren Sheridan, Lehman, to Heather D. McArn,
Jenner&Block,etal.(Jan.29,2010)(indicatingthatScottishFinance,CES,CESV,CESIX,Luxembourg
LLCandBNChadeitherminimalornobankingactivityduringtheStubPeriod).
6051SeeXOJetLCPIReceiptSupportAnalysis[LBEXAM5641494LBEXAM5641497].

1565

On September 30, 2008, LCPI received $58,969,818 from a third party in

connection with an aircraft lease.6052 These funds were subsequently transferred to
LBHI on October 1, 2008, three business days prior to the LCPI bankruptcy filing.
AccordingtoLehman,thistransferlikelyoccurredinordertoprotectthefundsfrom
beingseizedbyCitibank.6053ThesefundshavenotbeenremittedbyLBHItoLCPIasof
thedateofthisReport.6054TheExaminerhasdeterminedthatLCPImaybeentitledto
anadministrativeclaimagainstLBHIinconnectionwiththistransfer.
(2) CashReceivedbyLBHIonBehalfofLBHIAffiliates
The Examiner has identified cash received by LBHI for the benefit of LBHI
Affiliatesinthetotalamountof$264,944,535.6055
LBHIreceived$258,903,936ofthistotalamountforthebenefitofLCPI,relating
toprincipalandinterestpaymentsfromthirdparties.6056OnSeptember18and19,2008,
LBHI remitted a total of $258,745,279 to LCPI for these principal and interest
payments.6057 LBHI has not remitted the remaining balance of $158,657 to LCPI in
connection with these transactions, as of the date of this Report. The Examiner has

6052Seeid.
6053EmailfromLaurenSheridan,Lehman,toKenHalperin,Duff&Phelps(Jan.5,2010).
6054SeeXOJetLCPIReceiptSupportAnalysis[LBEXAM5641494LBEXAM5641497].
6055See

Debtor Bank Statement Data [LBEXAM 5642100 LBEXAM 5642389]; see also GCCM
IntercompanyReport[LBEXLL2040576LBEXLL2041244].
6056See Debtor Bank Statement Data [LBEXAM 5642100 LBEXAM 5642389]; see also GCCM
IntercompanyReport[LBEXLL2040576LBEXLL2041244].
6057See Debtor Bank Statement Data [LBEXAM 5642100 LBEXAM 5642389]; see also GCCM
IntercompanyReport[LBEXLL2040576LBEXLL2041244].

1566

determined that LCPI may be entitled to an administrative claim against LBHI in

connectionwiththesetransactions.
LBHI also received a total amount of $6,038,929 for the benefit of LBSF during
theperiodfromOctober1throughOctober3,2008,relatedtointerestrateswapcoupon
payments from third parties.6058 During 2009, LBHI remitted a total amount of
$5,710,986toLBSFinconnectionwiththesetransactions.6059LBHIhasnotremittedthe
remainingbalanceof$327,943toLBSFasofthedateofthisReport.TheExaminerhas
determined that LBSF may be entitled to an administrative claim against LBHI in
connectionwiththesetransactions.
Inaddition,theExamineridentifiedtworeceiptsbyLBHIforthebenefitofLBCS
and LBSF, which were de minimis in amount. On September 15, 2008, LBHI received
$1,484forthebenefitofLBCSand$186forthebenefitofLBSF.6060Asofthedateofthis
Report, LBHI has not remitted these amounts to LBCS and LBSF. The Examiner has
determinedthatLBCSandLBSFmaybeentitledtoadministrativeclaimsagainstLBHI
inconnectionwiththesetransactions.

6058LBHIbankstatementdata[LBEXAM5642390].
6059Id.
6060See

Debtor Bank Statement Data [LBEXAM 5642100 LBEXAM 5642389]; see also GCCM
IntercompanyReport[LBEXLL2040576LBEXLL2041244].

1567

(3) OtherRelevantTransactions
TheExamineridentifiedtwotransfersinthetotalamountof7,065,352NOKfrom
LBI(onbehalfofLBCC)toLBHI(forthebenefitofLBIE)onSeptember15,2008.6061
This transaction was the subject of a Bankruptcy Court decision dated May 12,
2009,concerningDnBNORBankASAs(DNB)entitlementtosetofffundsdeposited
toaLBHIbankaccountpostpetition.6062InitsdecisiondenyingDNBsrequestforrelief
from the automatic stay to effectuate setoff, the Court noted that the transaction
involvedatransferoffundsfromLBCCtoLBHI.TheCourtnotedthat:
[T]he current record fails to provide any explanation concerning the
reasonthatLBCCinitiatedthetransferoffundstoLBHI,theconsequence
of the transfer (other than as it relates to the setoff question) or whether
the transfer either satisfies or gives rise to an intercompany claim. The
Courtalsodoesnotknowwhetherthetransferisanexampleofordinary
courseprepetitioncashmanagementproceduresorrepresentsanisolated
transaction.6063
In investigating whether these NOK transfers constitute cash sweeps entitling
LBCCtoanadministrativeclaim,theExaminerreviewedtherecordbeforetheCourtas
well as Lehmans GCCM and RISC6064 records. These records provided additional
information regarding the entities involved in this transaction. Reflective of the

6061See

GCCM transaction detail [LBEXLL 3356465 LBEXLL 3356471, LBEXLL 3356472 LBEXLL
3356479] (funds transfer by LBI (for LBCC) was to the UK branch of LBHI (for LBIE).) The 7,065,352
NorwegianKroner(NOK)isequivalenttoapproximately$1.2million.
6062See Memorandum Decision Denying Relief from the Automatic Stay to Effectuate Setoff Under 11
U.S.C.553(a),DocketNo.3551,InreLehmanBrothersHoldingsInc.,No.0813555,(Bankr.S.D.N.Y.May
12,2009).
6063Id.atp.15.
6064RISCstandsforRealtimeInformationSystemsforCommodities.

1568

complicated nature of Lehmans cash management system, this data revealed that the
transactioninvolvedcashtransfersmadeinsettlementofforeignexchangetransactions
between LBCC and LBIE to exchange NOK for U.S. dollars.6065 The transfers of NOK
originated from an LBI bank account at DNB (on behalf of LBCC) to an LBHI (UK
Branch) bank account at DNB (for the benefit of LBIE).6066 Based on available
information, the Examiner has determined that the corresponding U.S. dollar transfer
fromLBIEtoLBCCwasnotconsummated.6067
Becausethesecashtransfersweremadeinsettlementofexistingobligationsand
were not postpetition extensions of credit, they do not constitute cash sweeps as
defined in this Report.6068 Thus, any potential claims that may arise from this multi
entitytransactionareoutsidethescopeoftheExaminersinvestigation.

6065See RISC statement detail [LBEXAM 5641773, LBEXAM 5641774, LBEXAM 564177 and LBEXAM

564180](listingtheexecutionandscheduledsettlementdatesfortheseforeignexchangetransactions);see
also Francois ChuFong, Lehman, Written Responses to Examiner Inquiry Regarding DnB NOR
Transaction, attached to email from Lauren Sheridan, Lehman, to Heather D. McArn, Jenner & Block
(Jan.15,2010).
6066TheExaminerdeterminedthatbecauseLBCCdidnothaveforeigncurrencybankaccounts,LBIpaid
and received foreign currencies on its behalf. Likewise, in this transaction, LBHI UK served as LBIEs
agentforthereceiptofNOK.
6067See Debtor Bank Statement Data [LBEXAM 5642100 LBEXAM 5642389] (reflecting that the U.S.
dollaramountswerenottransferredtoLBCC).
6068The Examiners review of these transfers focused on potential administrative claims by LBCC (an
LBHIAffiliate)againstLBHIarisingfromcashsweeps.TheExaminerhasnotassessedwhetheranynon
Debtor affiliates including LBI and LBIE may have claims against any Debtor in connection with these
transfers.

1569

3.

ExaminersInvestigationofPossibleAvoidanceActions(Third,Fourth
andEighthBullets)6069
a) Summary

This Section includes a discussion of (1) LBHI and LBHI Affiliate solvency
determinations, (2) unreasonably small capital determinations, (3) insider preferences
againstLBHI,and(4)potentialavoidanceclaimsavailabletoLBHIandLBHIAffiliates
againstfinancialparticipantsandpreChapter11lenders.
b) LBHISolvencyAnalysis
(1) Introduction
The analysis of LBHIs solvency is necessary as part of the Examiners
investigation into potential preferential and fraudulent transfers made by LBHI in the
timeleadinguptoitsbankruptcyfiling.6070TheBankruptcyCodedefinesinsolventas
afinancialconditionsuchthatthesumofsuchentitysdebtsisgreaterthanallofsuch
entitys property, at a fair valuation . . .6071 This definition of insolvency is the
traditionalbankruptcybalancesheettestofinsolvency:whetherdebtsaregreaterthan
assets, at a fair evaluation, exclusive of exempted property.6072 Although GAAP is

6069This

Section of the Report includes data extracted from Lehmans source systems, including, for
example,GCCM,GSSR,andDBS.
6070Whether a debtor was insolvent at the time of a transfer affects the avoidability of that transfer as
either a preference or a fraudulent transfer under the Bankruptcy Code. See 11 U.S.C. 547(b)(3),
548(a)(1)(B)(ii)(I).
607111U.S.C.101(32)(A).
6072Akersv.Koubourlis(InreKoubourlis),869F.2d1319,1321(9thCir.1989).

1570

relevant to a solvency analysis, it is not determinative.6073 A court should ask: What

wouldabuyerbewillingtopayforthedebtorsentirepackageofassetsandliabilities?
Ifthepriceispositive,thefirmissolvent;ifnegative,insolvent.6074Whetheracompany
isinsolventisconsideredamixedquestionoflawandfact.6075
Valuation need not be exact:6076 indeed, the precise value of a company as a
goingconcernisfarfromcertain.6077TheSecondCircuit,inRoblin,explained:
The matrix within which questions of solvency and valuation exist in
bankruptcydemandsthattherebenorigidapproachtakentothesubject.
Because the value of property varies with time and circumstances, the
finder of fact must be free to arrive at the fair valuation defined in
101[32]bythemostappropriatemeans.6078
As explained in Iridium, [n]o rigid approach should be taken regarding the fair
valuation of a company within the context of [a] solvency analysis, but rather courts
should consider the totality of the circumstances.6079 Additionally, though not

6073Shubertv.LucentTech.,Inc.(InreWinstarCommc.,Inc.),348B.R.234,274(Bankr.D.Del.2005),affd

2007WL1232185(D.Del.Apr.26,2007),affdinpart,modifiedinpartonothergrounds,554F.3d382(3dCir.
2009).
6074Coveyv.CommercialNatlBankofPeoria,960F.2d657,660(7thCir.1992).
6075Travelers Intl AGv. Trans WorldAirlines, Inc.(In reTrans WorldAirlines, Inc.), 134 F.3d 188, 193(3rd
Cir.1998),cert.denied523U.S.1138(1998).
6076Bridenv.Foley,776F.2d379,382(1stCir.1985).
6077Wolkowitzv.Am.ResearchCorp.(InreDakIndus.,Inc.),170F.3d1197,1200(9thCir.1999);seealsoBrown
v.ShellCanada,Ltd.(InreTenn.Chem.Co.),143B.R.468,479(Bankr.E.D.Tenn.1992)(Exactnessisnot
requiredindeterminingsolvencyorinsolvency.),affd112F.3d234(6thCir.1997).
6078Lawsonv.FordMotorCo.(InreRoblinIndus.,Inc.),78F.3d30,38(2dCir.1996)(quotingPorterv.Yukon
NatlBank,866F.2d355,357(10thCir.1989)).
6079IridiumCapitalCorp.v.Motorola,Inc.(InreIridiumOperatingLLC),373B.R.283,344(Bankr.S.D.N.Y.
2007) (Peck, B.J.) (the Second Circuit has adopted a flexible approach to insolvency analysis); see also
Neuger v. Casgar (In re Randall Constr., Inc.), 20 B.R. 179, 184 (N.D. Ohio 1981) (determination of fair
valuationis,atbest,aninexactscience,andmayoftenbeimpossible.Asaresult,insolvencyfrequently

1571

dispositive,expertappraisalsandvaluationsshouldbeconsidered,whenpossible,ina
solvencyanalysis.6080
In order to perform this analysis, the Examiners financial advisors utilized an
approach based on the market prices for LBHI equity and debt. This approach was
complemented by (1) the utilization of the technique of retrojection; and (2) the
applicationofcurrentawareness,asexplainedbelow.
TheExaminersfinancialadvisorsdidnotperformeitheradiscountedcashflow
valuation (DCF) or a market comparable valuation of Lehman for several reasons.
First,suchanalyseswouldhaverequiredsignificanttimeandexpensetoperform,and
eachhassignificantshortcomingswithregardtoitsdependabilityandapplicabilityto
theExaminersanalyses.Second,Lehmansassetswerecomprisedmostlyoffinancial
assetsforwhichaprojectionofcashflowswouldhavebeenchallenging.Further,the
investigationdonebytheExaminersfinancialadvisorsincludednumerousdatesover
whichLehmansfinancialhealthwasfluctuatingwithsomeseverity.Asaresult,aDCF
performed on a single date would not necessarily be applicable to any other date,
causing the Examiners financial advisors to have to perform separate DCFs for each
date in which there was a potentially avoidable transaction. Finally, due to the
subjectivity necessary when projecting cash flows or determining appropriate

mustbedeterminedbyproofofotherfactsorconsiderationofotherfactorsfromwhichinsolvencymay
beinferred.)
6080Iridium,373B.R.at344.

1572

multiples,theExaminersfinancialadvisorsfounditmoreappropriateinthissituation
to rely on the contemporaneous analyses performed by all of the market participants.
The presentation of pricebook ratios, for example, indicates the collective,
contemporaneous analysis of all market participants with regard to an appropriate
discount that should be applied to Lehman relative to its peers. Any comparable
companyvaluationperformedbytheExaminersfinancialadvisorswouldmerelyserve
toreplicatethisanalysisayearlater.
Utilizing a marketbased approach, the Examiner first concluded that there is
sufficientevidencetosupportafindingofinsolvencyofLBHIbeginningonSeptember
8,2008.Adjustingthemarketbasedapproachpursuanttothetechniqueofretrojection
and the application of current awareness, which would factor in information in
existencebutnotknownbythemarket,theExaminerconcludedthatthereissufficient
evidencetosupportafindingofinsolvencyofLBHIbeginningonSeptember2,2008.
(2) MarketBasedValuationAnalysis
(a) BasisforUtilizationofaMarketBasedValuationAnalysis
Lehmanwasinanindustrywhereitwasrequiredtomarkmanyofitsassetsto
market every day. Although not all of Lehmans assets were marked with daily
frequency,6081thebookvalueofthefirmsequityistypicallyareasonablestartingpoint

6081GAAP does not require firms to mark fixed assets to market. Rather, it allows those assets to be

reportedatbookordepreciatedvalues.Further,GAAPrequiresfirmstoperformgoodwillimpairment
analyses,butitdoesnotrequirefirmstoreportappreciatingvaluesofgoodwillorintangibles.Finally,
GAAPdoesnotrequirefirmstomarkmostdebttomarket.

1573

fortheassessmentofthefirmstrueequity.DespitetheExaminersfinancialadvisors
determination that Lehmans valuation methodology for certain asset categories was
reasonable,6082thereisevidenceindicatingthatLehmansvaluationswereinaccurateor
didnotproperlyallowforfirmwideilliquidityand/ortheappropriatelevelsofcurrent
distress.6083 Although Lehmans internal marktomarket marking models have an
advantage over the market owing to their access to extensive private information, the
markings that are reported to the public occur relatively infrequently (quarterly), and
quickly become outdated. Quarterly marktomarket values depend on quarterly
accounting data and may not reflect the changing risk profile of the institution.
Moreover, during the time period relevant to the Examiners financial advisors
analyses, market values were declining rapidly and new information that impacted
pricing was released frequently. Thus, while fluid equity markets interpret public
informationandincorporatenewdataintopricesveryquickly,thequarterlyaccounting
marksofLehmanlackedsuchtimeliness.
An additional explanation for the discrepancy between the market values and
Lehmans book values is that the firms internal marktomarket models focus on the
riskiness ofthe individualassets, and thereforedonotnecessarilycorrectly reflectthe
overall riskiness of Lehman. Often, large firms are less risky than the sum of their
individual assets because of the benefit gained by diversification. In Lehmans case,

6082SeeSectionIII.B.3.(c)ofthisReport,whichdiscussesthisdetermination.
6083SeeSectionIII.A.5.iofthisReportforadiscussionofLehmansliquiditypool.

1574

where the liquidity of the firm was questionable, the firm as a whole may have been
seen as riskier than the sum of its individual assets. Thus, the aggregate value of the
firmsassetscouldbelessthantheirsum,makingitentirelyreasonableandrationalfor
thecompanysstocktotradebelowGAAPbookvalueofequity.
Moreover,whileLehmanscompetitorsandtheinvestmentbankingcommunity
ingeneralhadequitymarketpricetobookratios6084inexcessof1.0xthroughoutmostof
thesummerof2008,Lehmandidnot.Asdisplayedinthechartbelow,Lehmansprice
to bookratiowas wellbelow 1.0x atall timesbeginningJune 1,2008, andformostof
July,AugustandSeptember,itwasbetween0.4xand0.6x.
PricetoBookRatiosforLehmanandComps
June1,2008 September14,2008
2.0x

1.8x

1.6x

1.4x

1.2x

1.0x

0.8x

0.6x

0.4x

0.2x

0.0x
Jun2

Jun9

Jun16

Jun23

LehmanBrothers

Jun30

Jul7
MerrilLynch

Jul14

Jul21

Jul28

MorganStanley

Aug4

Aug11

GoldmanSachs

Aug18

Aug25

BankingIndex

Sep1

Sep8

6084PricetoBookratioismeasuredasthemarketcapitalizationofafirmdividedbythefirmsbookvalue

ofequity.

1575

Thus, reliance upon Lehmans balance sheet alone would be imprudent in an

insolvencyanalysis.
Ratherthanrelyingonacorporationsownbalancesheetvaluations,somecourts
have indicated that a market capitalization valuation methodology is the appropriate
solvency analysis for a large, publicly traded financial institution such as LBHI.6085
AccordingtothecourtinIridium,[a]companysstockpriceisanidealdatapointfor
determining value.6086 The advantage of such contemporaneous market evidence is
thatitisuntaintedbyhindsightorposthoclitigationinterests.6087TheThirdCircuit
inVFB,inaffirmingthedistrictcourtsprimaryrelianceonmarketbasedvaluations
asameasureofvalue,reasonedthat[e]quitymarketsallowparticipantstovoluntarily
take on or transfer among themselves the risk that their projections will be
inaccurate,6088 and that absent some reason to distrust it, the market price is a more
reliablemeasureofthestocksvaluethanthesubjectiveestimatesofoneortwoexpert
witnesses.6089
ItisforthesereasonsthattheExaminerandhisfinancialadvisorsbelievethata
marketbased approach to the valuation of LBHIs solvency is the most relevant, with
otherapproachesprovidingfurtheranalysis.

6085SeeIridium,373B.R.at346;VFBLLCv.CampbellSoupCo.,482F.3d624,63133(3rdCir.2007).
6086Iridium,373B.R.at346.
6087VFBLLCv.CampbellSoupCo.,2005WL2234606,at*13(D.Del.Sept.13,2005).
6088VFB,482F.3dat631.
6089Id.at663(citingInrePrince,85F.3d314,320(7thCir.1996)).

1576

(b) MarketValueofAssetsApproach
WhilethecourtsinIridiumandVFBfocusedprimarily,ifnotexclusively,onthe
marketvalueofequity,theExaminersfinancialadvisorshaveincludedintheiranalysis
the implication of solvency that results from an analysis of both the market value of
equityandthemarketvalueofdebt.
Itisimportanttoconsiderthemarketvalueofdebtalongwiththemarketvalue
ofequityforseveralreasons.First,inthecaseofabankruptcy,thevalueachievedfrom
sellingtheassetsofthecompanywouldhavetofundtherepaymentofbothdebtand
equity.Totheextentthatthecreditors(andthedebtmarketparticipants)feelthatthe
valueoftheassetswillnotbesufficienttorepayallofthedebt,theywillcausethedebt
totradeatadiscounttopar.ThiswasthecaseinthemonthsleadinguptoLehmans
bankruptcyfiling.
In addition to discounts in the debt markets, one must consider option value
embeddedintheequityprices.6090Asanillustrativeexample,thefollowingcharttracks
the stock price for CIT Group in the period up to and after its bankruptcy filing on
November1,2009:

6090Foramoredetaileddiscussionoftheoptionvalueembeddedinequityprices,seeAppendixNo.21,

Duff&Phelps,LBHISolvencyAnalysis(Feb.1,2010).

1577

CITGroup StockPrice
$2.50

$2.00

$1.50

November1
BankruptcyFiling

$1.00

$0.50

$0.00

9/1/2009

9/8/2009 9/15/2009 9/22/2009 9/29/2009 10/6/2009 10/13/200910/20/200910/27/2009 11/3/2009 11/10/200911/17/200911/24/2009 12/1/20

CIT Group was a company that was widely known to be insolvent; however
eventwodaysbeforethecompanyfiledforbankruptcy,itsstockwastradingabove$1
pershare.Thisphenomenonillustratesthefactthatequitybeingnonrecourse,which
definitively caps potential downside encourages speculative trading even at times
whereupsidepotentialishighlyunlikely.
(i) ImpliedAssetValue
Discounts in the bond market work in conjunction with optionality in the
equitiesmarket.Asolvencyanalysisconsistsofaviewofacompanyatasinglepointin
time.Atthatpointintime,assetanddebtpricesareessentiallyfixedand,asaresult,
thetotalexpectedpayouttoequityanddebtholdersisfixedaswell.Foragivenvalue
ofafirmsassets,anyincreaseinexpectedpayouttobondholderscomesattheexpense

1578

ofequityholdersandviceversa.Assuch,theExaminersfinancialadvisorsconsidered
boththeequityanddebtmarketsforLehmanintheiranalysisofimpliedassetvalue.
Thevaluationprincipalthatestablishestheframeworkforthisanalysisis,The
currentvalueofassetsminusthecurrentvalueofliabilitiesequalsthecurrentvalueof
thebusinessownersequity,6091or:
AssetsLiabilities=Equity
Rearrangingthatformula,thecurrentvalueofassetsequalsthecurrentvalueof
businessownersequityplusthecurrentvalueofliabilities,or:
Assets=Equity+Liabilities
The exhibitbelowshows thatthe publicmarket (for debtand equity)indicated
that Lehman was insolvent on a balance sheet basis (1) between July 11 and July 15,
2008(aroundthetimeoftheIndyMaccollapse);(2)onJuly28,2008;(3)onseveraldates
betweenAugust19andAugust28,2008(duringcertainKDBrumorsandwhencertain
customers were leaving); (4) on September 4, 2008; (5) and on all dates on and after
September8,2008(FannieandFreddiefailedonSeptember7;6092theterminationofKDB
talks6093 became publicly known on September 9).6094 There is evidence, however, that

6091Shannon

Pratt, Valuing a Business, Fifth Edition 350 (McGrawHill 5th ed. 2007) (1981). This
accountingformulaholdstrueregardlessofwhetheroneisreferringtobookvalueorfairmarketvalue
providedthatonemaintainsconsistencyacrosshisevaluation.
6092Office of Federal Housing Enterprise Oversight Press Release, (Sept. 7, 2008) (available at
http://www.treas.gov/press/releases/hp1129.htm). Given that September 7, 2008 was a Sunday,
September8,2008wasthefirsttradingdaythereafter.
6093SeeSectionIII.A.3.cforadiscussionoftheKDBnegotiations.

1579

the markets were not fully informed with regard to Lehmans true liquidity position,
becauseofissuessuchasRepo105andLehmansliquiditypool.6095Accountingforthis
potential for misinformation would result in findings of less solvency on all dates
impactedbythemisinformation.

Lehman ImpliedMVofAssetsRelativetoTotalLiabilities
20.00

10.00

SolvencyEquity($bil)

May31,2008

(10.00)

June30,2008

July31,2008

August31,2008

$6BNcapitalraisedon6/9,
including$4 billionincommonequity
and$2billioninpreferredequity.

(20.00)

(30.00)

(40.00)

(ii) SmallEquityCushion

As is true with many highly leveraged firms, Lehmans small margin of equity
relativetoassetsmeantitdidnotneedmuchlossofassetvaluetorenderitinsolvent.

6094For

calculations supporting the exhibit below, see Appendix 21, Duff & Phelps, LBHI Solvency
Analysis(Feb.1,2010).
6095See Section III.A.4 of this Report which discusses Repo 105; see also Section III.A.5.i of this Report,
whichdiscussesLehmansliquiditypool.

1580

Beginning July 10, 2008, on all dates but one (August 5, 2008), the value of Lehmans
solvencyequity(computedasthemarketvalueofassetsminustheparvalueofdebt)
was less than 1% of the market value of assets. This implies a very low margin for
error. Thus, while it appears that Lehman was marginally solvent on several dates
throughoutAugust2008,afactfindermayconcludethat,givenLehmanssmallequity
cushionandthelowmarginforerror,LBHIwasinsolventonthosedatesaswell.
LehmanBrothersMarketValueofEquityasaPercentageofMarket
ValueofAssets
5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

(iii) LimitationsoftheMarketBasedApproach
A market value is not always a reliable measure of solvency, especially if the

market is not aware of circumstances in existence which, if known, would adversely

effectthemarketvalue.Forexample,theThirdCircuitnotedinVFBthatifthemarket

1581

capitalizationwasinflatedby[formerparent]smanipulationsitwasnotgoodevidence
ofvalue.6096
InAdlerI,thebankruptcycourtfortheSouthernDistrictofNewYorkheldthat
in determining the solvency or insolvency of a bankrupt securities clearing firm, the
court was not bound by the price at which the stock was trading at the time of the
challengedtransfers,totheextentthatthepricewasbeingmaintainedduetomassive
manipulation of the market.6097 Instead, the court relied on stock prices one business
dayafterthemarketmanipulatorclosed,February27,1995,asameasureofthemarket
priceofthestockonthedayofthechallengedtransfers,February16,1995.Theresult
wasastockpricemorethanseventyfivepercentlowerthanwhatithadbeentradingat
under manipulation.6098 Because a solvency analysis must ascribe a price to the stock
thatreflect[s]asnearlyaspossibleamarketuntaintedby[]manipulation,thecourt
held that the stock prices after the market manipulator had closed were a more
appropriatemeasureofvalue.6099TheSouthernDistrictofNewYorkinAdlerIIagreed,
holdingthatthemostaccuratereflectionofthestocksfairmarketworthasofFebruary

6096VFB,482F.3dat632.
6097Mishkinv.Ensminger(InreAdler,ColemanClearingCorp.),247B.R.51,110(Bankr.S.D.N.Y.1999)(Adler

I),affd263B.R.406(S.D.N.Y.2001)(AdlerII).
6098Id.
6099Id.at113.

1582

16wasthestockpriceonFebruary27,afterthemarketmanipulatorwasoutofbusiness
andthusunabletomanipulatethemarket.6100
In order to adjust for the limits of market knowledge, the Examiner and his
financialadvisorsanalyzedhowthevaluationofLBHImightbeaffectediftechniques
of retrojection and current awareness, described more fully below, were utilized to
ascertain a more accurate value of LBHI, given its market capitalization prior to the
filing.
a.

ApplicationofRetrojection

Because of the difficulty in valuing the assets and liabilities of a debtor on the
exact date of a preferential or fraudulent transfer courts often utilize the well
establishedbankruptcyprinciplesofretrojectionandprojection...6101Therearetwo
typesofretrojection:(1)whereevidenceofinsolvencyatareasonabletimesubsequent
tothedateofatransfercanbeusedascompetentevidenceofthedebtorsinsolvencyon
the date of the transfer, and (2) where evidence of insolvency at an early date and
evidenceofinsolvencyatalaterdatecanbeusedascompetentevidenceofthedebtors
insolvency for all of the dates in between. For both types of retrojection, courts

6100AdlerII,263B.R.at466470.
6101Coated Sales, Inc. v. First E. Bank (In re Coated Sales, Inc.), 144 B.R. 663, 666 (Bankr. S.D.N.Y. 1992)

(citationsomitted).

1583

universallyrequireproofthatthedebtorsfinancialsituationdidnotchangematerially
duringtheinterveningperiod.6102
Accounting for the implied market value of LBHIs assets relative to its total
liabilities, the exhibit in Section III.B.3.b.2.(i) demonstrates that LBHI was insolvent
betweenJuly11andJuly15,2008,onJuly28,2008,onseveraldatesbetweenAugust19
and August 28, 2008, on September 4, 2008, and on all dates beginning September 8,
2008. In order to utilize retrojection, Lehmans financial situation must not have
materiallychangedintheinterveningperiods.Thus,theExaminerconcludesthatthe
earliest date to apply retrojection is September 2, 2008, the point at which KDB
indicatedthatitrelayeditsdecisionnottocontinuetalkswithLehman.6103
b. TheApplicationofCurrentAwareness
ThecourtinCoatedSalesemphasizedthatalthoughacompanysassetsmustbe
valuedatthetimeoftheallegedtransferandnotwhattheyturnedouttobeworthat
some time after the bankruptcy court intervened, it is not improper hindsight for a
court to attribute current circumstances which may be more correctly defined as

6102See,e.g.,Killipsv.Schropp(InrePrimeRealty,Inc.),380B.R.529,535(B.A.P.8thCir.2007)(recognizing

validity of retrojection, but refusing to apply where trustee did not establish that debtors financial
conditionhadnotsubstantiallychangedbetweenthetimeofthetransferandwhenitmayhavebecome
insolvent);Briden,776F.2dat382,38283(courtfounddebtorinsolventatthetimeofaMarchandApril
transfertosolestockholderwheredebtorsbalancesheetforApriloverstatedvalueofdebtorsinventory;
thecourtusedretrojectiontoinferinsolvencyinMarchaswell,givenslowstateofdebtorsbusiness).
6103ForamoredetailedaccountofcircumstancessurroundingtheKDBdeal,seeSectionIII.A.3.cofthis
Report.

1584

current awareness or current discovery of the existence of a previous set of

circumstances.6104AsdescribedbyCoatedSales:
Fair market or going concern value, although presumed to be
determined free of impermissible hindsight, is not determined in a
vacuum free of external stimuli. In fact, fair market value presumes
thatallrelevantinformationisknownbysellerandbuyer.Itfollows,that
a party purchasing assets at the time of the alleged preferential transfer
wouldbeawareofallrelevantfactors,whichwouldincludeknowledgeof
a massive businesswide fraud and environmental contamination:
otherwise, that party would be the victim of fraud. In sum, fair market
valuationentailsahypotheticalsale,notahypotheticalcompany.Thus,it
is not improper hindsight for a court to attribute current circumstances
which may be more correctly defined as current awareness or current
discoveryoftheexistenceofaprevioussetofcircumstances.6105
In order to apply such an analysis, described as a current awareness
methodology,theExaminersfinancialadvisorsidentifiedandevaluatedcircumstances
that existed, but were unknown to the investing public, and which would have
materiallyimpactedavaluationofLBHIiftheyhadbeenknown.Suchcircumstances
generally fall into one of two categories: (1) information that was made public by
Lehman or other parties but was known or knowable as of an earlier date; and
(2)information that was never made public, but has since been discovered during the
courseoftheExaminersinvestigationeitherthroughwitnessinterviewsorthereview
ofeitherconfidentialorpreviouslyunreleaseddocuments.

6104Coated Sales, 144 B.R. at 668 (citing Cissel v. First Nat. Bank of Cincinnati, 476 F. Supp. 474, 484 (S.D.

Ohio1979));MutualSavings&LoanAssnv.McCants,183F.2d423,425(4thCir.1950)).
6105CoatedSales,144B.R.at668.

1585

For the first category, the Examiner has determined that there is sufficient
evidence to support a finding to apply current awareness to circumstances
surrounding the KDB deal. Following the Korean government officials statement
regarding the end of negotiations with Lehman, the cost of insuring Lehmans debt
surged by almost 200 basis points, Lehmans hedge funds pulled out, shortterm
creditors cut lending lines, JPMorgan required Lehman to execute Security and
Guaranty Agreements, and Citi sought a guarantee agreement to continue to clear in
Asia.6106BecauseLehmanwasinsolventonthedatethatthepublicwasinformedofthe
endofnegotiationsbetweenKDBandLehman,andbecausethisfactwasinexistenceas
ofSeptember2,2008(thepointatwhichKDBindicatedthatitrelayeditsdecisionnotto
continuetalkswithLehman),theExaminerconcludesthatthereissufficientevidenceto
supportafindingofinsolvencybeginningonSeptember2,2008.
For the second category of information, information that has not yet become
knowntothepublic(atleastpriortothepublishingofthisReport),theExaminerhas
determined that there is sufficient evidence to apply current awareness to the
circumstances of Repo 105 and issues of liquidity.6107 Applying a current awareness
methodologytosuchcircumstances,however,isinherentlycomplicatedbecauseofthe
difficultyinpredictinghowthestockmarketmightreacttoinformationthathasnever

6106ForamoredetailedaccountofcircumstancessurroundingtheKDBdeal,seeSectionIII.A.3.cofthe

Report.
6107SeeSectionIII.A.4ofthisReportforamoredetaileddiscussionofRepo105;seeSectionIII.A.5.iofthis
ReportforamoredetaileddiscussionofLehmansliquiditypool.

1586

become publicly known. Thus, this is an issue of fact that the Examiner has left
unresolved due to the difficulty in reliably quantifying the result that such
circumstances would have had on the fair market value of Lehman had they been
knowntothepublic.
(3) Conclusion
Utilizing a marketbased approach, the Examiner first concludes that there is
sufficientevidencetosupportafindingofinsolvencyofLBHIbeginningonSeptember
8,2008.Adjustingthemarketbasedapproachpursuanttothetechniqueofretrojection
and the application of current awareness, which would factor in information in
existencebutnotknownbythemarket,theExaminerconcludesthatthereissufficient
evidencetosupportafindingofinsolvencyofLBHIbeginningonSeptember2,2008.
c)

LBHIAffiliateSolvencyAnalysis
(1) Summary

This Section of the Report addresses whether there is sufficient evidence to

supportafindingthatanLBHIAffiliatewasinsolvent,assuchtermisdefinedbythe
Bankruptcy Code and applicable state law, prior to the date that each LBHI Affiliate
commenced its Chapter 11 case.6108 The Bankruptcy Court has charged the Examiner
with determining, among other things: (1) whether any LBHI Affiliate has colorable

6108Consistent

with the Courts order, the Examiner has only addressed those LBHI Affiliates that
commenced their bankruptcy cases prior to the appointment of the Examiner. See Order Directing
AppointmentofanExaminerPursuanttoSection1104(c)(2)oftheBankruptcyCode,atp.3,DocketNo.
2569,InreLehmanBrothersHoldingsInc.,etal.,No.0813555(Bankr.S.D.N.Y.Jan.16,2009).

1587

claims against LBHI for potentially insider preferences arising under the Bankruptcy
Codeorstatelaw;and(2)whetheranyLBHIAffiliatehascolorableclaimsagainstLBHI
oranyotherentitiesforpotentiallyvoidabletransfersorincurrencesofdebt,underthe
Bankruptcy Code or otherwise applicable law.6109 In order to prevail on a preference
claim,theplaintiffmustestablishthatthedebtorentitywasinsolventatthetimeofthe
challengedtransfer.6110Withrespecttoconstructivelyfraudulenttransfers,theplaintiff
must establish that at the time of the transfer the debtor (1)wasinsolvent or became
insolventasaresultofthetransfer,(2)hadunreasonablysmallcapitalforthepurpose
of continuing to engage in its business, or (3)incurred debts that were beyond the
debtorsabilitytopayastheymatured.6111Accordingly,thedeterminationofwhether
there are colorable claims of either preferences or constructively fraudulent
conveyancesrequiresanexaminationofeachLBHIAffiliatessolvencyconditionasof
thedateachallengedtransferoccurred.6112
The Bankruptcy Code defines insolvent, for entities other than a partnership
andamunicipality,asthefinancialconditionsuchthatthesumofsuchentitysdebts
is greater than all of such entitys property, at a fair valuation.6113 Fair value is the

6109Seeid.
6110SeeAppendix1,LegalIssues,atSectionIV.D.
6111Id.,atSectionIV.A.2.
6112Id.,atSectionsIV.A.2,IV.A.D.
611311 U.S.C. 101(32)(A). The solvency analysis is undertaken exclusive of property transferred with

intent to hinder, delay or defraud the entitys creditors, and property exempt from the debtors estate
pursuanttoSection522oftheBankruptcyCode.Id.

1588

pricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderly
transaction between market participants at the measurement date.6114 This Section of
theReportaddressesthegoingconcernvalueofeachLBHIAffiliate.6115
A debtor is presumed to be insolvent for purposes of a preferential transfer
analysisundertheBankruptcyCodeduringtheperiodbeginning90dayspriortothe
commencement of the debtors bankruptcy case.6116 The following table sets forth the
filingdatesforeachLBHIAffiliate,andthecorrespondingdatesunderSection547(b)(4)
of the Bankruptcy Code for the beginning of the 90day preference period for non
insidertransfersandfortheoneyearpreferenceperiodforinsidertransfers.6117

6114Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 157, Fair

ValueMeasurements,at6.SeealsoAppendix1,LegalIssues,atSectionIV.B.
6115An alternate means of valuation determines the liquidation value of the debtor. Courts in the
SouthernDistrictofNewYorkhaveappliedthisvaluationstandardwhenitisdeterminedthatthedebtor
isnominallyextantoronitsdeathbed,atthetimeinquestion.CoatedSales,Inc.v.FirstE.Bank(Inre
Coated Sales), 144 B.R. 663, 667 (Bankr. S.D.N.Y. 1992). The individual circumstances of each LBHI
Affiliate present questions of fact, to be determined by the Court, as to whether going concern or
liquidationvalueismostappropriateforanygivensolvencydetermination.However,becauseeachof
the LBHI Affiliates was able to continue daytoday operations in the months prior to commencing
theirbankruptcycases,theExaminerdeemsitmostappropriatetoconsidergoingconcernvalueforthe
purposeofthisanalysis.IridiumCapitalCorp.v.Motorola,Inc.(InreIridiumOperatingLLC),373B.R.283,
344(Bankr.S.D.N.Y.2007).
611611U.S.C.547(f).
6117TheseperiodsarecalculatedpursuanttoFederalRuleofCivilProcedure6(a)andthesimilarFederal
RuleofBankruptcyProcedure9006(a).

1589

DebtorEntity
DateFiled 90DaysPrior OneYearPrior
LB745LLC
9/16/08
6/18/08
9/14/07
PAMIStatlerArmsLLC
9/22/08
6/24/08
9/21/07
LehmanBrothersCommodityServices
10/3/08
7/3/08
10/3/07
Inc.
LehmanBrothersSpecialFinancingInc.
10/3/08
7/3/08
10/3/07
LehmanBrothersOTCDerivativesInc.
10/3/08
7/3/08
10/3/07
LehmanBrothersDerivativeProducts
10/5/08
7/7/08
10/5/07
Inc.
LehmanCommercialPaperInc.
10/5/08
7/7/08
10/5/07
LehmanBrothersCommercial
10/5/08
7/7/08
10/5/07
Corporation
LehmanBrothersFinancialProducts
10/5/08
7/7/08
10/5/07
Inc.
10/5/08
7/7/08
10/5/07
LehmanScottishFinanceL.P.
CESAviationLLC
10/5/08
7/7/08
10/5/07
CESAviationVLLC
10/5/08
7/7/08
10/5/07
CESAviationIXLLC
10/5/08
7/7/08
10/5/07
EastDoverLimited
10/5/08
7/7/08
10/5/07
1/7/09
10/9/08
1/7/08
LuxembourgResidentialProperties
LoanFinanceS.a.r.l.
BNCMortgageLLC
1/9/09
10/10/08
1/9/08

Whileadebtorispresumedinsolventforthe90dayperiodidentifiedabove,this
presumption is rebuttable. The Second Circuit has explained that [a] creditor may
rebut the presumption by introducing some evidence that the debtor was not in fact
insolventatthetimeofthetransfer.Ifthecreditorintroducessuchevidence,thenthe
trustee must satisfy its burden of proof of insolvency by a preponderance of the
evidence.6118 A balance sheet showing that the debtor was solvent at the time of the

6118Lawsonv.FordMotorCo.(InreRoblinIndustries,Inc.),78F.3d30,34(2dCir.1996).

1590

transfer may be sufficient to rebut the presumption of insolvency.6119 A balance sheet

maybeparticularlyeffectiveifitsaccuracycanbeconfirmedbywitnesstestimonyfrom
experts or officers and directors of the debtor.6120 However, a court need not accept a
balancesheetatfacevalue,andabalancesheetdeemedtobeinaccuratewillnotsuffice
toovercomethepresumption.6121Accordingly,thisanalysisconsidersthenatureofthe
assetsheldbythedebtorentitiesandnoteswhenthepossibilityofmisstatementaffects
thesolvencydetermination.
ThisSectionaddressesthesolvencyofeachLBHIAffiliateinturn.Thefollowing
analysisassesseswhetherthefairvalueofeachLBHIAffiliatesassetsexceededtheface
valueofitsliabilitiesduringtheperiodpriortoitsbankruptcycase.TheExamineralso
consideredtheriskthatLehmansvaluationofeachLBHIAffiliateslessliquidassets
thoseidentifiedasFASBLevel2and3wasunreasonable,andwhetheranyreduction
in the value of such assets would impact the determination as to the solvency of the
LBHIAffiliate.Additionally,observationsareprovidedonotherfactorsimpactingthe

6119SeeJones Truck Lines, Inc. v. Full Service Leasing Corp., 83 F.3d 253, 258 (8th Cir. 1996) (A financial

statement showing positive net worth is sufficient to rebut the presumption of insolvency [under
547(f)].); cf. In re Ramba, Inc., 416 F.3d 394, 403 (5th Cir. 2005) (noting that balance sheet did address
issueofsolvency,butholdingthatpresumptionwasnotrebuttedbecausebalancesheetinquestiondid
notreflectstatusattimeoftransfer).
6120See Toy King Distributors Inc. v. Liberty Sav. Bank, FSB (In re Toy King Distributors, Inc.), 256 B.R. 1,
91(Bankr. M.D. Fla. 2000) (relying on balance sheets in conjunction with expert testimony in finding
rebuttal of 547(f) presumption); T.M. Sweeney & Sons v. Crawford (In re T.M. Sweeney & Sons, LTL
Services, Inc.), 120 B.R. 101, 103, 106(Bankr. N.D. Ill. 1990) (holding that presumption was rebutted by
balancesheetshowingsolvencyandtestimonyofdebtorsformerpresident).
6121SeeAppendix1,LegalIssues,atSectionIV.D.

1591

solvency of the debtor entities, including the credit ratings for the applicable LBHI
Affiliates.6122
TheExaminerhasreachedthefollowingconclusions:
1.

ThereissufficientevidencetosupportafindingthatthreeLBHIAffiliates

LCPI, CES Aviation IX and CES Aviation V were balance sheet insolvent as of
May 31, 2008. Two of these entities, CES Aviation IX and CES Aviation V, remained
insolvent through the commencement of their bankruptcy cases. LCPI was balance
sheet insolvent through much of 2008, but received a $900 million capital infusion on
August29,2008,6123whichallowedittobecomeborderlinesolventasofAugust31,2008.
TheExaminerconcludesthatthereisinsufficientevidencetorebutthepresumptionof
insolvency for LCPI under Section 547(f) of the Bankruptcy Code after September 12,
2008,thelastbusinessdaypriortothecommencementofLBHIsbankruptcycase,for
thereasonssetforthinthefollowingparagraph.
2.

ThreeLBHIAffiliatesLBSF,LBCSandCESAviationwereborderline

solventasofMay31,2008,meaningthattheirbalancesheetsshowedassetsjustslightly
in excess of liabilities such that a minimal write down of asset values or a small
unaccountedfor liability would render these entities insolvent. The small margin by

6122As will be explained in more detail, for certain entities, such as LBDP and LBFP, which were rated

independentlyofLBHI,ratingsofAAAwerereflectiveofthesolvencyoftheentity.Forotherentities,
suchasLBSFandLBCS,investmentgraderatingswerenotdispositiveofsolvency.LBHIwasratedA
atthetimeitfiledforbankruptcy.
6123EmailfromA.Jacob,Lehman,toKristieWong,Lehman,etal.(August28,2008)[LBEXSIPA005564].

1592

whichtheseentitiesweresolventcreatesafactualissuetoberesolvedbythecourtona
casebycase basis.6124 During the week following LBHIs bankruptcy and thereafter,
LBHI Affiliate counterparties terminated derivatives and other contracts at balance
sheetlosses estimated to beinthetensofbillions of dollars;6125the securitiesinwhich
certain LBHI Affiliates held an interest at LBI were transferred to Barclays;6126 and
exchangetradedderivativespositionsclearedbyLBIforthebenefitofLBHIAffiliates
(suchasLBSFandLBCS)atclearingorganizationssuchastheCME6127andOCC6128were
liquidated. Moreover, after September 12, 2008, the collectability of intercompany
obligations reflected as assets on the balance sheets of LBHI Affiliates became
questionable. The LBHI Affiliates continued to update their balance sheets to reflect
suchactivity,butbaseduponinformationmadeavailabletohimtodate,theExaminer
concludes that there is insufficient evidence to rebut the presumption of insolvency

6124The Examiner did not conduct an assetbyasset valuation of each asset owned by LBHI Affiliates

becauseofthetimeandcostrequiredforsuchanexercise.Rather,positionsacrossanumberofdifferent
asset classes were reviewed for several Debtors. An entitys equitytototalassets ratio, as well as the
relative likelihood of a misstatement of the value of an entitys assets, is considered in determining
whether an entity that posted positive equity might nonetheless be borderline solvent. As the term is
used here, a low equitytototalassets ratio would make an entity borderline solvent unless the
compositionofitsassetswassuchthatmisstatementoftheirvaluewasveryunlikely.Inlightofthecost
andtimenecessarytoevaluatethevaluationofalloftheassetsofeachoftheborderlinesolvententities,
the Examiner determined that it would not be a prudent use of Estate resources to perform such an
exercise.ForpurposesofanalyzingwhethertheseLBHIAffiliateshavecolorableavoidanceclaims,the
Examinerassumedthattheborderlineentitieswereinsolvent.
6125SeeSectionIII.C.4ofthisReport.
6126SeeSectionIII.C.3.a.2.c.iofthisReport.
6127SeeSectionIII.B.3.g.5.hofthisReportforadescriptionoftheliquidationoftheCMEhousepositions.
6128SeeSectionIII.C.6.f.3.cofthisReport.

1593

underSection547(g)oftheBankruptcyCodeafterSeptember12,2008,withrespectto
anyoftheseLBHIAffiliates.
3.

NineLBHIAffiliatesLOTC,LB745,LBDP,LBCC,BNCMortgageLLC,

LBFP,EastDoverLimited,LSFandLRPweresolventasofasMay31,2008,andthere
is insufficient evidence to support a finding that any of these LBHI Affiliates became
insolventduringtheperiodendingAugust31,2008.However,forthereasonssetforth
above, the Examiner concludes that there is insufficient evidence to rebut the
presumption of insolvency under Section 547(g) of the Bankruptcy Code after
September12,2008withrespecttoLOTCandLBCC.6129
4.

Thereisinsufficientevidencetoreachadeterminationastothesolvency

ofdebtorentityPAMIStatlerArms.6130PAMIStatlerArmsisasubsidiaryofProperty
Asset Management, Inc. (PAMI), and its sole asset is an apartment complex in

6129 LB 745s principal asset was Lehmans headquarters building at 745 Seventh Avenue in New York.

See Section III.B.3.c.3.g of this Report. Following LBHIs bankruptcy, LBDP and LBFP continued to
maintaintheirAAAratings,andthebalancesheetsoftheseentitiescontinuedtoreflectpositiveequity.
See Section III.C.4 of this Report. BNC Mortgage LLCs principal assets, as of August 31, 2008, were
receivablesowingbynondebtorLehmansubsidiaries.SeeSectionIII.B.3.c.3.kofthisReport.EastDover
Limited, according to its August 31, 2008 balance sheet, had liabilities of $4 million and equity of
approximately $105.4 million. See Section III.B.3.c.3.l. LSF did not have anyliabilitiesaccording to its
May 31, 2008 and August 31, 2008 balance sheets. See Section III.B.3.c.3.m of this Report. LRP was
establishedinMay2008anddidnotpostabalancesheetuntilJune2008.LRPwassolventasofAugust
31, 2008, and its assets consisted of one corporate loan whose value was protected by price flex. See
SectionIII.B.3.c.3.eofthisReport.
6130A motion to dismiss PAMI Statler Arms LLCs bankruptcy petition was filed on May 26, 2009. See
Motion of Debtors Seeking Entry of an Order Pursuant to Section 1112(b) of the Bankruptcy Code
DismissingChapter11CaseofPAMIStatlerArmsLLC,DocketNo.3650,InreLehmanBros.HoldingsCo.,
No.0813555(Bankr.S.D.N.Y.May26,2009).Thehearingonthemotionhasbeenadjournedwithouta
date. See Notice of Adjournment of Motion of Debtors Seeking Entry of an Order Pursuant to Section
1112(b)oftheBankruptcyCodeDismissingChapter11CaseofPAMIStatlerArmsLLC,DocketNo.4060,
InreLehmanBros.HoldingsCo.,No.0813555(Bankr.S.D.N.Y.June20,2009).

1594

Cleveland, Ohio. Lehman did not maintain separate financial statements for PAMI
StatlerArmsinitsgeneralledgersoftwareprogram.
(2) DescriptionoftheExaminersAnalysis
TheExaminerinvestigatedthesolvencyofeachoftheLBHIAffiliates,takingasa
startingpointthebalancesheetsofeachentityasofMay31andAugust31,2008.6131The
Examinerdidnotperformanaudit,review,orexamination(asdefinedbytheAmerican
InstituteofCertifiedPublicAccountants)ofanyofthehistoricalfinancialinformation,
andthereforeexpressesnoopinionwithregardtosame.Thebalancesheetinformation
providedbelowforeachofthedebtorentitieswasobtainedfromLehmansHyperion
system,whichcontainsadjustedgeneralledgerinformation.LehmanalsousedtheDBS
general ledger system, accessed through EssBase, for internal management purposes,
buttheHyperionsystemwasthesourceforallpublicfinancialstatements.6132Balance
sheetinformationforLBHIAffiliatesthathadtheirownsubsidiariesispresentedona
consolidated basis. Information regarding the composition of each debtor entitys
financial inventory, and the SFAS 157 level of individual assets of the financial
inventory, is available on Lehmans Global Finance System (GFS), a positionlevel
database.However,theExaminersinvestigationhasrevealedthattheGFSdatabaseis

6131The Examiners analysis focuses on May 31, 2008 and August 31, 2008, because these were the end

dates of Lehmans second and third quarter reporting periods. Although Lehman did not file a 10Q
statement for the third quarter of 2008, its finance employees created financial statements for the third
quarterendingAugust31,2008.ExaminersInterviewofKristieWong,Dec.2,2009,atp.4.
6132ExaminersInterviewofKristieWong,Dec.2,2009,atp.4.

1595

incompleteandinaccuratewithrespecttomanyoftheassetsheldbyLBHIAffiliates.6133
Accordingly,informationfromtheGFSdatabaseisnotrelieduponinthisReportunless
ithasbeenreconciledtopubliclydisclosedfinancialstatementstoensureitsaccuracy.
Based on interviews with former and current Lehman financial personnel, as
wellastheExaminersanalysisofthesystemsandfinancialreportsthatwerecreatedby
Lehman prior to the bankruptcy filing, the Examiner has determined that there is
sufficientevidencetoconcludethattheLBHIAffiliatesbalancesheetsfairlyrepresent
thefinancialconditionofeachLBHIAffiliateasofMay31andAugust31,2008.6134
However, the Examiner has determined that the balance sheets of the LBHI
Affiliates created after August 31, 2008, which capture financial activity during the
remainingprepetitionperiodforeachLBHIAffiliate,arenotsufficientforpurposesof
making a determination of the solvency of each LBHI Affiliate during this period.6135
TheExaminerbasesthisconclusiononareviewoffinancialinformationobtainedfrom
various Lehman software systems. For example, in September 2008, the financial
systems lacked information technology support and, contrary to normal operation,
were not consistently receiving certain daily feeds between systems carrying pricing

6133Id.
6134TheExaminerdidnotconductaninvestigationofeachoftheliabilitiesreportedbytheLBHIAffiliates

and recognizes the possibility that there may be unreported or misstated liabilities which would be
consideredwhendeterminingthesolvencyofanygivenLBHIAffiliate.
6135Thisdeterminationdidnotimpacttheuseofbalancesheetinformationforthelimitedpurposesset
forthinSectionIII.C.3.b.

1596

and other information.6136 As a result, the financial statements produced by such

systemsarenotsufficientlyreliableforuseasthebasisofanysolvencydetermination.
Additionally, financial statements prepared by Lehman in the course of the
bankruptcy proceedings confirm that they differ materially from the public financial
statements that Lehman created in the ordinary course of its business prior to
bankruptcy. The Monthly Operating Reports (MOR), which are filed with the U.S.
BankruptcyCourt,specificallystatethat:
The Debtors have prepared [the MORs], as required by the Office of the
UnitedStatesTrustee,basedontheinformationavailabletoTheDebtors
atthistime,butnotethatsuchinformationmaybeincompleteandmaybe
materiallydeficientincertainrespects.ThisMORisnotmeanttoberelied
upon as a complete description of the Debtors, their business, condition
(financial or otherwise), results of operations, prospects, assets or
liabilities.TheDebtorsreserveallrightstorevisethisreport.6137
Among others, the MORs identify the following issues rendering the financials
reportedinsufficientforthepurposesofasolvencydetermination:

TheyarenotpreparedinaccordancewithU.S.GAAP.

They do not reflect normal quarterly adjustments that were generally

recordedbytheDebtor.

Certain items are under research and may be accounted for differently in
futuremonthlyreports(noupdateshavebeenfiledasofNovember2009).

CashandrestrictedcashmaynotbelongtotheDebtor.

6136ExaminersInterviewofKristieWong,Dec.2,2009,atp.4.
6137MonthlyOperatingReport,SelectedDebtorBalanceSheets,Docket3916,InreLehmanBros.Holdings

Inc.,etal.,No.0813555,atp.11(Bankr.S.D.N.Y.June15,2009).

1597

Securities and financial instruments are sometimes reported as of the last

valuationrecordedbyLehmananddonotreflectrealizablevaluesofassets
(i.e.,theyarenotFAS157compliant).6138

Giventheforegoing,andbecauseoftheextraordinarytimeandexpenserequired
to investigate the solvency of the LBHI Affiliates after August 31, 2008, the Examiner
expresses no view of the solvency of the LBHI Affiliates after August 31, 2008.
However, the Examiner notes that, of the evidence obtained, none suggests that the
solvency status of the borderline solvent or insolvent LBHI Affiliates materially
improved during the period beginning September 1, 2008, and ending on the
commencement of the respective bankruptcy cases. Furthermore, as noted above, the
Examiner finds that there is insufficient evidence to rebut the presumption of
insolvencyunderSection547(g)oftheBankruptcyCodeafterSeptember12,2008with
respecttoeachoftheborderlinesolventLBHIAffiliates,LOTC,andLBCC.
Becausethebalancesheetsolvencytestaskswhetherthefairvalueofadebtors
assets exceeds its liabilities, the solvency analysis performed is not based on GAAP.
CertainconceptsthatarenotaccountedforunderGAAP,butwhichimplicatethefair
value of the Debtors assets and its liabilities, are addressed here. For instance, the
Examiner has investigated whether any LBHI Affiliate held intangible assets.
Intangible assets are identifiable nonmonetary assets that are not physical in nature,
butcontributetothevalueofafirm.Theydonotappearonabalancesheetexceptin

6138Id.at4.

1598

certain circumstances, such as when an intangible asset is purchased in a transaction

andrecordedunderGAAPpurchaseaccountingrules.6139Examplesofintangibleassets
includecustomerlists,proprietarytechnology,internallydevelopedsoftware,andtrade
names.ForpurposesofthisSectionoftheReport,intangibleassetsarerelevanttothe
extentthattheywouldrenderanotherwiseinsolventdebtorsolvent,orimpairmentof
thebookvalueofintangibleassetswouldrenderasolventdebtorinsolvent.Therefore,
the analysis has focused on identifying intangible assets for insolvent or borderline
debtorsasidentifiedabove.
Addressing the LBHI Affiliates on a consolidated basis, the Examiner has
reviewed available documents and interviews with Legal Entity Controllers (LEC)
and identified intangible assets in the form of goodwill owned by LBSF and LBCS.
However, the existence of these assets, discussed below, does not change the
determinationofthoseentitiessolvency.Furthermore,basedontheanalysisprovided
in Section III.C.3 of this Report, it is possible that additional intangible assets may be
heldbycertainLBHIAffiliatesintheformofcustomerlists,proprietarytechnologyora
workforcerelatedasset,butsuchintangibleassetsarenotofmaterialvalueandwould
notchangethesolvencydeterminationforanyoftheLBHIAffiliates.

6139See

Financial Accounting Standards Board, Statement of Fin. Accounting Standards No. 141(R),
BusinessCombinations(2007).

1599

The following is a summary table of the Examiners conclusions regarding the

solvencyofLBHIAffiliatesasofMay31,2008:6140
Entity

PrimaryBusiness

Shareholder
Equity
($million)
(62.0)

Originateandtrade
Lehman
CommercialPaper securedandunsecured
loans;provide
Inc.
warehouseloans
securedbymortgage
loansandotherassets
CESAviationIX
Acquireandoperate
(0.9)
LLC
aircraftforLehman
CESAviationV
Acquireandoperate
(3.5)
LLC
aircraftforLehman
475.1
LehmanBrothersInc.s
LehmanBrothers
SpecialFinancing principaldealerina
broadrangeof
Inc.
derivativeproducts
includinginterestrate,
currency,creditand
mortgagederivatives
26.0
Tradepower,natural
LehmanBrothers
gas,oil,andstructured
Commodity
products
ServicesInc.
CESAviationLLC Acquireandoperate
0.1
aircraftforLehman
2.6
Investmentand
Luxembourg
financingvehicle,which
Residential
heldloans(typically
PropertiesLoan
commercialloans
FinanceS.a.r.l.
includingTermB
Archstoneloans)
Overthecounter
225.5
LehmanBrothers
derivativesdealer
OTCDerivatives
Inc.
55.3
LB745LLC
OwnerofLehmans
headquarterslocatedat
745SeventhAvenuein
NewYork

Shareholder
Equityas%of
TotalAssets6141
N/M

BalanceSheet
Solvencyasof
May31,2008
Insolvent
(borderlineasof
August2008)

N/M

Insolvent

N/M

Insolvent

0.4%

Borderline

0.4%

Borderline

0.6%

Borderline

0.4%

Solvent

4.2%

Solvent

7.2%

Solvent

6140Data is as of May 31, 2008, except in the case of Luxembourg Residential Properties Loan Finance

S.a.r.l.whosedataisasofAugust31,2008.FinancialdataisnotavailableforPAMIStatlerArmsLLC.
6141N/Mindicatesthattheratioisnotmeaningfulduetothefactthattheentityhadnegativeequity.

1600

Entity

PrimaryBusiness

AAAratedtermination
derivativeproduct
companythat
intermediatesinterest
rateandcurrencyswaps
betweenmarket
counterpartiesand
LehmanBrothers
SpecialFinancing
Dealerinoverthe
LehmanBrothers
counterforeign
Commercial
currencyforwardsand
Corporation
optionsandexchange
tradedfuturesand
futuresoptions
BNCMortgage
Subprimemortgage
LLC
origination
AAAratedcontinuation
LehmanBrothers
FinancialProducts derivativeproduct
companythatengages
Inc.
inoverthecounter
interestrateand
currencyswapsand
options,purchasingor
sellingexchangetraded
futuresandoptions,or
governmentbondsand
options
EastDover
Historicallypurchased,
Limited
leasedandsoldaircraft
andrelatedequipment;
asofthebankruptcy
filing,nolonger
performedthese
activitiesbutheld
mostlyintercompany
receivablesand
payables
LehmanScottish
Holdequitylinked
FinanceL.P.
notesofotherLehman
entities
LehmanBrothers
Derivative
ProductsInc.

Shareholder
Equity
($million)
47.4

Shareholder
Equityas%of
TotalAssets6141
8.9%

BalanceSheet
Solvencyasof
May31,2008
Solvent

230.9

6.9%

Solvent

11.1

45.8%

Solvent

290.0

54.1%

Solvent

101.1

92.9%

Solvent

57.4

100%

Solvent

1601

Entity

PrimaryBusiness

PAMIStatler
ArmsLLC

OwnerofStatlerArms
Apartments,a297suite
apartmentcomplexin
Cleveland

Shareholder
Equity
($million)
Unknown

Shareholder
Equityas%of
TotalAssets6141
Unknown

BalanceSheet
Solvencyasof
May31,2008
Unknown

Asindicatedinthetableabove,whilemostofthe16debtorentitiesmaintained
somedegreeofpositiveGAAPequityasofMay31,2008,sixentitiespostednegativeor
verylowlevelsofcapitalinrelationtotheirlevelofassets.6142TheseentitieswereLCPI,
CESAviationVLLC,CESAviationIX,CESAviation,LBCS,andLBSF.
The following issues and concepts are common to the analysis of one or more
LBHIAffiliatesandarediscussedattheoutsetforclarity.
Fair Market Value of Balance Sheet Assets and SFAS 157 Assets. For the
purposeofdeterminingthebalancesheetsolvencyofLBHIAffiliates,theassetvalues
reported in financial statements must be representative of fair market value, or
adjustmentsmustbemadetoensurethatthefairvalueiscaptured.6143Inthecaseofthe
assets held by LBHI Affiliates, most reported values are representative of fair market

6142For the period May 31, 2008, through August 31, 2008, all of the Debtors, except one, posted net

payables to LBHI. The exception was LBDP, which posted a net $7.7 million receivable from LBHI in
May2008.However,thisaccountedforonly1.4%ofLBDPstotalassetsandevenwithacompletelossof
the receivable from LBHI, LBDP would remain solvent. Therefore, LBHIs potential failure to pay its
receivablesisnotanissueinregardtothesolvencyoftheLBHIAffiliates.
6143SeeInreRoblinIndus.,Inc.,78F.3dat36(Itisalsotruethatbookvaluesarenotordinarilyanaccurate
reflectionofthemarketvalueofanasset.);InreIridiumOperatingLLC,373B.R.at344(Whenabusiness
isagoingconcern,fairvalueisdeterminedbythefairmarketpriceofthedebtorsassetsthatcouldbe
obtained if sold in a prudent manner within a reasonable period of time to pay the debtors debts.)
(internalquotationmarksomitted).

1602

value.FollowingisalistofassettypesownedbyLBHIAffiliates,andtherelationship
ofthereportedvaluetofairmarketvalueforeach:
Asset

RelationshiptoFairMarketValue

Cash

PresumedtobeatFairMarketValue

AccountsReceivable

PresumedtobeatFairMarketValueassumingnomaterial
changeinthefinancialhealthofcounterparties.

PrepaidandDeferred
Expenses

PresumedtobeatFairMarketValuependinginvestigation.
Theinstancesofdebtorsowningtheseassetsareaddressed
onacasebycasebasisbelow.

SecuritiesandOther
FinancialInventory

PresumedtobeatFairMarketValueconsideringthe
requirementtomarktheseassetstomarketunderSFAS157.
Theseassetsarediscussedfurtherbelow.

Plant,Propertyand
Equipment

UnlikelytobeatFairMarketValue.Otherthanland,these
assetsareassumedtobewastingassets,meaningthattheir
valuedecreasesovertime.Accordingly,FairMarketValue
fortheseassetswillgenerallybelessthanthepurchaseprice.
Duetocostandtimeconstraints,theExaminerdidnot
pursueanindependentvaluationoftheseassetsforany
LBHIAffiliate.Asdiscussedbelow,certainLBHIAffiliates
carriedsignificantamountsofPlant,Propertyand
Equipment,thoughinnocasewouldachangefrombook
valuetoFairMarketValuechangethefindingscontained
herein.

Goodwilland
Intangibles

UnlikelytobeatFairMarketValue.Goodwilland
Intangiblesaretheresultofpurchaseaccounting
requirementsanddonotnecessarilyreflectFairMarket
Value.

OffBalanceSheet
Assets

Asthenamesuggests,theseareassetsthatdonotappearon
thebalancesheet.BasedoninterviewswithLECs,nooff
balancesheetassetshavebeenidentifiedforanydebtor.

1603

In assessing the equity component of the LBHI Affiliates balance sheets, an

analysisofthecomponentsofeachentitysSecuritiesandFinancialInstrumentsOwned
hasbeenperformedinordertounderstandwheretheremayberisksofmisstatementof
the value of the entitys assets. Under SFAS 157, a firm is required to assess the fair
value of a financial instrument based on Level 1 (a market quoted price), Level 2
(measurement with no observable price, but based on observable inputs) and Level 3
(measurement using unobservable inputs).6144 Level 2 and 3 assets are at the greatest
risk of misstatement because their valuation is not based on a marketquoted price.
Data from Lehmans GFS system, modified by Lehmans finance team,6145 has been
assessed in order to identify the amount of Level 2 and 3 assets held by each debtor.
The ratio of equity to Level 2 and 3 assets is used as a measure of risk of possible
insolvencyasitrepresentstherelativesizeofanentitysequitycushionascomparedto
thevalueofitsassetssubjecttomisstatement.
CapitalInfusions.ThetaskofmonitoringtheequitylevelsofLehmansvarious
legalentitieswasperformedbyLECs.Whileeachlegalentityrequiredadifferentlevel
of attention based on its activity, each was assigned an LEC who was responsible for

6144StatementofFin.AccountingStandardsNo.157,FairValueMeasurements,atSFAS15710to12.
6145LehmanscontrollersindicatedthatGFSwasinaccurateand,onaquarterlybasis,GFSwasreconciled

to publicly filed financial statements for LBHI on a consolidated basis. When necessary, other source
systemswereconsideredtoprovidesupport.Nosuchexercisewasperformedatthelegalentitylevel.
ExaminersInterviewofKristieWong,Dec.2,2009,atp.4.

1604

monitoring and producing entity financials.6146 Unlike product controllers, whose

responsibilitieswereassignedalongproductand businesslines, LECs responsibilities
weredeterminedbywhichlegalentitiestheywereassigned.TheLECswereacritical
part of the process whereby the financial data of each entity was assembled in a
reportableform.TheExaminerhasfoundnoevidenceofaformalwrittenpolicyprior
to 2008 or any consistent unwritten policy that LECs were to keep entities solvent.6147
However, when an operating entity did become balance sheet insolvent, LECs would
often respond by proposing that a capital infusion be made into that entity.6148 In
general,theLECsfornonregulatedentitiesaimedtomaintainenoughcapitalsoasto
avoidnegativecapital.6149
In 2008, however, Lehmans regulatory group markedly changed the way it
approachedcapitalizationrequirementsforcertainlegalentitiesbecausethoseentities,
orentitiesofwhichtheyweresubsidiaries,werethesubjectofheightenedscrutinyby
regulatorsandthirdpartiesasaresultoffallingassetprices.Atleastonewitnesshas
suggested that LBI, a broker/dealer, would be precluded from trading if one of its
subsidiaries failed to meet a particular capital requirement.6150 This is because a
broker/dealer was required to meet reporting requirements on a consolidated basis,

6146SeeExaminersInterviewofMichaelMontella,Oct.26,2009,atpp.27.
6147Id.atpp.45.
6148Id. In the case of LCPI, these infusions were, until August 2008, insufficient to actually establish

solvency.
6149Id.atpp.1011.
6150ExaminersInterviewofAdaShek,Nov.24,2009,atp.6.

1605

whichincludedthefinancialinformationofallitssubsidiaries.6151Moreover,LCPIhad
a triparty repo clearing agreement with JPMorgan, pursuant to which LCPI was
obligatedtomaintainaparticularequitytoassetorleverageratio.6152BeginninginMay
2008, therefore, the LECs would meet in the beginning or middle of each month to
identifyprojectedprofitsandlosses,writeoffs,andothermetrics.6153TheLECswould
thencomparethesefigurestothepreviousmonthsequityandattempttopredictfuture
equity levels and any capital infusion needs.6154 It was not uncommon for frontoffice
traderstosendemailsnotingcapitallevelsforcertainentities,suchasLCPI.6155
LCPI and LBSF, both subsidiaries of LBI, were of considerable concern to
Lehman,regulators,andthirdpartiesbecausetheywereforcedtotakesignificantwrite
downsduring2008. AlthoughtherewasaminorcapitalinfusioninFebruary2008of
$200,000,6156thefirstmajorcapitalinfusionoccurredinMay2008,whichwasinresponse
to a significant writedown of securities backed by real estate in California.6157 From
April through July 2008, LCPI continued to post negative equity levels and required

6151Id.
6152Id.atp.7.
6153Id.
6154Id.atpp.67.
6155Id.
6156Id.TheLECforLCPIwasunawareofanycapitalinfusionforLCPIbeforeFebruary2008.
6157Id.

1606

significant capital infusions. The following chart shows capital infusions (in millions)
receivedbyLCPI,LBSF,andLBDPduring2008inresponsetotheseconcerns:6158
Debtor Jan08 Feb08 Mar08 Apr08 May08 Jun08 Jul08 Aug08
LCPI

0.2
200.0

150.0

275.0
900.0
LBSF

100.0

LBDP

150.0

Intermsofmechanics,theExaminerhasidentifiedthreeinternalLehmanemails
thatdescribethecapitalinfusionsforLCPIandLBSFandprovidetherelevantjournal
entriesandwiretransfers.6159TheExaminerhasnotlocatedanyemailwithrespectto
the July 2008 capital infusion of LCPI. As for LCPI, LBI would first request a
paydown from LBHI to LBI, which was consummated by a wire transfer. LBHI
wouldrecordareductionincashandanincreaseinitsinvestmentassetinLBI.Second,
LBIwouldsendthe moneyback toLBHI becauseLCPI, according to internal emails,
did not have a bank account.6160 In other words, LBHI accepted LCPIs money on its
behalf. Third, when LBHI received the money from LBI, it increased its cash account
and reduced its intercompany receivable from LCPI. Finally, LCPI reduced its debt
obligation to LBHI and credited its paidin capital account. LCPI did not record a

6158CapitalInfusionsaredeterminedbynotingthechangeinAdditionalPaidInCapital,asreportedin

LehmansHyperionfinancialsystem.
6159Email from Jeffrey Su, Lehman, to Arthur Hiller, Lehman, et al. (Mar. 27, 2008) [LBEXBARLEG
0000001to03];emailfromJeffreySu,Lehman,toArthurHiller,Lehman,etal.(May30,2008)[LBEX
BARLEG0000004];emailfromHuiWang,Lehman,toHelenChu,Lehman,etal.(Aug.28,2008)[LBEX
SIPA003320].
6160ThisisinconsistentwithobservationsofLCPIsbooksandrecords.DanJ.Fleming,Lehmansformer
Global Head of Cash and Collateral Management, also stated in an interview that LCPI did have bank
accounts.ExaminersInterviewofDanJ.Fleming,Dec.17,2009,atp.8.

1607

receivableonitsbooksandrecordswhenthemoneywasgivenbacktoLBHI.Inshort,
LCPIsliabilityinitsintercompanyaccountwithLBHIdecreasedandLBHIkepttheuse
ofthemoneyitoriginallytransferredtoLBI,causingnoimpacttoitsliquidity.Asfor
infusionsintoLBSF,theprocesswasidentical,exceptthatLBSFreceivedthefundson
its own behalf (they were not immediately remitted back to LBHI). The following
illustratesthestepsofthecapitalinfusionsreceivedbyLCPIandLBSF:
InfusionsintoLCPIMarch,MayandAugust2008

1608

InfusionintoLBSFMay2008

1609


(3) DebtorbyDebtorAnalysis
(a) LehmanCommercialPaperInc.
LCPIprimarilyengagedintheorigination,trading,andservicingofsecuredand
unsecuredloans.6161LCPIsmonthlybalancesheetsasofMay31,2008throughAugust
31,2008wereasfollows:6162

Lehman Commercial Paper, Inc

Balance Sheet Items at:

May 31, 2008

June 30, 2008

CASH & CASH EQUIVALENTS

675,756,009

725,929,267

2,708,432,808

961,859,857

29,433,762,189

28,305,430,247

25,718,241,256

23,593,952,592

SEC. & OTHER FINANCIAL INSTRUMENTS OWNED

CASH & SECURITIES SEGR. AND ON DEPOSIT
SECURITIES PURCHASED UNDER AGREEMENT TO SELL
RECEIVABLES- BROKER/DEALER
RECEIVABLES- CUSTOMERS
RECEIVABLES- OTHER
PROPERTY, EQUIPMENT & LEASE IMPROVEMENTS
TOTAL BRIDGE ACCOUNTS
DEFFERED EXPENSE & OTHER ASSETS
TOTAL ASSETS
COMMERCIAL PAPER & S.T. DEBT
SEC.& OTHER INSTRUMENTS SOLD NOT YET PURCHASED
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
SECURITIES LOANED
OTHER SECURED FINANCING
PAYABLES- BROKER/DEALER
PAYABLES- CUSTOMERS
ACCD LIABILITIES & OTHER PAY.
SENIOR DEBT
TOTAL LIABILITIES
COMMON STOCK
F/X TRANSLATION ADJUSTMENT
RETAINED EARNINGS
TOTAL ADDITIONAL PAID IN CAPITAL
TOTAL STOCKHOLDER'S EQUITY

(31)

(31)

19,578,651,244

22,275,502,285

July 31, 2008 August 31, 2008

(74)
21,168,272,398

(31)
21,366,118,677

464,902,039

622,970,642

583,521,985

434,533,107

2,101,522,190

2,698,515,924

1,406,513,724

1,421,687,767

13,160,040,651

7,493,297,900

7,764,947,048

8,246,411,601

1,462,823

1,828,038

1,773,679

1,707,311

328,525,248

330,203,124

371,986,965

285,342,973

65,744,622,369

62,453,677,403

59,723,689,795

56,311,613,860

454,183,781

28,140,653

18,158,345

3,020,383,281

1,105,104,778

2,122,362,958

2,369,393,978

3,369,552,952

20,267,872,715

19,123,893,904

19,549,285,798

18,438,230,178

(8,857,059)

(13,412,434)

6,684,055,232

6,745,696,751

(15,791,168)
6,430,902,517

(18,248,658)
6,729,268,740

70,772,641

33,162,439

80,435,168

47,118,454

482,545,031

529,525,271

274,976,726

232,856,709

36,750,913,611

34,026,234,430

31,177,301,584

24,285,597,683

65,806,590,731

62,595,603,973
10,000.00

59,884,662,948
10,000.00

56,104,759,340

10,000
22,422,006

18,600,078.01

22,624,113.30

45,165,409

-1,016,734,510.84

-1,314,805,129.27

(1,869,518,752)

856,197,863.00

1,131,197,863.00

2,031,197,863

(940,598,231)
856,197,863
(61,968,362)

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

65,744,622,369

CAPITAL INFUSION

150,000,000

(141,926,570)
62,453,677,403

(160,973,153)
59,723,689,795

10,000

206,854,520
56,311,613,860

275,000,000 900,000,000

6161Lehman,LCPICorporateDescription[LBEXBARLCT0000723].However,LCPIwasnotalwaysused

forthispurposeasitformerlytradedincommercialpaper.
6162AllbalancefiguresarepresentedonaconsolidatedLCPIbasis.

1610


As this table shows, from May through July 2008, LCPI reported negative equity by
amountsrangingfrom$62millionto$161million.InAugust2008,LCPIreported$207
millioninpositiveequity.
AsofMay31,2008,LCPIheldapproximately$29.4billioninfinancialinventory,
with the remaining assets on its balance sheet comprised largely of reverse repos and
intercompanyreceivables.Followingisatableofthefinancialinventorydirectlyheld
byLCPIasofMay31,2008andAugust31,2008.6163
Lehman Commercial Paper, Inc.
Total Financial Instruments Owned (Assets)
GAAP Asset Class
Commercial Paper & Money Market
Third Party Derivatives
Intercompany Derivatives
Total Derivatives
Corporate Debt
Corporate Equity

as of 5/31/08 % of Total as of 8/31/08 % of Total

1,500,606,326

5.10%

1,742,658,697

7.55%

274,401,594
712,018,593
986,420,187

0.93%
2.42%
3.35%

203,889,227
2,831,028,078
3,034,917,305

0.88%
12.26%
13.15%

58.89% 12,442,838,192

53.90%

17,332,854,996
1,034,329,176

3.51%

88,723,365

0.38%

19,658,550

0.07%

80,840,327

0.35%

Real Estate Held for Sale

5,090,122,271

17.29%

3,863,492,546

16.74%

Mortgages & Mortgage Backed

3,469,770,683

11.79%

1,831,526,818

7.93%

100.00% 23,084,997,251

100.00%

Governments & Agencies

29,433,762,189
Source: Hyperion.

6163InformationregardingthefinancialinventoryheldbyeachDebtorentityisobtainedfromLehmans

Hyperion reporting system. Note that there is an irreconcilable variance between the sum of the
individual line items for financial instruments owned in this table and the total stated in Hyperion for
August.

1611

As of May 2008, approximately $17.3 billion, or 59%, of LCPIs financial

instrumentpositionswerecorporateloans,droppingtoapproximately$12.4billion,or
53%, by August 2008. At the same time, the value of intercompany derivatives
increased significantly from approximately $710 million, or 2.4% of total financial
instrumentsinMay2008,to$2.8billion,or12.3%,inAugust2008.
As of August 31, 2008, LCPI held approximately $23.6 billion in financial
inventory, withtheremainingassets onits balance sheet comprisedlargely of reverse
repos and intercompany receivables. Because over 99% of Corporate Debt and
Mortgage and Mortgage Backed securities are SFAS levels 2 and 3, the Examiner
estimatesthatapproximately60%ofLCPIsfinancialinventorywasFASB157levels2
and3.6164Themarksassignedtheseassetsarenotsupportedbyamarketquotedprice
andtheyhaveahighriskofmisstatement.
SectionIII.C.3ofthisReportanalyzedpotentialintangibleassetsheldbyLCPIon
astandalone(i.e.,unconsolidated)basis.Whileitispossiblethatadditionalintangible
assets may exist in LCPI in the form of customer lists, proprietary technology and
human capital, the Examiner has determined that such intangible assets are not of
materialvalueandwouldnotchangethesolvencydeterminationofLCPI.6165

6164Lehman Brothers Holdings Inc., Quarterly Report as of May 31, 2008 (Form 10Q) (filed on Jul. 10,

2008).
6165Duetothecostandtimerequiredbysuchanexercise,theExaminerdidnotperformaninvestigation
intothepossibleintangibleassetsineachofLCPIssubsidiaries.

1612

The majority of LCPIs Deferred Expenses and Other Assets relate to its
investmentof$225millioninitssubsidiaryLeveragedLoanTradingHoldingsPartners
(LLTHP). Based on a review of the consolidated balance sheets of LLTHP, the
ExaminerhasconcludedthatthevalueofLCPIsinvestmentinLLTHPshouldnothave
beenimpaired.6166
LCPICapitalInfusions.LCPIwassignificantlyleveragedandpostednegative
equityfromApril2008throughJuly2008.InFebruary,March,May,JulyandAugust
2008, LCPI obtained capital infusions from LBI in an attempt to post positive equity.
Accordingtointernaldocuments,thenegativeequityinJulywasaresultof$1billionin
losses in, among others, SunCal and TXU Energy positions.6167 Losses in August 2008
weretheresultofwritedownsinmortgageresidualpositionsaswellaswritedownsof
certain corporate loans.6168 Interviews with Lehman finance personnel revealed that
there was an effort to keep LCPI, as the subsidiary of LBI, balance sheet solvent.6169

6166LLTHPs

consolidated balance sheets showed a level of assets that remained relatively steady
throughoutfiscalyear2008.ItslargestassetwasitsinvestmentinLuxembourgTradingFinanceSARL,
which,inturn,holdsArchstoneTermBloans.Becauseofthepriceflexfeatureoftheseloans,theirvalue
would not be impaired. Furthermore, LLTHP posted steady increases in retained earnings throughout
fiscalyear2008,and,withfewliabilities,postedsignificantpositiveequity.
6167EmailfromKristieWong,Lehman,toAnthonyStucchio,Lehman,etal.(July29,2008)[LBEXSIPA
005520].
6168EmailfromKristieWong,Lehman,toPaoloTonucci,Lehman(August27,2008)[LBEXSIPA005564].
6169Examiners Interview of Kristie Wong, Dec. 2, 2009, at p. 2; Examiners Interview of Joselito Rivera,
Oct. 13, 2009, at pp. 56. However, LEC Mike Montella stated that LECs may in some circumstances
allow a nonregulated entity to post negative equity at month end. Examiners Interview of Michael
Montella,Oct.26,2009,atp.1012.ThiscontradictionmaybeexplainedbythefactthatWong,whowas
headLEC,alsostatedthatthecapitalinfusionsLCPIreceivedinMayandJulyof2008wereintendedto
allow it to post positive equity, but that the amount of capital necessary to do so was underestimated.

1613

While there were no capital guidelines other than the principle of avoiding negative
equity,LECswereawareofthefactthatanentitysuchasLCPIwouldbereviewedand
questionedbyregulators.6170
LCPI became balance sheet insolvent for the first time in February 2008. It
posted positive equity by a small margin in March 2008, but then posted negative
equity until August, despite the capital infusions it received during this time.6171 In
August 2008, LCPI received a $900 million capital infusion from LBI which was
sufficienttoallowittomaintainborderlinebalancesheetsolvencyapparentlyuntilits
bankruptcy filing. Below is a table of LCPIs monthly equity in the year prior to its
bankruptcy filing, along with its ratio of equitytototalassets, and the Examiners
solvencydeterminationasofeachmonth.

ExaminersInterviewofKristieWong,Dec.2,2009,atp.3.Thus,LECsattemptedtomaintainpositive
equityinLCPI,butwereoccasionallyunabletodoso.
6170ExaminersInterviewofMichaelMontella,Oct.26,2009,atpp.1012;ExaminersInterviewofKristie
Wong,Dec.2,2009,atp.2.
6171Wong stated that she did not know why this would be so. She surmised that the capital infusions
weresimplyinadequate.ExaminersInterviewofKristieWong,Dec.2,2009,atp.3.

1614

Ratio of

September 30, 2007

October 31, 2007
November 30, 2007
December 31, 2007
January 31, 2008
February 29, 2008
March 31, 2008
April 30, 2008
May 31, 2008
June 30, 2008
July 31, 2008
August 31, 2008

Equity
$372,928,608
$484,906,910
$310,007,656
$302,649,926
$132,490,100
($6,669,838)
$255,994,138
($159,512,650)
($61,968,362)
($141,926,570)
($160,973,153)
$206,854,520

Solvency
Determination
Borderline
Borderline
Borderline
Borderline
Borderline
Insolvent
Borderline
Insolvent
Insolvent
Insolvent
Insolvent
Borderline

Equity to
Total Assets
0.61%
0.74%
0.53%
0.51%
0.20%
N/M
0.41%
N/M
N/M
N/M
N/M
0.37%

Note: N/M signifies "Not Meaningful" due to negative values of equity.

Source: Hyperion.

(b) CESAviation,CESAviationVLLC,CESAviationIX
The CES Aviation entities CES Aviation, CES Aviation V LLC, and CES
Aviation IX were established for the purpose of acquiring and operating aircraft for
Lehman.TheirbalancesheetsasofMay31,2008andAugust31,2008areasfollows:

CES Aviation
Balance Sheet Items at:

May 31, 2008 August 31, 2008

665,422

354,419

21,873,360

21,467,298

49,778

19,911

TOTAL ASSETS

22,588,560

21,841,628

ACCRUED LIABILITIES & OTHER PAYABLES

22,456,891

21,913,826

TOTAL LIABILITIES

22,456,891

21,913,826

RETAINED EARNINGS

(6,868,331)

(7,072,197)

7,000,000

7,000,000

CASH & CASH EQUIVALENTS

PROPERTY, EQUIPMENT & LEASE IMPROVEMENTS
DEFFERED EXPENSE & OTHER ASSETS

TOTAL ADDITIONAL PAID IN CAPITAL

131,669

TOTAL STOCKHOLDER'S EQUITY

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

1615

22,588,560

(72,197)
21,841,628

CES Aviation V LLC

Balance Sheet Items at:

May 31, 2008 August 31, 2008

CASH & CASH EQUIVALENTS

67,210

149,463

RECEIVABLES- OTHER

38,622

38,622

4,343,043

4,242,042

51,572

20,629

TOTAL ASSETS

4,500,447

4,450,756

ACCD LIABILITIES & OTHER PAY.

7,954,035

8,003,875

TOTAL LIABILITIES

7,954,035

8,003,875

RETAINED EARNINGS

(3,453,588)

(3,553,119)

TOTAL STOCKHOLDER'S EQUITY

(3,453,588)

(3,553,119)

4,500,447

4,450,756

PROPERTY, EQUIPMENT & LEASE IMPROVEMENTS

DEFFERED EXPENSE & OTHER ASSETS

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

CES Aviation IX
Balance Sheet Items at:

May 31, 2008 August 31, 2008

237,092

247,444

7,934

7,934

7,865,753

7,686,986

33,672

13,469

TOTAL ASSETS

8,144,451

7,955,833

ACCRUED LIABILITIES & OTHER PAYABLES

9,001,137

8,952,961

TOTAL LIABILITIES

9,001,137

8,952,961

CASH & CASH EQUIVALENTS

RECEIVABLES- OTHER
PROPERTY, EQUIPMENT & LEASE IMPROVEMENTS
DEFFERED EXPENSE & OTHER ASSETS

RETAINED EARNINGS

(856,686)

(997,128)

TOTAL STOCKHOLDER'S EQUITY

(856,686)

(997,128)

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

8,144,451

7,955,833

Theseentitiesassetsconsistedlargelyofaircraft,cashandprepaidinsuranceon
aircraft.Liabilitiesarerelatedtotheuseoftheaircraft,suchastransportationcosts,and
intercompany payables to LBHI and LBI. Because of the nature of their business, all
threeCESentitiesheldexclusivelyfixedassets,andtheExaminerconcludesthatnone
heldsignificantintangibleassets.

1616

Withnointangibleassetsassociatedwiththeseentities,CESAviationVLLCand
CESAviationIXwerebalancesheetinsolventasofMay31,2008,andAugust31,2008.
Theentitiesbookvalueforproperty,equipmentandleaseimprovements(PEL)takes
into account depreciation and does not reflect the fair market value of these entities
aviation equipment. However, even assuming the PEL was worth its purchase price
($8.7million),theentitiesequitydeficitistoosignificanttoovercomeanyincreasefrom
thebookvalueoftheassets.
AsofMay31,2008,CESAviationpostedpositiveshareholdersequitybyavery
slim margin. Accordingly, the Examiner concludes that CES Aviation was borderline
solventasofMay31,2008.InJuly2008,CESAviationpostednegativeequityanddid
sothroughAugust31,2008.However,becauseitsmarginofnegativeequitywasvery
small$15,813and$72,197inJulyandAugust2008,respectivelyitispossiblethatthe
fairmarketvalueofPELinthisentitywouldbesufficientlyabovethevaluereportedon
itsbalancesheettopushCESintopositiveequity.Accordingly,giventheuncertainty
of the market value of certain aviation assets in this entity, and their impact on the
solvencyoftheentity,theExaminerconcludesthatCESAviationremainedborderline
solvent as of August 2008. In light of the time and expense to the Debtors estates
required to conduct an independent valuation of these assets, the Examiner has
determinedthatitwouldbeanimprudentuseoftheEstatesresourcestodoso.The
tablebelowprovidesthemonthlyequitypositionsofeachentity.

1617

September 30, 2007

October 31, 2007
November 30, 2007
December 31, 2007
January 31, 2008
February 29, 2008
March 31, 2008
April 30, 2008
May 31, 2008
June 30, 2008
July 31, 2008
August 31, 2008

CES Aviation
Solvency
Equity
Determination
$917,722
Borderline
$770,068
Borderline
$765,759
Borderline
$626,549
Borderline
$444,105
Borderline
$331,361
Borderline
$237,230
Borderline
$49,335
Borderline
$131,669
Borderline
$49,067
Borderline
($15,813)
Borderline
($72,197)
Borderline

CES Aviation V
Solvency
Equity
Determination
($2,841,129)
Insolvent
($2,939,739)
Insolvent
($2,953,150)
Insolvent
($3,026,449)
Insolvent
($3,059,305)
Insolvent
($3,148,726)
Insolvent
($3,220,516)
Insolvent
($3,401,644)
Insolvent
($3,453,588)
Insolvent
($3,446,161)
Insolvent
($3,494,369)
Insolvent
($3,553,119)
Insolvent

Source: Hyperion.

CES Aviation IX
Solvency
Equity
Determination
($465,808)
Insolvent
($524,954)
Insolvent
($589,790)
Insolvent
($648,527)
Insolvent
($701,748)
Insolvent
($720,203)
Insolvent
($761,657)
Insolvent
($802,240)
Insolvent
($856,686)
Insolvent
($909,705)
Insolvent
($1,013,850)
Insolvent
($997,128)
Insolvent

(c) LBSpecialFinancing

LBSFwasLehmanBrothersInc.sprincipaldealerinabroadrangeofderivative
products, including interest rate, currency, credit and mortgage derivatives. For the
reasonsdescribedbelow,theExaminerdeemsLBSFtohavebeenborderlinesolventas
of May 31, 2008, and August 31, 2008. LBSFs balance sheets as of April 30, 2008,
throughAugust31,2008areasfollows:6172

6172NotethatallbalancefiguresarepresentedonaconsolidatedLBSFbasis.

1618

LB Special Financing Inc.

Balance Sheet Items at:

April 30, 2008

June 30, 2008

July 31, 2008

August 31, 2008

40,170,990

38,978,054

54,277,418

121,898,763

130,804,614

142,211,812

158,859,102

78,574,785,243

71,822,087,467

81,038,596,170

77,021,236,554

66,005,066,729

4,799,272,249

5,579,013,493

3,117,305,188

3,213,698,449

3,253,884,281

43,783,917,364

26,365,338,267

34,440,447,484

36,632,787,111

26,565,362,945

RECEIVABLES- BROKER/DEALER

4,553,931,571

6,946,351,256

3,907,417,323

6,618,862,372

4,083,561,521

RECEIVABLES- CUSTOMERS

1,462,805,597

1,584,409,453

1,503,468,998

2,306,493,702

2,230,283,390

RECEIVABLES- OTHER

2,581,362,126

2,159,122,186

2,162,547,954

2,394,986,043

3,549,323,316

284,765,999

284,763,199

287,253,790

287,250,990

291,248,190

11,460,586

10,919,044

12,549,216

12,328,440

10,108,220

219,240,440

199,515,090

391,189,073

448,445,623

430,075,277

CASH & SEC.SEGR. & ON DEPOSIT

SEC. & OTHER FININANCIAL INSTRUMENTS OWNED
SECURITIES PURCHASED UNDER AGREEMENT TO SELL
SECURITIES BORROWED

GOODWILL & INTANGIBLES

PROPERTY, EQUIPMENT & LEASE IMPROVEMENTS
DEFFERED EXPENSE & OTHER ASSETS
TOTAL BRIDGE ACCOUNTS
TOTAL ASSETS
COMMERCIAL PAPER & S.T. DEBT
SEC.& OTHER INSTRUMENTS SOLD NOT YET PURCHASED

32,268,168

May 31, 2008

39,695,084

CASH & CASH EQUIVALENTS

31

136,303,809,375

115,113,113,305

127,031,750,801

129,117,279,154

106,632,050,391

185,291,739.29
45,632,121,885.11
2,887,343,577.67
43,011,801,476.53
1,906,166,762.30
3,956,473,979.96
3,154,191,489.04
25,187,338,234.46
659,429,677.75

190,472,213.47
45,395,025,250.05
3,698,729,925.45
44,678,811,748.63
1,414,153,886.91
4,240,558,371.16
2,980,868,156.83
25,373,700,109.15
640,889,783.27

126,580,158,822

128,613,209,445

188,128,111

184,568,237

55,595,965,409

40,456,549,211

4,347,510,621

2,936,970,849

43,991,644,009

40,672,680,943

OTHER SECURED FINANCING

2,429,178,131

1,918,859,123

PAYABLES- BROKER/DEALER

3,696,490,806

3,304,690,852

PAYABLES- CUSTOMERS

3,689,374,176

4,268,820,487

21,622,506,426

20,211,734,488

SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

SECURITIES LOANED

ACCD LIABILITIES & OTHER PAY.

SENIOR DEBT
TOTAL LIABILITIES
COMMON STOCK
F/X TRANSLATION ADJUSTMENT
RETAINED EARNINGS
TOTAL ADDITIONAL PAID IN CAPITAL
TOTAL STOCKHOLDER'S EQUITY
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY
CAPITAL INFUSION
EQUITY AS % OF TOTAL ASSETS

695,725,691

683,144,683

136,256,523,382

114,638,018,874

176,893,415
33,540,848,955
4,249,528,937
35,540,001,644
1,074,702,425
5,253,116,854
2,657,840,130
23,040,698,961
630,005,545
106,163,636,866

1,000

1,000

1,000

1,000

1,000

(26,146)

(55,861)

(23,322)

(15,863)

(16,532)

(202,688,861)

125,149,292

101,614,301

154,084,572

118,429,057

250,000,000

350,000,000

350,000,000

350,000,000

350,000,000

47,285,993

475,094,431

451,591,979

504,069,709

468,413,525

136,303,809,375

115,113,113,305

127,031,750,801

129,117,279,153

106,632,050,391

100,000,000

0.03%

0.41%

0.36%

0.39%

0.44%

AsofMay31,2008,LBSFheldapproximately$72billioninfinancialinventory,
with the remaining asset balance made up largely of receivables, reverse repos and
securitiesborrowed.Ofthefinancialinventory,nearly80%iscomprisedofderivatives
and government and agency securities, including 15% allocated to intercompany
derivatives.FollowingisatableoftheinventorydirectlyheldbyLBSFas ofMay31,
2008andAugust31,2008.

1619

Lehman Brothers Special Financing

Total Financial Instruments Owned (Assets)
GAAP Asset Class
Commercial Paper & Money Market
Third Party Derivatives
Intercompany Derivatives
Total Derivatives

as of 5/31/08 % of Total as of 8/31/08 % of Total

87,851,674
21,490,667,702
11,124,364,636
32,615,032,338

0.12%

38,050,077

0.06%

29.92% 22,267,378,700
15.49% 10,977,690,112
45.41% 33,245,068,813

33.74%
16.63%
50.37%

Physical Commodities
Corporate Debt
Corporate Debt & Other

526,763,622
3,279,571,273
3,806,334,896

0.73%
4.57%
5.30%

413,833,886
5,215,184,322
5,629,018,208

0.63%
7.90%
8.53%

Corporate Equity

9,379,851,772

13.06%

9,113,820,996

13.81%

34.64% 17,668,641,729

26.77%

Governments & Agencies

Mortgages & Mortgage Backed

24,877,048,749
1,055,968,037
71,822,087,467

1.47%

310,466,906

100.00% 66,005,066,729

0.47%
100.00%

AssetforthinSectionIII.A.2ofthisReport,theExaminerhasdeterminedthatthereis
insufficient evidence to support a finding, for purposes of a solvency analysis, that
Lehmans derivative instruments or corporate debt and equity positions were
unreasonablymarked.
LBSF was a warehouse for derivative positions and did not originate business
activityorperformsignificantbusinessoperations.However,goodwilldidappearon
its consolidated balance sheet as of June 2007 in the amount of approximately $285
millionduetotheacquisitionofEagleEnergy.Duetothecostandtimerequired,the
Examiner did not conduct an investigation of the reasonableness of the magnitude of
the goodwill and intangibles; even if the goodwill was written off completely, LBSF
would continue to post positive equity for all months in 2008 other than March and

1620

April. Moreover, Section III.C.3 of this Report analyzes potential intangible assets in
LBSFona standalone (i.e., unconsolidated)basis.Whileit is possiblethatadditional
intangibleassetsmayexistintheformofcustomerlists,proprietarytechnologyand/or
humancapital, suchintangibleassetsarenot ofmaterial value andwould not change
thesolvencydeterminationofLBSF.6173BelowisatableofLBSFsmonthlyequityinthe
yearpriortoitsbankruptcyfiling,alongwithitsratioofequitytototalassets,andthe
Examinerssolvencydeterminationasofeachmonth.
Ratio of
Solvency
Equity to
Equity
Determination Total Assets
September 30, 2007 $418,047,690 Borderline
0.51%
October 31, 2007 $812,630,989 Borderline
0.85%
November 30, 2007 $574,878,581 Borderline
0.60%
December 31, 2007 $712,458,966 Borderline
0.64%
January 31, 2008 $723,769,461 Borderline
0.55%
February 29, 2008 $953,503,304 Borderline
0.73%
March 31, 2008 $270,750,552 Borderline
0.19%
April 30, 2008 $47,285,993 Borderline
0.03%
May 31, 2008 $475,094,431 Borderline
0.41%
June 30, 2008 $451,591,979 Borderline
0.36%
July 31, 2008 $504,069,709 Borderline
0.39%
August 31, 2008 $468,413,525 Borderline
0.44%
Source: Hyperion.

As with other LBHI Affiliates, LECs attempted to make sure that LBSF had
positive equity. Accordingly, while in February and March of 2008, LBSF paid
dividendsof$300millionand$500milliontoLBI,justtwomonthslater,inMay2008,

6173Due to the cost and time required, the Examiner did not perform an investigation into the possible

intangibleassetsineachofLBSFssubsidiaries.

1621

LBSFreceivedacapitalinfusionof$100millionfromLBI.Withoutthisadditional$100
million,LBSFwouldhavebeenbalancesheetinsolventasofMay2008.
Asillustratedabove,LBSFmaintainedanequitytototalassetsratioofnomore
than 0.44% from March through August 2008. Even though the Examiner concludes
that there is insufficient evidence to support a finding, for purposes of a solvency
analysis,thattheassetsheldbyLBSFwereunreasonablymarked,LBSFsassetswould
onlyneedtolose0.45%oftheirvalueinordertorenderLBSFbalancesheetinsolvent.
Becauseofitssmallequitycushion,theExaminerdeemsLBSFtohavebeenborderline
solventasofMay31,2008,andAugust31,2008.
(d) LBCommodityServices
LBCSs principal business was the trading of power, natural gas, oil, and
structured products. The following table details LBCSs balance sheets as of May 31,
2008,andAugust31,2008:6174

6174NotethatallbalancefiguresarepresentedonaconsolidatedLBCSbasis.

1622

LB Commodity Services Inc.

Balance Sheet Items at:

May 31, 2008 August 31, 2008

CASH & CASH EQUIVALENTS

SEC. & OTHER FININANCIAL INSTRUMENTS OWNED
SECURITIES PURCH. UNDER AGREEMENT TO SELL

6,850,371

22,550,284

5,488,309,683

4,340,355,972

4,155,555

1,263,880,051

1,085,836,004

RECEIVABLES- CUSTOMERS

265,921,188

86,194,370

RECEIVABLES- OTHER

106,985,698

280,851,379

7,718,516

7,034,975

RECEIVABLES- BROKER/DEALER

PROPERTY, EQUIPMENT & LEASE IMPROVEMENTS

DEFFERED EXPENSE & OTHER ASSETS

145,476,400

GOODWILL & INTANGIBLES

284,763,199

291,248,190

TOTAL BRIDGE ACCOUNTS

378,237,034

TOTAL ASSETS

7,569,905,106

6,496,463,763

SEC.& OTHER INSTRUMENTS SOLD NOT YET PURCHASED

3,538,571,157

2,058,364,215

152

79,068

COMMERCIAL PAPER & ST DEBT

PAYABLES- BROKER/DEALER

145,550,384

8,834,794

PAYABLES- CUSTOMERS

207,624,790

115,438,486

2,974,541,324

3,485,452,763

677,617,075

624,483,872

7,543,904,882

6,292,653,199

ACCD LIABILITIES & OTHER PAY.

SENIOR DEBT
TOTAL LIABILITIES

100

COMMON STOCK

(116,705)

F/X TRANSLATION ADJUSTMENT

100
(47,837)

RETAINED EARNINGS

(4,883,170)

172,858,302

TOTAL ADDITIONAL PAID IN CAPITAL

31,000,000

31,000,000

TOTAL STOCKHOLDER'S EQUITY

26,000,224

203,810,565

7,569,905,106

6,496,463,763

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

0.34%

EQUITY AS % OF TOTAL ASSETS

3.14%

TheincreaseinstockholdersequityfromMaytoAugustwasduetoanincrease
of approximately $117 million in retained earnings between May and June 2008, and
another$60millionincreasebetweenJuneandJuly2008.LBCSalsopostedareceivable
fromLBIof$1.3billiononMay31,2008,and$1.1billiononAugust31,2008.Giventhe
pendingfailureofLBIandLBHI,itispossiblethattheAugust31valueofthereceivable
fromLBIshouldbevaluedatlessthanbookvalue.However,inlightofthecostand

1623

expense of examining this issue, and because the Examiner deems LBCS to be
borderline solvent even if the receivable from LBI is valued at full book value, the
Examinerhasdeterminedthatitwouldnotbeaprudentuseofresourcestoinvestigate
thisissuefurther.
Asshownabove,asofMay31,2008,LBCSsbalancesheetshowed$5.5billionin
financialinventory,decreasingto$4.3billionbyAugust31,2008.Followingisatableof
theinventorydirectlyheldbyLBCSasofMay31,2008,andAugust31,2008.
LB Commodity Services
Total Financial Instruments Owned (Assets)
GAAP Asset Class
Commercial Paper & Money Market
Third Party Derivatives
Intercompany Derivatives
Total Derivatives
Physical Commodities
Corporate Debt
Corporate Debt & Other
Governments & Agencies

as of 5/31/08 % of Total as of 8/31/08 % of Total

3,016,437

0.05%

2,343,645

0.05%

3,982,759,627
914,611,931
4,897,371,558

72.57%
16.66%
89.23%

2,763,758,194
1,009,617,031
3,773,375,225

63.68%
23.26%
86.94%

526,763,622
61,158,066
587,921,688

9.60%
1.11%
10.71%

413,833,886
150,801,915
564,635,801

9.53%
3.47%
13.01%

(0)

0.00%

1,301

0.00%

5,488,309,683

100.00%

4,340,355,972

100.00%

OfLBCSsfinancialinventoryportfolio,almost90%pertainstoderivatives,with
17% and 23% allocated to intercompany derivatives in May and August, respectively.
TheExaminersvaluationanalysisofderivativepositions,describedinSectionIII.A.2of
the Report, indicates that there is insufficient evidence to support a finding, for
purposes of a solvency analysis, that they were unreasonably marked. Also, while
LBCSdidperformbusinessoperationsand,asdiscussedinSectionIII.C.3,itispossible

1624

that additional intangible assets may exist in the form of customer lists, proprietary
technologyandhumancapital,theExaminerhasdeterminedthatsuchintangibleassets
arenotofmaterialvalue.6175However,asnotedaboveforLBSF,LBCSsparententity,
approximately$285millioningoodwillandintangiblesdidexistbeginninginJune2007
due to the acquisition of Eagle Energy. These same goodwill assets are reflected on
LBCSsconsolidatedbalancesheet.TheExaminerhasdeterminedthatifthisgoodwill
were entirely written off, LBCS would become balance sheet insolvent as of May and
August 2008. However, due to the expense and time required, the Examiner has not
engagedinaninvestigationofthereasonablenessofthemagnitudeofthegoodwilland
intangibles.6176
Below is a table of LBCSs monthly equity in the year prior to its bankruptcy
filing, along with its ratio of equitytototal assets, and the Examiners solvency
determinationasofeachmonth.

6175As

noted above, the analysis in Section III.C.3 was performed on LBCS on a standalone (i.e.,
unconsolidated)basis.Duetothecostandtimerequired,theExaminerdidnotperformaninvestigation
intothepossibleintangibleassetsineachofLBCSssubsidiaries.
6176LBHIguaranteedcertainoftheobligationsofLBCS,LBCC,LOTCandLBSF,pursuanttoaLehman
Executive Committee Order dated June 9, 2005. See Lehman, Unanimous Written Consent of the
ExecutiveCommitteeoftheBoardofDirectorsofLehmanBrothersHoldingsInc.(June9,2005)[LBEX
AM 003415003417]. LCPI and LOTC also received guaranties from LBHI for their activity with
JPMorganChaseonAugust26,2008.JPMorgan,Guaranty[JPM200400058790005884].TheExecutive
Committee Order stated that LBHI would guarantee payment of all liabilities, obligations and
commitmentsofthesubsidiaries.JPMorgan,Guaranty[JPM200400058790005884].Assumingthatthe
guarantyisalegallyenforceableobligation,itisnotanassetoftheDebtorentity,nordoesitcontributeto
the solvency of the LBHI Affiliates. See Section III.A.5 and III.B.3.g of this Report for additional
informationonLBHIguaranties.

1625

September 30, 2007

October 31, 2007
November 30, 2007
December 31, 2007
January 31, 2008
February 29, 2008
March 31, 2008
April 30, 2008
May 31, 2008
June 30, 2008
July 31, 2008
August 31, 2008

Ratio of
Solvency
Equity to
Equity
Determination Total Assets
$90,229,685 Borderline
3.74%
$124,441,423 Borderline
4.15%
$132,927,603 Borderline
4.17%
$111,784,670 Borderline
3.18%
$123,068,926 Borderline
3.28%
$83,838,341 Borderline
1.81%
$54,934,471 Borderline
1.02%
$25,662,935 Borderline
0.38%
$26,000,224 Borderline
0.34%
$143,082,271 Borderline
1.46%
$203,052,519 Borderline
2.58%
$203,810,565 Borderline
3.14%

Source: Hyperion.

LBCSs equitytototalassets ratio of 0.3% in May 2008 and 3.14% in August of 2008,
rendered it vulnerable to small writedowns or unforeseen liabilities.6177 Accordingly,
althoughLBCSsbalancesheetindicatesthatitwassolventasofMay31andAugust31,
2008,theExaminerhasdeterminedthatLBCSwasborderlinesolventduringtheperiod
notedinthetableabove.6178

6177ThereisevidencethatoneofLBCSssubsidiaries,EagleEnergyPartners1L.P.(EagleEnergy)may

have been overvaluedas of May and August of 2008. In May 2008, Eagle Energys shareholder equity
was $354 million. Hyperion report [LBEXBARHYP 00000380000049]. In August, Eagle Energys
shareholder equity was $363 million. Id. The magnitude of Eagle Energys book value of shareholder
equityisrelevantbecauseinOctober2008,LBCSsoldEagleEnergytoElectricitedeFranceSAfor$230.5
million, over $100 million less than book value of the equity. Edvard Pettersson, Lehman to Sell Eagle
Energy Unit to EDF for $230.5 Million, Bloomberg, October 1, 2008; Federal Energy Regulatory
Commission,FERCAuthorizesLehmanEDFTransaction,October30,2008.Becauseofthenarrowmargin
by which LBCS was balance sheet solvent in May 2008, a significant decrease in the equity of Eagle
Energy,aLevel2asset,wouldhaverenderedLBCSinsolvent.
6178TherewerefourDebtorentitiesthatwerereviewedandratedbyratingagencies:LBCS,LBFP,LBDP
and LBCC. Each entity obtained credit ratings of at least A. In light of the applicable precedent, the
Examinerdoesnotconsidertheratingitselftobedispositiveofsolvency.

1626

(e) LuxembourgResidentialPropertiesLoanFinanceS.A.R.L.
LRPwasestablishedinMay2008asaninvestmentandfinancingvehicletohold
primarily commercial loans.6179 Balance sheet information was not available for this
entityuntilJuneanditsbalancesheetasofAugust31,2008,isstatedasfollows:

Luxembourg Residential Properties

Balance Sheet Items at August 31, 2008
CASH & CASH EQUIVALENTS
SEC. & OTHER FININANCIAL INSTRUMENTS OWNED
TOTAL ASSETS
ACCD LIABILITIES & OTHER PAY.
TOTAL LIABILITIES
COMMON STOCK
RETAINED EARNINGS
TOTAL STOCKHOLDER'S EQUITY
Total Liabilities & Stockholder's Equity

20,000
596,624,913
596,644,913
593,998,140
593,998,140
20,000
2,626,773
2,646,773
596,644,913

LRPsassetsconsistentirelyofonecorporateloan;anArchstoneTermBloanin
the principal amount of $597 million. As noted in Section III.A.2, the Examiner has
determined that it was reasonable for Lehman to value its Archstone Term B loan at
99%ofstatedprincipalduetopriceflex.
BasedonthefactthattheArchstoneTermLoanBwastheonlyassetofLRP,and
becausethereisnobasistoexpectanydeteriorationinthevalueofthatasset,thereis
insufficientevidencetosupportafindingthatLRPwasinsolventasofAugust31,2008.

6179ExaminersInterviewofGeraldHaupt,Oct.13,2009,atpp.23.LRPisadistinctandseparateentity

fromLuxembourgFinance,S.a.r.l.,whichisnotaDebtorLBHIAffiliate.

1627

(f) LBOTCDerivatives
LOTCisanoverthecounterderivativesdealeranditsbalancesheetsasofMay
31,2008andAugust31,2008arestatedasfollows:

LB OTC Derivatives
Balance Sheet Items at:

May 31, 2008 August 31, 2008

0

31,661

2,006,960,062

1,760,363,783

SECURITIES PURCHASED UNDER AGREEMENT TO SELL

99,617,347

759,230,174

SECURITIES BORROWED

99,412,565

53,742,524

CASH & CASH EQUIVALENTS

SEC. & OTHER FININANCIAL INSTRUMENTS OWNED

RECEIVABLES- BROKER/DEALER

1,531,638,380

944,631,818

RECEIVABLES- CUSTOMERS

1,605,884,195

1,095,052,703

47,733,513

54,138,936

2,559,784

RECEIVABLES- OTHER
DEFERRED EXPENSE & OTHER ASSETS

(0)

TOTAL BRIDGE ACCOUNTS

5,391,246,062

TOTAL ASSETS

0
4,669,751,382

187,220,440

1,013,982,923

3,900,934,006

2,274,803,899

3,024,306

129,388

48,967,601

14,091,730

PAYABLES- CUSTOMERS

196,846,122

199,396,799

ACCD LIABILITIES & OTHER PAY.

578,708,851

702,239,780

SUBORDINATED INDEBTEDNESS

250,000,000

250,000,000

5,165,701,327

4,454,644,519

100

100

125,544,736

115,106,863

99,999,900

99,999,900

225,544,736

215,106,863

5,391,246,062

4,669,751,382

COMMERCIAL PAPER & S.T. DEBT

SEC.& OTHER INSTRUMENTS SOLD NOT YET PURCHASED
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
PAYABLES- BROKER/DEALER

TOTAL LIABILITIES
COMMON STOCK
RETAINED EARNINGS
TOTAL ADDITIONAL PAID IN CAPITAL
TOTAL STOCKHOLDER'S EQUITY
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

Ofits$5billionintotalassetsasofMay31,2008,approximately$2billionwasin
the form of financial instruments owned by LOTC. Almost 40% of the financial
inventory was derivatives, with the other 60% comprised of corporate equity and
corporatedebtpositions.TheExaminersvaluationreviewoftheseassetssuggeststhat

1628

there is insufficientevidenceto supportafinding that these assetswere unreasonably

marked.6180ThefollowingisatableofthefinancialinventorydirectlyheldbyLOTCas
ofMay31,2008andAugust31,2008:
LB OTC DERIVATIVES
Total Financial Instruments Owned (Assets)

(1,037,563)

-0.05%

(737,700)

% of
Total
-0.04%

Third Party Derivatives

Intercompany Derivatives
Total Derivatives

792,685,335
263,105
792,948,439

39.50%
0.01%
39.51%

664,058,534
51,169
664,109,703

37.72%
0.00%
37.73%

Corporate Debt

911,345,248

45.41%

775,426,806

44.05%

Corporate Equity

303,715,608

15.13%

321,564,974

18.27%

(11,670)

0.00%

(0)

0.00%

2,006,960,062

100.00%

GAAP Asset Class

Commercial Paper & Money Market

as of 5/31/08 % of Total as of 8/31/08

Governments & Agencies

1,760,363,783 100.00%

Based on the positive equity cushion reflected on its balance sheet and the
reasonableness of the value of the financial assets it owned, there is insufficient
evidencetosupportafindingthatLOTCwasinsolventasofMay31,2008andAugust
31,2008.
(g) LB745LLC
LB 745 is an entity established for the primary purpose of acquiring Lehmans
headquarters building at 745 Seventh Avenue in New York. As of May 2008, the
entityscoreassetsincludedapproximately$193millioninreceivablesand$576million

6180SeeSectionIII.A.2ofthisReport.

1629

forthepropertyandrelatedequipment.6181Thesevalueshadnotvariedsignificantlyby
August31,2008.Although the value of theproperty onLB745sbalancesheet is not
fair market value, the value of commercial real estate property in New York would
likelyhaveexperiencedsignificantappreciationfromitspurchasein2001toMay2008
or August 2008.6182 The entitys largest liability is comprised of intercompany debt of
approximately$600million.LB745sbalancesheetsasofMay31,2008andAugust31,
2008areasfollows:

LB 745 LLC
Balance Sheet Items at:

May 31, 2008 August 31, 2008

RECEIVABLES- OTHER

193,404,492

197,484,533

PROPERTY, EQUIPMENT & LEASE IMPROVEMENTS

576,533,350

568,301,224

1,206,427

6,028,918

771,144,269

771,814,675

ACCD LIABILITIES & OTHER PAY.

715,829,776

711,579,742

TOTAL LIABILITIES

715,829,780

711,579,746

RETAINED EARNINGS

55,314,488

60,234,928

TOTAL STOCKHOLDER'S EQUITY

55,314,488

60,234,928

771,144,269

771,814,675

DEFFERED EXPENSE & OTHER ASSETS

TOTAL ASSETS
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

Based on the assets held by LB 745, there is insufficient evidence to support a

findingthatLB745wasinsolventasofMay31,2008andAugust31,2008.

6181Notethatapproximately$25millionoftotalreceivableswasanintercompanyreceivablefromLCPI

and$8millionfromLBSF.
6182SeeMoodys/REALCommercialPropertyPriceIndex,NewYorkCityMetroArea,Q42000Q22009,
availableat,http://web.mit.edu/cre/research/credl/rca.html.

1630

(h) LBDerivativeProducts
LBDP is a termination derivative product company that intermediates interest
rate and currency swaps between market counterparties and LBSF. In order for
investmentbankslikeLehman,whichareratedbelowAAorAAA,totradewithcertain
highly rated counterparties, banks establish derivative product companies that can
maintain a high rating from the rating agencies. In general, these AAA ratings are
dependent on certain criteria, the most visible of which are: (1) hedging market risk
through backtoback transactions or mirror transactions with another corporate
entity; (2) minimizing counterparty credit risk with the hedging counterparty by
requiringcollateralonnegativemarktomarketexposurestothecounterparty;and(3)
maintainingstrictcapitalrequirements.6183
LBDP entered into a variety of derivative transactions and eliminated market
riskbyenteringintomirrortransactionswithLBSF,whichwereguaranteedbyLBHI.
As a termination structure, LBDP would provide for the acceleration and cash
settlement of all contracts before their maturity upon certain events.6184 Furthermore,
LBDP purchased a surety bond from Ambac Assurance Corp., which guaranteed that
itsobligationstocounterpartieswouldbefulfilled.6185

6183Standard&PoorsRatingsDirect,LehmanBrothersDerivativeProductsInc.(Feb.4,2000).
6184Lehman,

Lehman Brothers Derivatives Products Operating Guidelines, Article X (July 16, 1998)
[LBEXBARLEG00018240001885];ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.5.
6185Standard&PoorsRatingsDirect,LehmanBrothersDerivativeProductsInc.,atp.2(Feb.4,2000).

1631

LBDPsassetsconsistedalmostentirelyofinterestrateswapsandmoneymarket
instruments.ItsbalancesheetsasofMay31,2008,andAugust31,2008,areasfollows:

LB Derivative Products Inc

Balance Sheet Items at:

May 31, 2008 August 31, 2008

CASH & CASH EQUIVALENTS

SEC. & OTHER FININANCIAL INSTRUMENTS OWNED
RECEIVABLES- CUSTOMERS

86,538,624

5,745,136

432,292,498

756,349,084

7,600,000

RECEIVABLES- BROKER/DEALER

7,720,095

99

514,973

674,972

TOTAL ASSETS

534,666,190

762,769,292

SEC.& OTHER INSTRUMENTS SOLD NOT YET PURCHASED

375,222,833

488,716,675

PAYABLES- CUSTOMERS

10,266,440

ACCD LIABILITIES & OTHER PAY.

91,767,234

66,595,639

SUBORDINATED INDEBTEDNESS

10,000,000

10,000,000

487,256,507

565,312,314

100

100

RETAINED EARNINGS

22,409,683

22,456,978

TOTAL ADDITIONAL PAID IN CAPITAL

24,999,900

174,999,900

TOTAL STOCKHOLDER'S EQUITY

47,409,683

197,456,978

534,666,190

762,769,292

RECEIVABLES- OTHER
DEFFERED EXPENSE & OTHER ASSETS

TOTAL LIABILITIES
COMMON STOCK

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

TheincreaseinLBDPsstockholderequitybetweenMay31,2008,andAugust31,
2008, was largelydue to acapital infusion of $150millionreceivedfromLBI,through
LBHI, on June 12, 2008.6186 This capital infusion was in response to the downgrade of
Ambac,LBDPsinsurer,andwasrequiredinordertomaintainLBDPsAAArating.6187

6186Lehman,DailyTreasuryMISasof6/12/08[LBEXDOCID552032].
6187EmailfromJ.Palumbo,Ernst&Young,toW.SchlichandJenniferJackson,Ernst&Young,(Jun.8,

2008) [EYLELBHIKEYPERS 257754]; email from J. Goodman, Lehman, to C. OMeara and V.

DiMassimo,Lehman(June6,2008)[LBHI_SEC07940_781486].

1632

LBDP was consistently rated AAA by S&P until it was placed on CreditWatch
with negative implications on September 25, 2008. The entitys operating guidelines
provide for the termination of all outstanding swaps should the following events
occur:6188

LBDPceasedtomaintainanArating;

LBSF fails to deliver the required collateral under the backtoback

transactionswithinatwodaycureperiod;

LBDPfailstomaintainthecapitalrequired;or

LBHIorLBSFfileforbankruptcyprotection.

In this case, the termination trigger was the bankruptcy filing of LBHI on
September15,2008.
Because the Examiner finds, for purposes of a solvency analysis, that there is
insufficient evidence to conclude that LBDPs derivative assets were marked
unreasonably, there is also insufficient evidence to support a finding that LBDP was
insolvent during the period in question. The Examiner concludes that LBDP was
balancesheetsolventonMay31,2008,andAugust31,2008.
(i) LBFinancialProducts
LBFP was established for the purpose of engaging in overthecounter interest
rate and currency swaps and options, as well as trading exchangetraded futures and
options,andgovernmentbondsandoptions.SimilartoitssistercompanyLBDP,LBFP

6188Lehman, Lehman Brothers Derivatives Products Operating Guidelines, Article X, at p. 25 (July 16,

1998)[LBEXBARLEG00018240001885].

1633

wasaderivativeproductcompany.Assuch,iteliminatedmarketriskbyenteringinto
offsettingmirrortransactionswithLBSF,whichwasunconditionallybackedbyLBHI,
and was bound by strict capital requirements. However, unlike LBDP, which had a
terminationstructure,LBFPwasacontinuationderivativeproductcompanythatwould
maintainitsderivativepositionsthroughmaturity,evenuponatriggerevent.6189
LBFPsassetsconsistedalmostentirelyofinterestrateswapsandmoneymarket
instruments.ItsbalancesheetsasofMay31,2008,andAugust31,2008,areasfollows:

LB Financial Products Inc.

Balance Sheet Items at:

May 31, 2008 August 31, 2008

(56,027)

CASH & CASH EQUIVALENTS

SEC. & OTHER FININANCIAL INSTRUMENTS OWNED

530,169,151

1,430,613
548,897,873

106

3,504

5,889,140

5,779,137

TOTAL ASSETS

536,002,370

556,111,126

SEC.& OTHER INSTRUMENTS SOLD NOT YET PURCHASED

220,854,048

237,596,839

25,142,974

29,705,786

245,997,022

267,302,625

10

10

RECEIVABLES- OTHER
DEFFERED EXPENSE & OTHER ASSETS

ACCD LIABILITIES & OTHER PAY.

TOTAL LIABILITIES
COMMON STOCK

39,871,006

38,674,159

TOTAL ADDITIONAL PAID IN CAPITAL

250,134,332

250,134,332

TOTAL STOCKHOLDER'S EQUITY

290,005,348

288,808,502

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

536,002,370

556,111,126

RETAINED EARNINGS

LBHIs bankruptcy filing automatically placed LBFP into continuation mode,

forcingLBFPintoawinddownphaseastheentitieswereintertwinedtoagreatextent,

6189Lehman, Lehman Brothers Financial Products Inc. Operating Guidelines [LBEXBARLEG 0001886

0001933];ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.5.

1634

withLBHIplayingbothoperationalandfinancialrolesforLBFP.6190LBFPsassetswere
primarily interest rate swaps and money market instruments. As a continuation
structure, LBFP would not terminate these positions with counterparties upon a
triggeringevent.Instead,acontingentmanagerwouldassistinmanagingtheportfolio
untilfinalmaturityandtakeresponsibilityforhedgingtheportfolioagainstinterestrate
movements.AtthetimeofLBFPsvoluntarybankruptcyfiling,however,thestatusof
theoutstandingderivativespositionswasunclear.6191
TheExaminerfindsinsufficientevidencetosupportafinding,forpurposesofa
solvencyanalysis,thattheassetsheldbyLBFPwereunreasonablymarked.Therefore,
the Examiner concludes that LBFP was balance sheet solvent on May 31, 2008, and
August31,2008.
(j) LBCommercialCorporation
LBCC acted primarilyasa dealerinoverthecounter(OTC)foreign currency
forwards and options and exchangetraded futures and futures options. LBCCs
balancesheetsasofMay31,2008,andAugust31,2008,wereasfollows:

6190Examiners

Interview of Michael Montella, Oct. 26, 2009, at p. 5; Standard & Poors, Lehman Bros
FinancialProdRatingsPutonWatch;LehmanBrosDerivativeProdRatingsAffirmed,Sept.25,2008.
6191Lehman, Lehman Brothers Financial Products Inc. Operating Guidelines, [LBEXBARLEG 0001886
0001933]; Standard & Poors, Lehman Bros Derivative Product Rts Cut, Put on Watch Neg; Lehman Bros
FinancialProductRtsCut,Oct.6,2008.

1635

LB Commercial Corp.
Balance Sheet Items at:

May 31, 2008 August 31, 2008

678,036

23,755

SEC. & OTHER FININANCIAL INSTRUMENTS OWNED

1,356,600,864

912,862,084

RECEIVABLES- BROKER/DEALER

1,250,349,674

1,264,899,973

CASH & CASH EQUIVALENTS

RECEIVABLES- CUSTOMERS
RECEIVABLES- OTHER

13,541,462

1,716,562

702,816,861

939,587,074

(803)

DEFFERED EXPENSE & OTHER ASSETS

(803)

3,323,986,094

3,119,088,646

773,420,701

1,301,089,939

9,402,088

608,606,177

468,207,184

79,895,667

77,720,011

ACCD LIABILITIES & OTHER PAY.

1,631,146,162

1,058,172,121

TOTAL LIABILITIES

3,093,068,707

2,914,591,343

1,000

1,000

TOTAL ASSETS
SEC.& OTHER INSTRUMENTS SOLD NOT YET PURCHASED
COMMERCIAL PAPER & S.T. DEBT
PAYABLES- BROKER/DEALER
PAYABLES- CUSTOMERS

COMMON STOCK

(211,560)

RSU MTM APPRECIATION

RETAINED EARNINGS
TOTAL ADDITIONAL PAID IN CAPITAL
TOTAL STOCKHOLDER'S EQUITY
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

(211,560)

219,827,971

193,407,886

11,299,976

11,299,976

230,917,387

204,497,303

3,323,986,094

3,119,088,646

A reviewof LBCCs balancesheet revealsthatLBCCsfinancialinventoryas of

May31,2008,andAugust31,2008,wascomprisedentirelyofderivatives.Asampleof
thesederivativeswasreviewedandaresummarizedbelow.TheremainderofLBCCs
assetsasofthesedateswaslargelyreceivables.

1636

LB Commercial Corporation
Total Financial Instruments Owned (Assets)
GAAP Asset Class
Commercial Paper & Money Market

as of 5/31/08 % of Total as of 8/31/08 % of Total

(27,625,745)

-2.04%

(48,950,953)

-5.36%

760,551,422
623,334,582
1,383,886,004

56.06%
45.95%
102.01%

393,277,657
568,535,577
961,813,234

43.08%
62.28%
105.36%

887

0.00%

0.00%

Governments & Agencies

204,987

0.02%

0.00%

Mortgages & Mortgage Backed

134,731

0.01%

(197)

1,356,600,864

100.00%

912,862,084

Third Party Derivatives

Intercompany Derivatives
Total Derivatives
Corporate Debt

0.00%
100.00%

AsdescribedinSectionIII.A.2,theExaminerhasfoundinsufficientevidenceto
support a finding that Lehmans derivatives positions, as an asset class, were
unreasonablymarked.Additionally,theExaminerevaluatedthereasonablenessofthe
valuation of twelve option positions held by LBCC as of May 31, 2008.6192 Lehmans
GFS quotes for price and total dollar value for these positions were evaluated by
comparisontopricequotesfromeitherBloombergorMarketWatch.TheExaminerhas
determinedthatLehmanspricesforthesepositionswerereasonable.
Given the makeup of its assets and the reasonableness of their marks, the
Examinerconcludes thatthere is insufficientevidence to support afinding thatLBCC
wasbalancesheetinsolventasofMay31,2008andAugust31,2008.

6192TheExaminerevaluatedcallandputoptionsonAmericanInternationalGroup,AppleInc.,BPPLC,

Citigroup, Google Inc., and the S&P 500. The GFS ticker symbols for the positions investigated were
QWAPMG, QAPVAP, QQAAAR, QBPAN, QBPMM, QSXYUO, QBPMN, QSXYFS, QCIT, QBPSL,
QGOOFN,andQVAFAO.

1637

(k) BNCMortgageLLC
BNC Mortgage LLC was a subprime mortgage originator. As of May 31, 2008,
andAugust31,2008,itsbalancesheetswereasfollows:

BNC Mortgage LLC

Balance Sheet Items at:

May 31, 2008 August 31, 2008

1,572

1,572

23,843,678

20,335,920

436,122

427,302

TOTAL ASSETS

24,281,373

20,764,794

ACCD LIABILITIES & OTHER PAY.

13,155,418

10,316,050

TOTAL LIABILITIES

13,155,418

10,316,050

COMMON STOCK

25,000,000

25,000,000

CASH & CASH EQUIVALENTS

RECEIVABLES- OTHER
DEFFERED EXPENSE & OTHER ASSETS

(56,305,764)

(56,982,974)

TOTAL ADDITIONAL PAID IN CAPITAL

42,431,718

42,431,718

TOTAL STOCKHOLDER'S EQUITY

11,125,954

10,448,744

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

24,281,373

20,764,794

RETAINED EARNINGS

As detailed above, 98% of BNCs assets consisted of intercompany receivables,

split between receivables from Lehman Brothers Bank and Aurora Loan Services.
GivenBNCssubstantialequity cushion,aswellasthefactthat itslargestassets were
receivables from nondebtor entities, its balance sheet was relatively strong.
Accordingly, the Examiner concludes that there is insufficient evidence to support a
findingthatBNCwasbalancesheetinsolventasofMay31,2008andAugust31,2008.
(l) EastDoverLimited
East Dover Limited was established for the sole purpose of purchasing, leasing
and selling aircraft and related equipment. However, at the time of its bankruptcy
filing, this entity was no longer used for this purpose and held mostly intercompany
1638

receivables and payables. Its balance sheets as of May 31, 2008, and August 31, 2008,
wereasfollows:

East Dover Ltd

Balance Sheet Items at:

May 31, 2008 August 31, 2008

59,605,203

CASH & CASH EQUIVALENTS

SEC. & OTHER FININANCIAL INSTRUMENTS OWNED

(34)

100,373
(0)

49,135,409

109,486,530

117,344

117,344

108,857,921

109,704,246

7,686,388

4,215,167

32,513

30,817

TOTAL LIABILITIES

7,718,901

4,245,983

RETAINED EARNINGS

25,139,020

29,458,263

TOTAL ADDITIONAL PAID IN CAPITAL

76,000,000

76,000,000

TOTAL STOCKHOLDER'S EQUITY

101,139,020

105,458,263

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

108,857,921

109,704,246

RECEIVABLES- OTHER
DEFFERED EXPENSE & OTHER ASSETS
TOTAL ASSETS
ACCD LIABILITIES & OTHER PAY.
COMMERCIAL PAPER S.T. DEBT

AsofMay31,2008,over50%ofEastDoversassetswerederivedfromcash.The
remainingassetsconsistedlargelyof$46millionofintercompanyreceivablesfromLBI
and LCPI. An intercompany receivable from LCPI of $39.1 million comprised 37% of
East Dovers total assets. However, even if LCPI were unable to repay its obligation,
EastDoverhadsufficientequity,$101million,tocoveritsloss.
By August 31, 2008, East Dovers cash had decreased to less than 1% of total
assets and was replaced by a $99 million intercompany receivable from LCPI.
However,inthisinstanceaswell,evenifLCPIwereunabletorepayitsobligation,East
Doverhadsufficientequity$105milliontocoveritsloss.

1639

ThereisinsufficientevidencetosupportafindingthatEastDoverwasinsolvent
and the Examiner concludes that East Dover was balance sheet solvent as of May 31,
2008,andAugust31,2008.
(m) LehmanScottishFinance
LSFwasestablishedforthesolepurposeofholdingequitylinkednotesofother
Lehman entities. Its balance sheets as of May 31, 2008, and August 31, 2008, were as
follows:

Lehman Scottish Finance LP

Balance Sheet Items at:

May 31, 2008 August 31, 2008

CASH & CASH EQUIVALENTS

1,541,639

1,544,815

SEC. & OTHER FININANCIAL INSTRUMENTS OWNED

2,793,978

7,263,935

RECEIVABLES- OTHER

53,032,408

53,914,704

TOTAL ASSETS

57,368,026

62,723,454

TOTAL LIABILITIES

50,000,000

50,000,000

7,368,026

12,723,454

TOTAL STOCKHOLDER'S EQUITY

57,368,026

62,723,454

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY

57,368,026

62,723,454

COMMON STOCK
RETAINED EARNINGS

LSFdidnotpostanyliabilitiesonitsbalancesheetasofMay31,2008,orAugust
31,2008.Thisisconsistentwithitsroleasanonoperatingentitythatwasnotinvolved
in transactions and which was created for the sole purpose of holding equitylinked
notes of other Lehman entities. At the same time, on May 31, 2008, LSFs assets
consisted of $2.8 million in U.S. equities and $53 million in intercompany receivables.
By August 31, 2008, its financial inventory, still consisting entirely of derivatives,

1640

increasedto$7.2million.ThereceivablesreportedbyLSFareprimarilycomprisedof
$9millioninLuxembourgFinance,S.a.r.l.redeemablecommonstockand$40millionin
subordinatedebtpurchasedfromLuxembourgFinance,S.a.r.l.in2007.
Given the lack of any liabilities and the composition of its assets, 93% being
redeemablecommonstockandasubordinateloan,theExaminerconcludesthatthereis
insufficient evidence to support a finding that LSF was balance sheet insolvent as of
May31,2008,andAugust31,2008.
(n) PAMIStatlerArms
PAMIwas aLehmanentitycreatedto own andmanagea variety ofreal estate
properties.Oneofitssubsidiaries,PAMIStatlerArms,wasestablishedtoholdtitleto
theStatlerArmsApartments,a297suiteapartmentcomplexinCleveland,Ohio.PAMI
StatlerArmstookownershipofthebuildinginMay2008.
According to the Chapter 11 petition filed by PAMI Statler Arms, it had $20
millioninassetsand$38.5millioninliabilitiesatthetimeofitsbankruptcyfiling.6193No
financialinformationisavailableforPAMIStatlerArmsinLehmansfinancialsystems.
Given the lack of data available on this entity, as well as the immaterial amount of
assetsinvolved,theExaminerisunabletodrawanyconclusionregardingthesolvency
ofthisentity.

6193Exhibit

A to Voluntary Petition, Docket 1, In re PAMI Statler Arms LLC, No. 0813664 (Bankr.
S.D.N.Y.Sept.22,2008).

1641

d) UnreasonablySmallCapital
As set forth supra, the avoidance of a prepetition transfer as constructively
fraudulent requires, among other things, one of three measuresof a debtors financial
condition to be satisfied: insolvency, unreasonably small capital, or an inability to
pay debts as they come due.6194 This Section addresses whether, and as of what date,
there is evidence sufficient to establish a finding that LBHI or an LBHI Affiliate had
unreasonablysmallcapital.Becauseofthefactintensivenatureoftheunreasonably
smallcapitaltest,thisSectiondrawsextensivelyuponthefactsandfindingssetforth
more fully in other Sections of this Report, but repeats those facts to the extent
necessarytoprovideclaritytothediscussionofundercapitalization.
Giventherelativelylimitednumberofreportedcasesapplyingtheunreasonably
smallcapitaltest,ascomparedtotheinsolvencytest,theunreasonablysmallcapitaltest
canfairlybecharacterizedasanalternativetestthatacourtmayconsiderintheevent
that it determines that the debtor was not insolvent as of the date of the challenged
transfer. As noted by Judge Richard Posner in a recent Seventh Circuit decision, the
unreasonably small capital test allows a court to assess the avoidability of a given
prepetitiontransferwithoutnecessarilyhagglingoverwhetheratthemomentofthe

6194See11U.S.C.548(a)(1)(B)(ii).

1642

transferthecorporationbecametechnicallyinsolvent,aquestionthatonlyaccountants
couldrelishhavingtoanswer.6195
This test seems particularly apt in the Lehman matter, as the unreasonably
smallcapitaltestcanallowafactfindertotakeabroaderviewofcertainrisks,suchas
liquidityrisk,thatarenotnecessarilyreflectedonabalancesheet.Financialinstitutions
such as Lehman have a relatively greater risk of failure due to a lack of liquidity, as
comparedtoariskoffailureduetothevalueoftheirliabilitiesexceedingthefairvalue
oftheirassets.AsnotedbyPaulShotton,LehmansGlobalHeadofRiskControl,inthe
aftermath of the near collapse of Bear Stearns, [l]iquidity is more important than
capital; most entities which go bankrupt do so because they run out of financing, not
becausethevalueoftheirassetsfallsbelowthevalueoftheirliabilities.6196
Accordingly,andinlightofthepurposeofthefraudulentconveyancelawsto
ensurethatpropertytransferredbythedebtorforlessthanreasonablyequivalentvalue
duringtheapplicableperiodisavailablefordistributiontothedebtorscreditorsthe
Examinerhasdeterminedthatitisprudenttoaddresstheunreasonablysmallcapital
test.
The Examiner emphasizes that a finding of unreasonably small capital is
germane only to the narrow question of evaluating the viability of certain claims to

6195Boyerv.CrownStockDistrib.,Inc.,587F.3d787,794(7thCir.2009).
6196See

Email from Paul Shotton, Lehman, to Christopher OMeara, Lehman (Apr. 15, 2008)
[LBHI_SEC07940_768467].

1643

avoid transfers as constructively fraudulent under Section 548(a)(1)(B) of the

Bankruptcy Code or under analogous sections of applicable state law. As
unreasonablysmallcapitaldenotesafinancialconditionshortofinsolvency,afinding
of unreasonably small capital is not relevant to evaluating claims that require a
finding of insolvency as one of their essential elements.6197 Moreover, a finding that a
transferisconstructivelyfraudulentdoesnotrequireorimplyafindingthatapartyto
thetransfercommittedanybadacts.6198Rather,thepurposeoffraudulentconveyance
lawistoprotectcreditorsfromlastminutediminutionsofthepoolofassetsinwhich
theyhaveinterestsandnottoidentifyorpunishbadactors.6199Forthesereasons,the
Examiners application of the unreasonably small capital test is relevant only to his
consideration of constructively fraudulent avoidance claims and is discussed only in
thatcontext.
As set forth in detail below, the Examiner has identified evidence that would
supportadeterminationbyafinderoffactthatLBHI,andeachoftheLBHIAffiliates
that relied on LBHI to provide funding or credit support, had unreasonably small
capital beginning early in the third quarter of 2008 and continuing through to the
applicablepetitiondate.TheExaminerhasalsoidentifiedevidencethatwouldsupport

6197 See Pereira v. Farace, 413 F.3d 330, 343 (2d Cir. 2005) (holding that a cash flowbased analysis that

projectsintothefuturetodeterminewhethercapitalwillremainadequateovertimeisnotrelevantto
determiningwhetheracorporationisinsolventundertheapplicableDelawarelaw.);butseeASARCO
LLCv.AmericasMiningCorp.,396B.R.278,395(Bankr.S.D.Tex.2008).
6198SeeInreFBNFoodServs.,Inc.,82F.3d1387,1394(7thCir.1996).
6199BondedFin.Servs.,Inc.v.EuropeanAmericanBank,838F.2d890,892(7thCir.1988).

1644

a contrary finding. As such, a future finder of fact would need to weigh carefully all
evidence to determine whether the unreasonably small capital element is satisfied.
Becauseconflictingevidenceexistsandbecausetheunreasonablysmallcapitaltestis
fuzzy6200andinfrequentlyconsideredbycourts,theExaminerexpressesnoopinionas
tohowsuchafinderoffactwouldfind.
(1) Summary
The unreasonably small capital test is a forwardlooking analysis that
considerswhether,andatwhatpoint,adebtorcouldhavereasonablyprojectedthatit
faced an unreasonable risk of insolvency given its business model and financial
condition.6201 As a highly leveraged investment bank that required tens of billions of
dollarsinovernightfunding,Lehmansprimaryinsolvencyriskwasthatitwouldnot
have sufficient funds to satisfy its debts asthey came due.6202 Thisrisk, referred to as
liquidityrisk,differsfrombalancesheetinsolvency,theconditionwherethefairvalue
oftheentitysassetsislessthanitsliabilities.

6200Boyerv.CrownStockDistribution,Inc.,587F.3d787,794(7thCir.2009).
6201SeeBoyerv.CrownStockDistrib.,Inc.,No.1:076CV409RM,2009WL418275,at*11(N.D.Ind.Feb.17,

2009) (describing the unreasonably small capital test as forwardlooking, requiring consideration of
liabilities the debtor would incur or contemplated transactions for which the remaining assets were
unreasonablysmall),affdinpart,revdinpart,Boyer,587F.3dat787;seealsoBrandtv.Hicks,Muse&Co.,
Inc. (In re Healthco Interl), 208 B.R. 288, 302 (Bankr. D. Mass. 1997) (describing unreasonably small
capitalasanunreasonableriskofinsolvency,notnecessarilyalikelihoodofinsolvencythatissimilar
to the concept of negligence, which is conduct that creates an unreasonable risk of harm to anothers
personorproperty);cf.InreVadnaisLumberSupply,Inc.,100B.R.127,137(Bankr.D.Mass.1989)(noting
thatunreasonablysmallcapital...encompassesdifficultieswhichareshortofinsolvencyinanysense
butarelikelytoleadtoinsolvencyatsometimeinthefuture).
6202Although Lehman and other investment banks measured their capital adequacy according to
metrics such as net leverage ratios and CSE Capital Ratios, as discussed below, these metrics do not
adequatelymonitororaddressaninvestmentsbanksliquidityrisk.

1645

Lehmanrelieduponrepofundingaformofshorttermsecuredfinancingto
support a substantial part of its less liquid assets.6203 After the near collapse of Bear
Stearns, Lehman recognized that its ability to obtain such financing was more
dependentonthemarketsconfidenceinLehmansviabilitythantheactualvalueofthe
underlyingassetbeingfinanced.6204Afterhavingengagedinacountercyclicalstrategy
ofincreasingitsrealestateassetsaswellasincreasingitspositionsinleveragedloans,
privateequityandotherlessliquidassets,bylate2007,Lehmanrecognizedtheneedto
reduce its firmwide leverage. By January 2008, Fuld had ordered Lehman to cut its
balancesheetinhalf,andbythesecondquarterof2008,Lehmanreversedcourseand
executedadeleveragingplaninthesecondquarterof2008towinbacktheconfidence
of the market and Lehmans lenders.6205 Notwithstanding Lehmans execution of this
plan, the market did not respond as Lehman had anticipated.6206 As discussed below,
sufficientevidenceexiststosupportadeterminationthatLehmankneworshouldhave
known that, beginning early in the third quarter of 2008, there was a reasonable

6203Lehman

defined less liquid inventory positions as including derivatives, private equity

investments,certaincorporateloans,certaincommercialmortgagesandrealestatepositions.Lehman
BrothersHoldingsInc.,QuarterlyReportasofFeb.29,2008(Form10Q),atp.68(filedonApr.9,2008)
[LBEXDOCID1024435](LBHI10Q(Apr.9,2008)).
6204See, e.g., Email from Paul Shotton, Lehman, to Chris OMeara, Lehman (Apr. 15, 2008)
[LBHI_SEC07940_768467].
6205ErinCallan,Lehman,LeverageAnalysis[Draft](Apr.7,2008),atp.1[LBEXDOCID1303158].
6206StartinginJune2008,Lehmanssharepricewasapproachingits52weeklow,wouldsoonfallbelow
$30pershareandwouldnotagainreturntothatlevel.SeealsoBenLevisohn,Lehman:IndependentforHow
Long? The diversified investment bank does not have the requisite strength or size for the current environment.
But suitors are holding back for now, Business Week, June 11, 2008, available at
http://www.businessweek.com/investor/content/jun2008/pi20080610_650233.htm) (The market believes
Lehman hasnt fully cleaned up its balance sheet and that the worst is still to come, managements
assurancesnotwithstanding.).

1646

possibility,orrisk,thatLehmanwouldsufferamateriallossofmarketconfidenceinits
nearfuture,andthatthislossofconfidencewouldmanifestitselfasalossofabilityto
financeitslessliquidassetsthroughtherepomarket.
ThenextstepistoassesswhetherLehmanwasreasonablypreparedtoabsorbor
addressthisreasonablyforeseeablerisk.FollowingtheBearStearnsevent,theSECand
theFRBNYrequestedthateachoftheCSEsdevelopliquiditystressteststhataddressed,
among other things, a significant loss of repo financing of less liquid assets.6207
AlthoughLehmanprojectedthatitcouldsurvivesuchastressevent,thereissufficient
evidence to support a determination that certain of these projections were based on
assumptionsthatfailedtotakeintoaccountfactorsthatLehmanknew,orshouldhave
known, would directly impact its liquidity position in a stress event. In particular,
Lehman assumed that its clearing banks would provide unsecured credit on an intra
daybasisandthatoperationalfrictionwouldnothaveamaterialimpactonitsliquidity,
ineachcaseduringtheprojectedstressevent.
For the reasons discussed below, the Examiner finds that sufficient evidence
existstosupportafindingthat,beginninginthethirdquarterof2008andatalltimes
througheachapplicablepetitiondate,LBHIandeachoftheLBHIAffiliatesthatrelied
on LBHI to provide funding or credit support had unreasonably small capital to
engageintheirbusinesses.

6207Joint

Request of SEC and FRBNY: Liquidity Scenarios for CSEs (May 20, 2008),
[LBHI_SEC07940_505195].

1647

(2) AnalysisoftheUnreasonablySmallCapitalTest
(a) SummaryofLegalStandard6208
Courts and commentators have recognized that the criteria for determining
whetheracompanyhasunreasonablysmallcapitalarenotclearlydefined.6209There
isagreement,however,thattheunreasonablysmallcapitaltestisaforwardlooking
analysisthatexaminesnotonlyhowacompanyisperformingatagivenpointintime,
but also whether the company had sufficient resources to withstand reasonably
foreseeable downturns in its performance or in the broader market in which it
operates.6210
Todeterminewhetheracompanyhasunreasonablysmallcapital,courtshave
assessedboththenatureoftheenterpriseitselfandtheextentoftheenterprisesneed
forcapitalduringtheperiodinquestion.6211Inconductingthisanalysis,courtslookat

6208The legal standard for unreasonably small capital is discussed more fully in Appendix 1, Legal

Issues,atSectionIV.A.2.b.
6209In re Best Products Co., Inc., 168 B.R. 35, 54 (Bankr. S.D.N.Y. 1994) (noting that the test is far from
clear). There is no statutory definition of the term unreasonably small capital (or its equivalent,
unreasonably small assets) under the Bankruptcy Code or applicable state law. The unreasonably
small capital test requires judicial consideration of the overall state of affairs surrounding the
corporationandthechallengedtransferitself,andthusisgenerallyanalyzedandappliedonacaseby
casebasis.InreSuburbanMotorFreight,Inc.,124B.R.984,99899(Bankr.S.D.Ohio1990);seealsoCredit
Managers Assn of So. Cal. v. Federal Co., 629 F. Supp. 175, 183 (C.D. Cal. 1985) (describing the
unreasonablysmallcapitaltestasaquestionoffactthatmustbeascertainedonacasebycasebasis);
Barrettv.ContinentalIll.NatlBank&TrustCo.,882F.2d1,4(1stCir.1989)(Unreasonablyisclearlya
relativetermanddemands,forthepurposesof[Section5oftheUFCA],thesortofrelative,contextual
judgment which looks to both the ends served by 5 and the overall state of affairs surrounding the
transferorcorporationandthechallengedtransferitself.).
6210Moody v. Sec. Pacific Bus. Credit, Inc., 971 F.2d 1056, 1074 (3d Cir. 1992) (The critical question is
whetherthepartiesprojectionswerereasonable.);seealsoBoyer,2009WL418275,at*11;InreHealthco
Intl,208B.R.at302.
6211Barrett,882F.2dat4.

1648

allreasonablyanticipatedsourcesofoperatingfunds,whichmayincludenewequity
infusions, cash from operations, or cash from secured or unsecured loans over the
relevanttimeperiod.6212Inaddition,acompanymustaccountfordifficultiesthatare
likelytoarise,6213andotherwiseincorporatesomemarginforerror.6214Theobjectof
an unreasonably small capital analysis is to determine the moment . . . that
bankruptcyisaconsequencebothlikelyandforeseeable.6215
Application of the unreasonably small capital test to Lehman involves a fact
intensive twostep analysis. The first inquiry is whether and at what point it was
reasonably foreseeable that Lehman was at risk of losing access to the financing it
required to operate its business and to satisfy its obligations as they came due. The
secondinquiryiswhetherLehmansliquiditystresstests,whichprojectedthatLehman
couldsurviveaperiodduringwhichitwouldobtainreducedlevelsoffinancing,were
reasonablyconstructed.

6212Moody,971F.2dat1072n.24.
6213Id;InreTOUSA,Inc.,B.R.,Bankr.No.0810928,Adv.No.081435JKO,2009WL3519403,at*74

(Bankr. S.D. Fla. Oct. 30, 2009) (describing the test as whether a company has sufficient capital to
support operations in the event that performance is below expectations) (emphasis added); Carpenter v.
Roe,10N.Y.227,232(1851)(invalidatingaprebankruptcytransfermadeatatimewhenthedebtorwas
indebted,andhadreasontobelievethatinsolvencywouldbetheinevitableorprobableresultofwantof
success in the business in which he was engaged); In re Iridium Operating LLC, 373 B.R. at 344 (Bankr.
S.D.N.Y.2007).
6214Moody,971F.2dat1073.
6215Boyer,587F.3dat794.

1649

(b) LehmansCountercyclicalStrategy
InAugust2006,Lehmandecidedtopursueastrategytosignificantlyincreaseits
subprime lending and commercial real estate financing businesses.6216 In 2007, as the
subprime residential mortgage market deteriorated, Lehman made a countercyclical
betoncommercialrealestateontheassumptionthatthesubprimecrisiswouldnotspill
overintothecommercialmarket.6217AsignificantelementofLehmansstrategywasto
monetize certain of these assets through syndication or securitization.6218 Lehman
described itself in itsForm10Q forthethird quarterof 2006asthe marketleader in
mortgage and asset backed securitizations and other structured financing
arrangements.6219

6216See

Email from Jeffrey Goodman, Lehman, to Madelyn Antoncic, Lehman, et al. (Aug. 23, 2006)
[LBEXDOCID 1368052]; see also Ronald Marcus, U.S. Department of the Treasury, Office of Thrift
Supervision,ExaminersReportofLehmanBrothersHoldingsInc.(July7,2008),atpp.12(describingthe
strategicdecisiontogrowthebalancesheetasanoutsizedbetonrealestate.).
6217 Examiners Interview of Richard S. Fuld, Jr. Sept. 30, 2009, at pp. 1415; Examiners Interview of
JosephGregory,Nov.13,2009,atpp.78;ExaminersInterviewofMarkA.Walsh,Oct.21,2009,atpp.7
9.
6218SeeLehmanBrothersHoldingsInc.,AnnualReportforFY2007asofNov.30,2007(Form10K)(filed
onJan.29,2008),atp.104(LBHI200710K)(describingLehmansintenttosellthroughsecuritization
orsyndicationactivities,residentialandcommercialmortgagewholeloansweoriginate,aswellasthose
weacquireinthesecondarymarket);seealsoBinyaminAppelbaum,etal.,Fedsapproachtoregulationleft
banks exposed to crisis, Wash. Post, Dec. 21, 2009, available at http://www.washingtonpost.com/wp
dyn/content/article/2009/12/20/AR2009122002580.html (Rather than wait for borrowers to repay loans,
banks were adopting a technique called securitization. The banks created pools of loans and sold
investors the right to collect portions of the inflowing payments. The bank got its money upfront.
Equally important, under accounting rules it was allowed to report that the loans had been sold, and
thereforeitdidnotneedtoholdanyadditionalcapital.Butinmanycases,thebankstillpledgedtocover
lossesifborrowersdefaulted.).
6219LehmanBros.HoldingsInc.,QuarterlyReportasofAug.31,2006(Form10Q)(filedonOct.10,2006),
atp.18.

1650

TimothyGeithner,thethenPresidentoftheFRBNY,describedsecuritizationina
June9,2008speechasa$2.2trillionparallelfinancialsystemoutsideofthetraditional
bankingsystem.6220The assetssofinancedwere assumed to bereadilysaleableatfair
values, and the liquidity supporting them was assumed to be continuous and
essentiallyfrictionless,becauseithadbeensoforalongtime.6221
In 2007, it became apparent that the market for assetbacked securities (ABS)
begantobecomemoreilliquidinlightoftheweakperformanceofsuchsecuritiesthat
werebackedbysubprimemortgages:
Assetbacked securities . . . experienced the greatest degree of stress in
2007. The loss of the value of subprime mortgages throughout the year
led to growinguncertaintyaboutthe valueofcreditinstrumentssuchas
collateralizeddebtobligations(CDOs)thatoftenincludedsuchsubprime
mortgages in what investors and ratings agencies had previously
consideredhighqualityassets.6222
FRBNY President Geithner described the state of the securitization markets
beginning in late 2007 as follows: The funding and balance sheet pressures on banks
were intensified by the rapid breakdown of securitization and structured finance
markets. Banks lost the capacity to move riskier assets off their balance sheets, at the

6220FRBNY

President Timothy F. Geithner, Reducing Systemic Risk In A Dynamic Financial System,

Transcript of Remarks to The Economic Club (June 9, 2008), available at
http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html (In early 2007, assetbacked
commercialpaperconduits,instructuredinvestmentvehicles,inauctionratepreferredsecurities,tender
optionbondsandvariableratedemandnoteshadacombinedassetsizeofroughly$2.2trillion.).
6221Id.
6222Senior Supervisors Group, Observations on Risk Management Practices during the Recent Market
Turbulence(Mar.6,2008)atp.1,availableathttp://www.newyorkfed.org/newsevents/news/banking/2008/
SSG_Risk_Mgt_doc_final.pdf.

1651

sametimetheyhadtofund,ortopreparetofund,arangeofcontingentcommitments
overanuncertaintimehorizon.6223
Thedisruptionsinthesecuritizationmarketputpressureonthebalancesheetsof
majorinvestmentbanks,asnotedbyS&PinaNovember2007report:
Recent disruptions in the subprime market and its contagion effects into
the leveraged finance, assetbacked commercial paper (ABCP), and CDO
spaces have substantially curtailed market liquidity. The sudden loss of
appetite for subprime and other highyield exposure has significantly
narrowedthesemarkets,whileuncertaintyregardingassetvaluationsleft
manyinstitutionsunabletounwindexposuresatfairmarketprices...As
aresult,themarketsfortheseassetshaveconsiderablyshrunk,whilethe
spiral effects have led to concerns with respect to the brokerdealers
fundingliquidityrisk.6224
Lehman,inaSeptember2007presentationtotheFinanceCommitteeofitsBoard
ofDirectors,observedthatthecommercialpaper,structuredfinanceandotherfinancial
markets had experienced significant turmoil in 2007.6225 Such turmoil began with
initial tremors in the subprime mortgage market at the end of 2006, and then spread
withthefailureoftwohedgefundsoperatedbyBearStearnsthatwereheavilyexposed
tosubprimemortgageloansinJune2007.6226Lehmanobservedthat,byJuly2007,the
fearofcontagionhadspreadtoothermarketscausingaroutinallcreditproducts,of

6223FRBNYPresidentTimothyF.Geithner,TranscriptofRemarkstoTheEconomicClub,NewYorkCity,

New York, Reducing Systemic Risk In A Dynamic Financial System, (June 9, 2008), available at
http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html.
6224Diane Hinton, S&P, Liquidity Management In Times Of Stress: How The Major U.S. BrokerDealers Fare,
S&PRatingsDirect,Nov.8,2007,atpp.23[LBHI_SEC07940_439424].
6225Lehman,PresentationtotheFinanceCommitteeoftheBoardofDirectors,Risk,Liquidity,Capital&
BalanceSheetUpdate:RiskUpdate(Sept.11,2007),atp.4[LBEXDOCID505941].
6226Id.

1652

every rating including all the way up to AAAbonds.6227 Lehman concluded that the
assetbacked commercial paper market was facing challenging conditions, with very
little liquidity and that [f]unding for almost any type of mortgage or ABS product
driedup.6228
As Lehman executed its countercyclical strategy and the securitization and
structuredfinance markets deteriorated, the size of Lehmans balance sheet increased.
Lehmans reported gross assets grew from $504 billion at the end of FY 2006 to $691
billion by the end of FY 2007,6229 and its net assets grew by a similar proportion, from
$269billionto$373billionoverthesametimeperiod.6230Althoughbylate2007certain
senior Lehman personnel identified the need for Lehman to reduce the firmwide
leverage,Lehmansbalancesheetcontinuedtogrowthroughtheendofthefirstquarter
of2008,withgrossassetsofapproximately$786billionandnetassetsofapproximately
$397billion.6231Lehmansnetleverageratio,whichmeasuredtheratioofLehmansnet
assetsagainstitstangibleequitycapitalbase,6232increasedfrom14.5xattheendoffiscal

6227Id.
6228Id.
6229LBHI200710K,atp.29.
6230Id.Lehmancalculatednetassetsbystartingwithtotalassetsandexcludingfromthatamountthe

following three categories: (i) cash andsecuritiessegregatedandon deposit for regulatoryreasons and
otherpurposes;(ii)collateralizedlendingagreements;and(iii)identifiableintangibleassetsandgoodwill.
Id.atp.30n.3.
6231LBHI10Q(Apr.9,2008),atp.72.
6232Lehman defined tangible equity capital as stockholders equity and junior subordinated notes
minusidentifiableintangibleassetsandgoodwill.Tangibleequitycapitalwasusedasthedenominator
inLehmansnetleverageratiocalculation.LBHI200710K,atp.29.

1653

year2006to16.1xbytheendoffiscalyear2007.6233Lehmannotedthatitsnetleverage
ratiohadcreptbacktowardthehigherendofthepeergroupinrecentyears.6234
At the end of the second quarter of 2008, Lehman reported a quarterover
quarterreductionof$146.6billionofgrossassets,and$68.9billionofnetassets.6235The
asset reductions, together with the issuance of equity capital, contributed to the
reductioninLehmansgrossleverageratioto24.3xanditsnetleverageratioto12.06x
as ofthe endof thesecondquarterof2008.6236Asdiscussed elsewherein this Report,
Lehmans reportedleverage ratioswere enhanced(thatislowered) by its useofRepo
105 transactions.6237 At the end of the second quarter of 2008, Lehman proclaimed,
basedonitsreportednumbers,thatithaditslowestnetleverageratioinitshistoryas
a public company,6238 and Lehman CEO Richard Fuld stated that Lehmans capital
positionhadneverbeenstronger.6239
(c) LehmansRepoBookandLiquidityRisk
ThereporteddeleveragingofLehmansbalancesheetduringthesecondquarter
of 2008 allowed Lehman to project the appearance of capital adequacy to the extent

6233Id.
6234ErinCallan,Lehman,LeverageAnalysis[Draft](Apr.7,2008),atp.5[LBEXDOCID1303158].
6235Lehman Brothers Holdings Inc., Quarterly Report as of May 31, 2008 (Form 10Q) (filed on July 10,

2008),atpp.56,86(LBHI10Q(July10,2008)).
6236Id.atpp.55,56,89.
6237SeeSectionIII.A.4,whichdiscussesLehmansuseofRepo105/108transactions.
6238Lehman, Capital Adequacy & Liquidity Update (June 4, 2008), at p. 7, [LBHI_SEC07940_513590]
(DespiteaforecastlossinQ208,theactionstakenbyLehmaninthequarterwillresultinthestrongest
capitalandliquiditypositionstheFirmhaseverhad.).
6239FinalTranscriptofLehmanBrothersHoldings,Inc.SecondQuarter2008EarningsCall(June16,2008),
atp.4[LBHI_SEC07940_519082].

1654

measuredintermsoftheratioofitsassetstoitstangibleequitycapitalbase.Asnoted
above,however,LehmansGlobalHeadofRiskControlstatedthat[l]iquidityismore
importantthancapital,6240andLehmanrecognizedthat[l]iquidity,thatisreadyaccess
tofunds,isessentialtoourbusinesses.6241Lehmanwas,likeotherinvestmentbanks,
heavily reliant upon wholesale funding sources to finance the inventory on its
balance sheet.6242 Callan, in an interview after the Bear Stearns event, stated that
[l]iquidityisthethingthatwillkillyouinamoment.6243
Accordingly, the analysis as to whether Lehman had unreasonably small
capitalmustbeginwithLehmansexposuretoliquidityrisk,whiletakingintoaccount
other metrics of capital adequacy. Lehmans liquidity risk arose primarily from its
relianceuponshorttermrepofundingtosupportassetsthatwouldtakelongertosellif
theycouldnotbefinanced,particularlyinastressedenvironment.6244Theothermetrics
of capital adequacy that Lehman measured, such as Lehmans reported cash capital

6240See

Email from Paul Shotton, Lehman, to Chris OMeara, Lehman (Apr. 15, 2008)
[LBHI_SEC07940_768467].
6241LBHI200710K,atp.17.
6242Diane Hinton, S&P, Liquidity Management In Times Of Stress: How The Major U.S. BrokerDealers Fare,
S&PRatingsDirect,Nov.8,2007,atp.2[LBHI_SEC07940_439424].
6243Maria Bartiromo, Lehman CFO Erin Callan: Back from Ugly Monday, Business Week, Mar. 20, 2008,
availableathttp://www.businessweek.com/magazine/content/08_13/b4077023363140.htm?chan=
magazine+channel_the+business+week.
6244See, e.g, Tobias Adrian, et al., The Federal Reserves Primary Dealer Credit Facility, 15 Current Issues In
Economics
and
Finance,
at
pp.
34
(Aug.
2009)
available
at
http://www.newyorkfed.org/research/current_issues (Originally focused on the highest quality
collateralTreasuryandagencydebtrepotransactionsby2008weremakinguseofbelowinvestment
gradecorporatedebtandequitiesandevenwholeloansandtrustreceipts.Thisshifttowardlessliquid
collateral increased the risks attendinga crisis in the market since, in the event of a crisis,selling these
securitieswouldlikelytaketimeandoccuratasignificantloss.).

1655

surplus, its Equity Adequacy Framework and its CSE Capital Ratios, did not fully
account for the nature and extent of Lehmans liquidity risk, especially following the
BearStearnsevent.
(i) BearStearnsDemonstratestheLiquidityRisk
AssociatedwithRepoFinancing
Lehmanwashighlydependentuponrepofunding,6245aformofsecuredlending
structured as a sale of assets and forward commitment to repurchase the same or
similarassetswithaslightmargin.6246Becauserepofundingistypicallyshortterm,and
creditisdesignedtobeprovidedonanoversecuredbasis,6247itwasgenerallyviewedas
a reliable form of shortterm financing, even in a stressed environment.6248 Robert
Azerad,LehmansGlobalHeadofAssetandLiabilityManagement,statedthat,priorto
theBearStearnsevent,liquidity riskmanagerswereconcernedthattheirfirmswould

6245LBHI200710K,atp.17(discussingLehmansrelianceoncontinuousaccesstotherepomarket).
6246FRBNY,

Repurchase and Reverse Repurchase Transactions, Fedpoint, available at

http://www.newyorkfed.org/aboutthefed/fedpoint/fed04.html. The repo market has a long pedigree,
datingbacktotheearly20thcenturywhentheFederalReserveusedreposingovernmentsecuritiesto
eitherdrainoraddliquiditytothebankingsystem.SeeMooradChoudhry,TheRepoHandbook6(2002).
6247For each class or type of asset, there is a haircut provided by the liquidity provider. For lesser
quality collateral, the haircut would be larger. In this manner, the repo counterparty in the event of a
defaultwasabletosellthecollateralsuchthatevenifitwassoldatlessthanpar,solongasitwasnot
soldforlessthanhaircut,therepocounterpartywouldnotsufferaloss.
6248See Lehman, Liquidity Stress Scenario Analysis (Apr. 21, 2008), at p. 8 [LBEXDOCID 008608]
(assertingthat[l]iquidityriskatthebrokerdealersisthoughttobelessofanissuebecausethe[r]epo
marketisthoughttobemuchmorereliablethanunsecuredmarketwitha[l]owcreditriskbecauseof
thecollateralreceivedbythelenderandthehaircutandalsoduetothe[s]ophisticatednatureofmost
lenders.).

1656

lose access to unsecured forms of financing, but not necessarily access to repo
funding.6249
The near collapse of Bear Stearns in March 2008 was a paradigmatic event
because it demonstrated that repo funding, even when supported by relatively high
qualityassets,couldproveunreliableinacrisis.Inanumberofpresentations,Lehman
quotedthenSECChairmanChristopherCoxsobservationsandconclusionsregarding
theliquiditylessonslearnedfromtheBearStearnsevent,wherehedescribedthecause
ofthenearcollapseofBearStearnsasbeginningwithareluctancetodealwithBearon
anunsecuredbasis,whichextendedtosecuredlendingonlessliquidandlowerquality
assetsandlater,aninabilityofBearStearnstoobtainsecuredfinancingevenonhigh
quality agency securities. 6250 Chairman Cox also observed that [t]he Bear Stearns
experiencehaschallengedthemeasurementofliquidityineveryregulatoryapproach,
notonlyhereintheUnitedStatesbutaroundtheworld.6251AzeradtoldtheExaminer
that the Bear Stearns event shattered commonly held assumptions about the
market.6252

6249ExaminersInterviewofRobertAzerad,Sept.23,2009(secondinterview),atp.4.
6250Lehman,LiquidityManagementAtLehmanBrothers,PresentationtotheS&P(May15,2008),atp.20

[LBEXDOCID008669].
6251Id.;seealsoLehman,Leverage,andLiquidity,PresentationtotheFederalReserveUpdateonCapital,
(May 28, 2008), at p. 6 [LBHI_SEC07940_062581]; Lehman, Project Green: Liquidity & Liquidity
Management[Draft](June2008),atp.19[LBHI_SEC07940_844120].
6252ExaminersInterviewofRobertAzerad,Sept.23,2009(secondinterview),atp.4.

1657

(ii) QualityandTenorofLehmansRepoBook
ThenatureandextentofLehmansliquidityriskisdemonstratedthroughabasic
analysis of the composition of Lehmans repo book. Two key criteria that Lehman
monitored were the quality of the repo collateral and the tenor, or term, of the repo
agreements(e.g.,overnight).Lehmandisclosedinitsquarterlyreport,orform10Q,for
the second quarter of 2008 that it had $188 billion of repo financing, $105 billion of
whichwas secured by nongovernment, nonagencycollateral.6253Lehman specifically
trackeditsrepocollateralthatwasnotgovernmentandagencyfixedincomesecurities
governmentandagencysecuritieswereperceivedashighlyliquidformsofcollateral
invirtuallyanymarketcondition.6254AsofMay30,2008,thecompositionofLehmans
nongovernment,nonagencyrepobookwasasfollows:6255
CollateralType
AssetBacksInvestmentGrade
AssetBacksNonInvestmentGrade
C1InvestmentGradeConvertibles
C2NonInvestmentGradeConvertibles

Amount($billion)
25.4
2.0
1.5
2.3

6253LBHI 10Q (Apr. 9, 2008), at pp. 8485. Lehman thus had $83 billion of government and agency

inventorythatwasusedtogenerateshorttermfundingthroughtherepomarket,although$71billionof
this funding was used in matched book transactions to provide financing to Lehmans prime broker
clients(throughreverserepotransactions).Theremaining$12billionofcashgeneratedthroughtherepo
marketwascashforLehmansliquiditypool.SeeEmailfromRobertAzerad,Lehman,toThomasLuglio,
Lehman,etal.(June26,2008)[LBHI_SEC07940_522788].
6254See
FRBNY, System Open Market Account, Fedpoint (Mar. 2009), available at
http:/www.newyorkfed.org/aboutthefed/fedpoint/fed27.html (describing how the New York Fed uses
Open Market Operations to control the money supply by lending money to primary dealers in
governmentsecuritiesinexchangeforhighqualitysecuritiesasgeneralcollateralagainsttherepofunds);
see also FRBNY, Understanding U.S. Government Securities Quotes, Fedpoint (Aug. 2007), available at
http://www.newyorkfed.org/aboutthefed/fedpoint/fed07.html(BecausethemarketforU.S.Government
securitiesisbothglobalandhighlycompetitive,pricestendtobesimilarthroughouttheworld.).
6255Lehman,GlobalLiquidityMIS(May30,2008)atp.20[LBEXDOCID1058911].Notethetotaldiffers
slightlyfromthesumoftheparts,whichwebelieveisduetorounding.

1658

CorporatesInvestmentGrade
CorporatesNonInvestmentGrade
EMG(EmergingMarketsbonds)
Equities
MoneyMarkets
Muni
PrivateLabelsHighYield
PrivateLabelsInvestmentGrade
ResidentialWholeLoan
Total

12.8
8.2
7.1
23.4
7.3
2.2
2.3
9.9
1.1
105.3

Lehman, for internal reporting purposes, divided its nongovernment, non

agency repo book into two categories: assets that were eligible to be funded by the
FederalReserveandEuropeanCentralBank(ECB),andnoncentralbankeligibleassets.
According to its internal analysis, from May 30, 2008 to July 3, 2008, Lehmans non
government,nonagencyrepobookrangedbetween$105billionand$112billion,and
its nongovernment, nonagency repo book that was also noncentral bank eligible
rangedbetween$60billionand$67billion.6256Inotherwords,approximately60percent
of its nongovernment, nonagency repo book was composed of noncentralbank
eligible assets assets that are less liquid, by definition, because central banks would
notacceptthemascollateral.
Basedonthecategorizationofitsnongovernment,nonagencyrepobookinthe
abovetable,Lehmanwasrelyinguponrepofundingtofinancecertainofitslessliquid
noninvestment grade and high yield assets. Further, by the fall of 2007, Lehman
understoodthatthemarketwasbecominglessliquidforcertainofitsinvestmentgrade

6256Lehman,LiquiditySlides(July29,2008),atp.8[LBEXDOCID1300268].

1659

assets.InaSeptember11,2007presentationtotheFinanceCommitteeoftheBoardof
Directors, Lehman noted that the fear of contagion had spread from subprime
mortgage loans to other credit products of every rating including all the way up to
AAA bonds.6257 In February 2008, it was reported that [t]he seizure in the credit
marketscausedbythecollapseofsubprimemortgagesismakinginvestorsdoubteven
theAAAratedsecuritiesofcompanieswithinvestmentgradecredentials.6258
To the extent that repo funding, which is shortterm in nature, was used to
financelongerterm,lessliquidassets,therewasamaturitymismatchthatcouldexpose
Lehman to liquidity risk. Lehman monitored the tenor of its nongovernment, non
agencyrepofunding,andinaninternalpresentationnotedthat,asoftheendofthefirst
quarter2008,56%ofitsrepofundingwasovernight,andanadditional18%hadaterm
oflessthanoneweek.6259Lehmanacknowledgedthat[d]ailyrefinancingriskishigher
than we would want.6260 By the end of the second quarter of 2008, of its $105 billion
nongovernment,nonagencyrepobook,Lehmanwasfunding42%($43.9billion)onan

6257Lehman, Risk, Liquidity, Capital & Balance Sheet Update: Risk Update, Presentation to the Finance

CommitteeoftheBoardofDirectors(Sept.11,2007)at4[LBEXDOCID505941].
6258AbigailMoses,InvestmentGradeDefaultstoRise,CreditModelsShow(Update2),Bloomberg.com(Feb.
15, 2008), available at http://www.bloomberg.com/apps/news?pid=20601087&sid=aIy82dumycXg&refer=
home.
6259Lehman,FundingLehmanBrothers,(Sept.10,2008),atp.13[LBHI_SEC07940_739985].
6260Lehman,LiquidityUpdate(Apr.1,2008),atp.6[LBEXDOCID1300141].

1660

overnight basis, and an additional 19% ($19.7 billion) with a term of less than two
weeks.6261
Theriskaccompanyingrelianceuponshorttermfunding tosupportlongterm,
illiquid assets was well recognized, particularly in the aftermath of the Bear Stearns
crisis.Forexample,FRBNYPresidentGeithnernotedinhisJune2008speech:
Thescaleoflongtermriskyandrelativelyilliquidassetsfinancedbyvery
shortterm liabilities made many of the vehicles and institutions in this
parallel financial system vulnerable to a classic type of run, but without
the protections such as deposit insurance that the banking system has in
place to reduce such risks. Once the investors in these financing
arrangementsmany conservatively managed money fundswithdrew
or threatened to withdraw their funds from these markets, the system
became vulnerable to a selfreinforcing cycle of forced liquidation of
assets, which further increased volatility and lowered prices across a
varietyofassetclasses.6262
Lehman internally measured and monitored its repo book at risk, which
assessed its repo book in terms of asset quality and tenor of funding in order to
determinehowmuchsecuredfundingLehmancouldexpecttoloseinacrisis.6263Asof

6261Lehman,2008Q2LiquidityMetrics,Version2,(June14,2008),atp.18[LBHI_SEC07940_601022].
6262FRBNY

President Timothy F. Geithner, Reducing Systemic Risk In A Dynamic Financial System,

Transcript of Remarks to The Economic Club (June 9, 2008), available at
http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html.
6263ShortlyaftertheBearStearnsevent,Lehmanrecognizedthatinastressevent,asubstantialportionof
its repo book would be at risk, and Lehman modeled this impact. Lehman, Liquidity Stress Scenario
Analysis(Apr.21,2008),atp.5[LBEXDOCID008608](showing$25.3billionnetlossofsecuredfunding
onthefirstdayofastressevent).AsofJune2008,Lehmanbeganinternallymeasuringitsrepobookat
riskinitsperformanceofstresstests.See,e.g.ApocalypseNowliquidityscenarioasofJune12,2008
[LBEXDOCID 022363]; Apocalypse Now Liquidity Scenario as of July 10, 2008 [LBEXDOCID
1300118].AsofAugust1,2008,LehmanbeganinternallytrackingrepoatriskinitsdailyliquidityMIS
reports.See,e.g.,Lehman,GlobalLiquidityMIS(Aug.1,2008),atp.14[LBEXDOCID1058944](showing
$55.7 billion of repo at risk); Lehman, Global Liquidity MIS (Aug. 4, 2008), at p. 14 [LBEXDOCID
1058945] (showing $56.9 billion of repo at risk). Lehman continued to track this repo book at risk

1661

June12,2008,forexample,Lehmanprojecteditcouldlose,inastressedenvironment,
approximately$56.7billionofrepocapacityoutofits$107.9billiontotalrepobookfor
nongovernment,nonagencycollateral.6264Thus,aftertheBearStearnsevent,Lehman
wasincreasinglyawareofthenatureandextentofitsliquidityrisk,bothintermsofthe
qualityoftherepobookandthematuritymismatch.
(d) DeleveragingtoWinBackMarketConfidence
Notwithstandingthetechnicalcomplexityoftheirdaytodaybusiness,financial
institutions cannot operate absent the fundamental ability to trade with third parties.
That ability, in turn, requires those potential counterparties to have confidence in the
financialinstitutionspecifically,theinstitutionsabilitytosatisfyitsobligationstoits
counterparties.Inthismanner,asS&PnotedinaMay2008report,investmentbanks
relyontheirreputationsinallaspectsoftheirbusiness,fromfacilitatingtradingand
financialadvisorywork,tofindingnewinvestments,toborrowingcapital.6265Thus,the
most troublesome crisis that these firms can face is a crisis of confidence in the
firm.6266TheimportanceofconfidenceandcredibilitytoLehmansfranchiseisevident
inthematerialsLehmanusedtotrainitstraders,whichemphasizedthat[c]redibility

metric through the week leading up to its bankruptcy filing on September 15, 2008. See, e.g., Lehman,
LiquidityManagementMIS(Sept.8,2008),atp.2[LBEXDOCID022279](showing$56.5billionrepoat
risk);Lehman,LiquidityUpdate(Sept.10,2008),[LBHI_SEC07940_845894],atp.8.
6264ApocalypseNowliquiditystressscenarioasofJune12,2008[LBEXDOCID022363].
6265MatthewAlbrecht,S&P,InvestmentServicesIndustrySurvey(May29,2008),atp.1.
6266Id.

1662

takesyearstoearn,andonedaytolose.6267Azeradconfirmedthatconfidenceisavery
fleetingconceptthatcoulddisappearinaday.6268
Giventhe natureandtheextentofLehmansliquidityrisk, the next step inthe
unreasonably small capital analysis is to assess whether (and if applicable, when)
Lehman could or should have anticipated that it could be faced with a loss of market
confidencethatwouldmateriallyimpairitsabilitytoobtainfinancing.
Immediately following the near collapse of Bear Stearns, Lehman was widely
viewedasoneofthenextmostvulnerableinvestmentbanks.6269EricFelder,Lehmans
US head of Global Credit Products, in a March 26, 2008 email to Herbert Bart
McDade,thethenGlobalHeadofLehmansCapitalMarketsEquitiesGroup,explained
the risk facing Lehman in light of Lehmans repo funding maturity mismatch and the
sizeandilliquidityofLehmansrealestaterelatedinvestments:

6267KentaroUmezaki,Lehman,LehmanBrothers1998LiquidityRiskCaseStudy,atp.13[LBEXDOCID

251244].
6268ExaminersInterviewofRobertAzerad,Sept.23,2009(secondinterview),atp.3.
6269The assessment that Lehman was seen as the next most vulnerable was noted by Federal Reserve

chairman Ben S. Bernanke, former Treasury Secretary Henry M. Paulson, Jr., and present Treasury
Secretary and former FRBNY President Timothy F. Geithner in their interviews with the Examiner.
Examiners Interview of Ben S. Bernanke, Dec. 23, 2009, at p. 3; Examiners Interview of Timothy F.
Geithner, Nov. 24, 2009, at p. 3; Examiners Interview of Henry M. Paulson, Jr., June 25, 2009, at p. 11.
This view reflects reports in the financial press immediately following Bear Stearns. For example, on
March20,2008,an articleappeared onPortfolio.comstating, After the [near] collapse[ofBearStearns],
Wall Streets attention naturally turned to the other investment banks, especially Lehman Brothers,
perceivedasthemostvulnerable.JesseEisinger,TheDebtShuffle:WallStreetcheeredLehmansearnings,
but there are questions about its balance sheet, Portfolio.com (Mar. 20, 2008), available at
http://www.portfolio.com/newsmarkets/top5/2008/03/20/LehmansDebtShuffle.EricFelderforwarded
thearticletoIanLowitt,withthenote,bunchofpeoplelookingatthisarticle.EmailfromEricFelder,
Lehman, to Ian Lowitt, Lehman (Mar. 23, 2008) [LBHI_SEC07940_625905]. Lowitt responded, Doesnt
help.EmailfromIanLowitt,Lehman,toEricFelder,Lehman(Mar.23,2008)[LBHI_SEC07940_625905].

1663

Everyfinancialfailurehasbeentheresultofnotbeingmatchfunded.Im
scared our repo is going to pull and our 7b over overnight [commercial
paper] is going to go away mid april. . . . We need to set up for
[commercialpaper]goingtozeroandameaningfulportionofoursecured
repofading(notbecauseitmakessensebutjustbecause)....Thereality
of our problem lies in our dependence on repo and the scale of the real
estaterelatedpositionswhichwilltakelongertosell.6270
In response to Felders warnings, Ian Lowitt, who was then Lehmans cochief
administrativeofficer(andwhowouldlaterbecomeLehmansCFO),reassuredFelder
by emphasizing the availability of the liquidity pool, Lehmans expectation that it
would be able to obtain temporary funding from central banks, as well as ongoing
effortstodeleveragethebalancesheet:
The[commercialpaper]fadingwilljustcomeoutoftheexcessliquidityin
holdingcompanyliquiditypoolso32bngoesto24.LBIwillbeableto
funditselfviathefedwindowinonewayoranothertogetflatcash.LBIE
is getting securities into form can pledge via bankhaus to the [European
CentralBank],tothetuneof4bnorsobymidApril.Thereisalotofterm
in thesecured funding book. Thedeleveraging focusisnowreal.Itwill
betoughbutwearemuchmoreactivethantheothers....Peopleareon
it.Agreetherewillbeanotherrun,butbelieveitwillbeindustrywidenot
Lehmanspecific.Youare not Cassandra,cursed by Apollo to be ableto
seethefuturebuthavenoonebelieveyou!!6271
Lehmansbalancesheet,intermsofitssizeandcomposition,wasamainfocusof
the market in late 2007 and early 2008, and Lehman was focused upon reducing its
leveragenumbersbyraisingequityandsellingorotherwisetransferringassetsoffofits
balancesheetinordertoengendermarketconfidence.Forexample,Callan,Lehmans

6270Email

from Eric Felder, Lehman, to Herbert Bart McDade, Lehman (Mar. 26, 2008)
[LBHI_SEC07940_32640001].
6271EmailfromIanLowitt,Lehman,toEricFelder,Lehman(Mar.26,2008)[LBHI_SEC07940_326400].

1664

CFOatthetime,statedinaninternalApril7,2008presentationthatdeleveragingwas
designed to win back the confidence of the market, lenders and investors.6272 The
presentationdemonstratesthat,asofApril2008,Lehmanrecognizedthatithadalready
lostsomemeasureofmarketconfidence,andinparticular,theconfidenceofLehmans
lenders.
(e) BeginningintheThirdQuarterof2008,LehmanCould
HaveReasonablyAnticipatedaLossofConfidenceWhich
WouldHaveTriggeredItsLiquidityRisk
Prior to Lehmans earnings announcement for the second quarter of 2008, on
June 2, 2008, S&P downgraded Lehmans longterm rating from A+ to A,
expressingconcernaboutpersistentdislocationsinglobalcapitalmarkets[that]could
furtherweighoncoreoperatingperformanceforthesecuritiesindustryasawhole.6273
Although S&PacknowledgedLehmans stable funding profileand excessliquidity
position,S&PnotedthatLehmansrepocapacitycouldbeadverselyaffectedifthere
isachangeinmarketperceptionofthefirm,howeverillfounded.6274
LehmannotedthatinaJune3,2008conferencecallwithS&P,theratingsagency
referredtoLehmanscapitalraisesduringthequarterandstatedthatLehmandoesnot

6272Erin Callan, Lehman, Leverage Analysis [Draft] (Apr. 7, 2008), at p. 1 [LBEXDOCID 1303158]. She

alsonotedthat,inadditiontodeleveraging,Lehmanneededtousemoreconservativetermstructuresto
fundlessliquidsecurities(EMG,highyield,E2andE3equities).Id.atp.14.
6273SeeDianeHinton,S&P,ResearchUpdate:LehmanBrothersHoldingsInc.RatingLoweredToAFromA+;
Outlook Negative, S&P RatingsDirect, June 2, 2008, at p. 2 [LBHI_SEC07940_512922], available at
http://www2.standardandpoors.com/spf/pdf/events/fiart56308.pdf.
6274Id.

1665

have a capital issue at this time.6275 Lehman also stated its belief that the S&P
downgradedidnotfullyreflect or acknowledgeLehmansmaterialimprovement[s]
initsalltimelowfornetleverageoritssignificantreductioninitsexposuretohigh
riskassets.6276
Lehmanrecognizedandanticipatedtheimpactofthisdowngrade,andonJune
4,2008, responded bypreparing awritten presentationentitled, Capital Adequacy &
Liquidity,whichwasintendedforLehmanssignificantrepocounterparties6277andin
which Lehman downplayed the anticipated action as reflecting industry concerns,
insofaritsratingsrelativetomostofitsdirectpeersdidnotchange.6278
Prior to the opening of business on June 9, 2008, Lehman announced that it
intended to raise $6 billion through offerings of common stock and noncumulative
mandatoryconvertiblepreferredstock,andthatitexpectedtoreportanetearningsloss
of $2.8 billion for the second quarter of 2008.6279 These announcements were reported
upon shortly before 7:00 a.m. EST on June 9, 2008 by the Wall Street Journal

6275Lehman,CapitalAdequacy&Liquidity(June4,2008),atp.19[LBHI_SEC07940_513590].
6276Id.
6277Id.atp.18.
6278SeealsoDianeHinton,S&P,ResearchUpdate:LehmanBrothersHoldingsInc.RatingLoweredToAFrom

A+; Outlook Negative, S&P RatingsDirect (June 2, 2008), at p. 2 [LBHI_SEC07940_512922], available at

http://www2.standardandpoors.com/spf/pdf/events/fiart56308.pdf(statingthatratingswerealsolowered
forMorganStanleyandMerrillLynch&Co.,Inc.).
6279Lehman,PressRelease:LehmanBrothersAnnouncesExpectedSecondQuarterResults(June9,2008),
at p. 1 [LBHI_SEC07940_035278287]; Lehman,Press Release:Lehman Brothers AnnouncesOfferings of
Common Stock and Mandatory Convertible Preferred Stock (June 9, 2008), at p. 1
[LBHI_SEC07940_221826263].

1666

MarketWatch.6280 This loss was Lehmans first as a public company.6281 Although the
markethadanticipatedaloss,itssizewasnearly10timeswhatmanyanalystshadbeen
predicting for Lehman.6282 At 10:00 a.m., Lehman, led by its thenCFO Erin Callan,
hosted a preliminary earnings call regarding its second quarter performance and
financialcondition.6283Tooffsetthenegativeearningsreport,Lehmanemphasizedthat
it had engaged in and successfully executed an aggressive deleveraging effort over
the courseof thesecondquarterof2008,thatalargepart of the reduction occurred
with less liquid asset categories, and that it had raised $6 billion in new equity. 6284
Lehman also stated that the effect of these efforts was to reduce Lehmans gross
leverage ratio to less than 25 times equity, and its net leverage ratio to less than 12.5
timesequity.6285Notwithstandingtheearningsloss,Lehmanspositionwasthatitsgoal
for the quarter was to bring down gross and net leverage, and that Lehman had

6280SteveGilsi,LehmanBrotherstopost$3blnloss;sets$6blnstocksale,WallStreetJournalMarketWatch,

June 9, 2008, available at http://www.marketwatch.com/story/lehmanbrotherstopost3blnlosssets6

blnstocksale?siteid=bnbh.
6281Ben White, et al, Lehman targets up to $6bn in fresh capital, Financial Times (June 6, 2008), available at
http://www.ft.com/cms/s/0/51c1624c341711dd869b0000779fd2ac.html.
6282SusanneCraig,LehmanSettoRaise$5BillionAmidLosses,WallStreetJournal,June9,2008,availableat
http://online.wsj.com/article/SB121296377617855623.html?mod=djemalertMARKET(Untilrecently,most
analystswhofollowLehmanhavebeenpredictingalossofabout$300million.).
6283TranscriptofLehmanBrothersHoldingsInc.SecondQuarter2008PreliminaryEarningsCall(June9,
2008)[LBHI_SEC07940_592160].
6284Id.atp.2.
6285Id.

1667

accomplishedthisgoal.6286Thus,Lehmanmadeitscaseforwhythemarketshouldnot
loseconfidenceinitscorefranchiseorcapitalposition.
However, notwithstanding this presentation, on June 9, 2008, Fitch Ratings
issuedaratingsdowngrade for Lehman, citingincreasedearnings volatility, changes
initsbusinessmixduetocontractioninthesecuritizationandstructuredcreditmarkets
andthelevelofriskyassetsexposingearningstochallengesinhedgeeffectiveness.6287
Fitch noted that [d]espite [its] asset sales, Lehmans exposure to higher risk asset
categoriesasapercentofFitchcorecapitalishigherthan[its]peers.6288Further,Fitch
expressed concern that Lehmans deleveraging was removing its most attractive
assetsfrom its balance sheet, leaving a concentrated level of least desirable or more
problematic assets.6289 Moodys similarly changed Lehmans outlook from stable to
negative on June 9, despite Lehmans June 6 announcement of its $6 billion equity
raise.6290Moodysstatedthatitsdecisionreflecteditsconcernaboutriskmanagement
decisions that resulted in elevated real estate exposures and the subsequent
ineffectivenessofhedgestomitigatetheseexposuresintherecentquarter.6291

6286Id.atp.3.
6287FitchRatingsPressRelease:FitchDowngradesLehmanBrothersLT&STIDRstoA+/F1;Outlook

Negative (June 9, 2008), available at http://www.prinside.com/fitchdowngradeslehmanbrotherslt

r633111.htm.
6288Id.
6289Id.
6290RubyMcDermid,MoodysdowngradesLehmantonegativefromstable,WallStreetJournalMarketWatch
June 9, 2008, available at http://www.marketwatch.com/story/moodysdowngradeslehmantonegative
fromstable.
6291Id.

1668

Following the preliminary earnings call on June 9, the market had an

opportunitytoreflectontheearningsannouncement,Lehmansreporteddeleveraging
and Lehmans $6 billion equity raise. There is evidence sufficient to support a
determinationthat,notwithstandingLehmansplantowinbacktheconfidenceofthe
market,itsplanhadnotsucceeded.
The price of Lehmans common stock could support a determination that the
stepstakenbyLehmanthroughoutthesecondquarterandthefirstpartofJunedidnot
resultinincreasedmarketconfidence.Fromthebeginningof2008throughtheendof
thesecondquarterof2008,Lehmanscommonstocktradedinrangebetweenahighof
$66 per share on February 1, 2008 to a low of $31.75 on March 17, 2008, immediately
afterthenearcollapseofBearStearns.StartinginJune2008,Lehmanssharepricewas
approachingits52weeklow,wouldsoonfallbelow$30pershareandwouldnotagain
return to that level.6292 On June 12, 2008, Lehmans stock opened at $21.35/share, and
closed at $21.17/share lows that Lehman had not reached since 1996 and the
volumeontradingofLehmanssharesreachedanalltimehighofover173milliona
level of trading that would only be eclipsed in Lehmans final week prior to the
bankruptcyfiling.6293

6292ThelasttimeLehmansstockhadtradedbelow$30/sharewasinSeptemberandOctober1998in

theaftermathofthecollapseofLongTermCapitalManagementandtheRussianSovereignDebtCrisis.
AllhistoricalpricinginformationispubliclyavailablefromsitessuchasYahoo!Finance.
6293Id.

1669

Press reports at that time are also an indicator of the declining confidence in
Lehman. On June 11, 2008, Robert Azerad forwarded to Paolo Tonucci two articles
fromthatday.6294ThefirstarticlefromBusinessWeek,entitled,Lehman:Independent
forHowLong?concludedwithaquotefromananalyst:Lehmanisnext.Whenyou
have a pack of dinosaurs, the slowest gets picked off.6295 The second article, a
commentaryfromJonathanWeilofBloomberg.com,stated:
Lehman reported a $2.8 billion quarterly loss on June 9, the same day it
saidithadraised$6billioninfreshcapital.Investorsseemedsurprised,
judgingbythestocks15percentdeclinesincethen.Theyshouldnthave
been.WallStreetstockanalystswerepredictingamuchsmallerloss.Yet
Lehmans market capitalization, at $19.2 billion, is now almost $7 billion
lessthanthecompanys$26billionbookvalue,orassetsminusliabilities.
ThatsuggeststhatthemarketbelievesLehmanhasntfullycleanedupits
balancesheetandthattheworstisstilltocome,managementsassurances
notwithstanding.6296
InhisemailtoTonucci,Azeraddescribedthesearticlesas[r]epresentativeofthetone
ofthemarket.6297
OnJune12,LehmanannouncedthatitwasreplacingitslongstandingPresident
andCOO,JosephGregory,aswellasCallan.6298AsdescribedinofficialLehmantalking

6294Email

from Robert Azerad, Lehman, to Paolo Tonucci, Lehman (June 11, 2008)
[LBHI_SEC07940_517806809].
6295Ben Levisohn, Lehman: Independent for How Long? Business Week, June 11, 2008, attached to email
fromRobertAzerad,Lehman,toPaoloTonucci,Lehman(June11,2008)[LBHI_SEC07940].
6296Email from Robert Azerad, Lehman, to Paolo Tonucci, Lehman (June 11, 2008)
[LBHI_SEC07940_517806809] (Jonathan Weil, Lehmans Greatest Value Lies In Lessons Learned,
Bloomberg.com (June 11, 2008), attached to email from Robert Azerad, Lehman, to Paolo Tonucci,
Lehman(June11,2008)[LBHISEC07940].
6297Email from Robert Azerad, Lehman, to Paolo Tonucci, Lehman (June 11, 2008)
[LBHI_SEC07940_517806].

1670

points distributed to Lehman managers for internal distribution, these senior

management changes were made in an effort to regain the confidence of investors
anditsbusinesspartners,andtorepairthefirmserodedcredibility.6299
Also,onJune12,2008,oneofLehmansclearingbanks,Citigroup,requestedthat
LehmanprovideitwithasubstantialcashdeposittocoveritsexposuretoLehmanon
anintradaybasis,inaninitialamountofbetween$3billionand$5billion,whichwas
laternegotiateddowntoa$2billioncomfortdeposit.6300Inanemailsentinternally
between Citigroup personnel on that date, Citigroup risk manager Thomas Fontana
stated:

6298SeeAlistairBarr,et.al,LehmanCFOCallan,COOGregoryoustedfromposts,MarketWatch,June12,2008,

available at http://www.marketwatch.com/story/lehmanscfoandcoooustedasturmoiltakesanew
turn2008612111300.
6299Lehman,President,COO,CFOChanges:InternalTalkingPoints(June12,2008),atp.1[LBEXDOCID
362070], email from George Creppy, Lehman, to Steven Hash, Lehman, et al. (June 12, 2008) [LBEX
DOCID362233](subjectline:ForInternalUsebyManagers:TPs/FAWsonSeniorMgmtChanges.).
6300See Email from Thomas Fontana, Citigroup, to Christopher Foskett, Citigroup, et al. (June 12, 2008)
[CITILBHIEXAM00074930](AfterspeakingwiththeCFOandTreasurer,wemadearequestfor$5Bin
a cash deposit.); see also email from Christopher Foskett, Citigroup, to John Havens, Citigroup, et al.
(June 12, 2008) [CITILBHIEXAM 00074930] (I have been on the phone this morning with Ian Lowitt,
newCFOofLehmanandPaoloTonucci,globalTreasurer.Inordertokeepourclearingcapabilitiesat
levelstheyrequiretoefficientlyoperate,IhaveaskedthemtoputupacashdepositaswedidwithBear
Stearns last summer to offset any intraday or end of day shortages that may occur. While
disappointed, they have directed their team to put it in place.); cf. email from Daniel J. Fleming,
Lehman,toIanLowitt,Lehman(June12,2008)[LBEXAM008609008610](Citibankisaskingfora$3bn
cash deposit tonight to cover intraday exposures.). Ultimately, Lehman provided and Citigroup
accepted a deposit in the amount of $2 billion. See Email from Thomas Fontana, Citigroup, to Richard
Blaszkowski,Citigroup,etal.(June12,2008)[CITILBHIEXAM00051023](AlotofstressontheLehman
nameinthemarkettoday.Wetookina$2Bdepositandresizedtheclearinglines.);emailfromDaniel
J.Fleming,Lehman,toIanLowitt,Lehman,etal.(June12,2008)[LBEXAM008608](Willbedepositing
$2bnwithCititonight.Nolienorrightofoffset,astraightovernightfedfundsdeposit.).

1671

Fuldoust[edthe]CFOandCOO....Wehavecutbackclearinglinesin
Asia . . . .This is bad news. Market is saying Lehman can not make it
alone.Lossofconfidenceishugeatthemoment.6301
Onthesamedate,DonaldKohn,theFederalReserveBankViceChairman,wrote
toFederalReserveBankChairmanBenBernanke,notingthatwhileLehmanhadraised
$6billionthroughanequityofferingthatday,theadditionalinjectionofequitydidnot
restorethemarketsconfidenceinLehman,andthattherewasapossibilitythatthis
isThursdayofBS[BearStearns]weekend,andequityholderscouldwakeupMonday
with no value.6302 Kohn also noted that Fuld really [had] no alternative plan at this
point.6303 Kohn provided Bernanke with a report of a joint call between the Federal
Reserve,TreasuryDepartmentandtheSECthatoccurredontheafternoononJune12,
2008 regarding Lehman, and noted that the discussion turned to thinking about
options in the eventthe slowerosion ofconfidence [inLehman] turns into a routand

6301EmailfromThomasFontana,Citigroup,toChristopherFoskett,Citigroup,etal.(June12,2008)[CITI

LBHIEXAM00081606].
6302EmailfromDonaldKohn,FRBNY,toBenS.Bernanke,FederalReserve,etal.(June12,2008)[FRBto

LEHExaminer00073].
6303Id.Coincidentally,onJune12,2008,theEconomist magazinepublishedanarticletitled,Litterbinof
LastResort,criticizingtheECBforallowinginvestmentbankstodumpassetbackedsecurities,likeso
muchradioactivewaste,andforstickingtoitsprecrisisacceptancerulesthatwerebeinggamedor
arbitragedbyinvestmentbanks,whowerecreatingassetbackedsecuritiesthathadnopubliclytraded
valuebutweredesignedsolelyforpledgingtoECBwindows.SeeEmailfromRobertAzerad,Lehman,to
Paolo Tonucci, Lehman, et al. (June 12, 2008) [LBEXDOCID 008040]. Lehman had been internally
concernedaboutitsincreasingrelianceonitsstrategyofcreatingABSsolelyforthepurposeofpledging
totheECB,evendiscussingthepossiblereputationalissueiftheextentofitsreliancebecamepublic.
See email from Carlo Pellerani, Lehman, to Robert Azerad, Lehman (May 12, 2008)
[LBHI_SEC07940_336321]; cf. Carlo Pellerani, Lehman, ECB Strategy (June 2008)
[LBHI_SEC07940_345777786].Atthesametime,however,Lehmanscontingencyplanintheeventofa
loss of repo funding relied upon increased funding through the ECB. See Lehman, Presentation to the
Federal Reserve: Update on Capital, Leverage, and Liquidity (May 28, 2008), at pp. 7, 16
[LBHI_SEC07940_062581].

1672

liquidityfledquickly.6304KohnconcludedthattheFederalReservedidnothaveany
optionstoprovideconfidenceinthefirm.6305
After the release of its second quarter 2008 financials, Fuld was receiving
increasingly blunt pressure from Secretary Paulson and FRBNY President Geithner to
sell Lehman or find a strategic partner.6306 Secretary Paulson told the Examiner that
Lehmans devastating announcement of its firstever earnings loss in the second
quarterof2008convincedFuldthatdramaticactionwasnecessarytosaveLehman.6307
AccordingtoSecretaryPaulson,thereleaseofthenumbersservedasawakeupcall
toFuldwho,atthatpoint,appreciatedLehmansfragilityandcomprehendedthatthe
futureportendednothingbetter.6308
The Examiner finds that there is evidence sufficient to support a determination
that,beginningearlyinthe thirdquarterof2008,therewasareasonablelikelihoodof
Lehman losing the confidence of the markets in the near term, such that its ability to

6304EmailfromDonaldKohn,FRBNY,toBenS.Bernanke,FederalReserve,etal.(June12,2008)[FRBto

LEHExaminer00073].
6305Id.
6306Examiners Interview of Treasury Secretary Henry Paulson, June 25, 2009, at p. 14; Examiners
InterviewofTreasurySecretaryTimothyF.Geithner,Nov.24,2009,atp.6.However,FederalReserve
Chairman Ben S. Bernanke told the Examiner that he was not of the view in the summer of 2008 that
Lehmansfailurewasinevitable.ExaminerInterviewofChairmanBenS.Bernanke,Dec.22,2008,atp.
7.
6307ExaminersInterviewofTreasurySecretaryHenryPaulson,June25,2009,atpp.1314.
6308Id.atp.14.

1673

obtain financing to support its nongovernment, nonagency asset classes through the
repomarketwasatrisk.6309
(f) LehmanWasNotSufficientlyPreparedtoAbsorba
LiquidityCrisisMarkedbyaSuddenLossofNon
Government,NonAgencyRepoFunding
The next step of the analysis is to determine whether Lehman was adequately
prepared to manage the liquidity risk posed by the reasonably foreseeable loss of
market confidence. After the Bear Stearns event, Lehman conducted liquidity stress
tests that assumed Lehman would lose a certain measure of repo funding for non
government,nonagencyassetsoverafourweekperiod.EachofLehmansstresstests,
other than one, predicted that they would survive.6310 If these stress scenarios were
foundeduponreasonableandprudentassumptions,theresultssupporttheconclusion
that Lehman was adequately prepared to handle such risks and it did not have
unreasonably small capital. Conversely, if Lehman was only able to project survival
under these stress scenarios through the use of assumptions that were imprudent or

6309Selectingaprecisedatethatacompanyhasunreasonablysmallcapitalisamatterofjudgment.As

a matter of law, such precision is unnecessary: a factfinder can examine the financial condition of the
companyforareasonableperiodoftimebothbeforeandafterthedateofthetransferinquestion.See,
e.g.,Barrettv.ContinentalIll.NatlBank&TrustCo.,882F.2d1,4(1stCir.1989).TheExaminerhasfocused
onJuneof2008inlightoftheapplicablefactsandgoverninglaw.
6310TheApril21stresstest,whichwasthefirstthatLehmanpresentedtotheFederalReserveandSEC,
showedLehmansurvivingafourweekstressscenariowithlessthan$500millionofliquidity.Lehman,
LiquidityStressScenarioAnalysis (Apr.21,2008),at p. 5 [LBEXDOCID 008608]. Lehmans next stress
test,presentedtotheFederalReserveandSEConMay28,2008,showedLehmansurvivingthefourweek
stress event with more than $20 billion left in its liquidity pool. Lehman, Presentation to the Federal
Reserve: Update on Capital, Leverage & Liquidity (May 28, 2008), at p. 13 [LBHI_SEC07940_062581].
However,LehmanBrotherswasaskedtorestateitsMay28thstresstestresultsusingmoreconservative
assumptions, andas restated, LehmanBrothers would have shown failure byapproximately $6 billion.
SeeLehman,LiquidityStressTestsAtLehmanBrothers(Aug.8,2008),atp.3[LBEXDOCID3211633].

1674

unreasonable,thentheresultofthesestresstestsdonotprecludeadeterminationthat
Lehmanwasoperatingwithunreasonablysmallcapital.Furthermore,notwithstanding
theliquiditystresstests,theExaminerhasevaluatedothermetricsofcapitaladequacy
thatLehmanmonitoredandthatpurportedtoshowLehmansstrongcapitalpositionto
determine whether these metrics preclude a conclusion that Lehman was operating
withunreasonablysmallcapital.
(i) LehmansLiquidityPool
As noted above, Lehman was well aware that a loss of shortterm financing
could impair its ability to continue operations. Lehman had experienced a liquidity
crisisin1998followingtheRussianSovereignDebtCrisisandthecollapseofthehedge
fund, LongTerm Capital Management.6311 In response, Lehman adopted a three
dimension[al] funding framework to guide its funding of assets and mitigate its
liquidity risk (the Funding Framework).6312 One of the principal components of

6311See

Kentaro Umezaki, Lehman Brothers, 1998 Liquidity Risk Case Study, at p. 7 [LBEXDOCID
251244], attached to email from Kentaro Umezaki, Lehman, to Rebecca Miller, Lehman (Sept. 5, 2007)
[LBEXDOCID427653].
6312Lehman, Project Green Liquidity & Liquidity Management [Draft] (June 2008), at p. 2
[LBHI_SEC07940_844120]. The principal components of Lehmans Funding Framework were the
liquiditypool,thecashcapitalsurplus,andthereliablesecuredfundingmodel.Thethreecomponents
weredesignedtoworkinconjunctionwitheachother.SeeLBHI10Q(July10,2008),atpp.8182.The
reliable secured funding model was designed to address the risk of a loss of repo funding through a
relationshipbased strategy of Lehman obtaining a certain level of financing from counterparties the
relationshipsofwhichwithLehmanweresufficientlystrongsuchthatLehmanprojectedthatthesefirms
wouldcontinuetotradewithLehmanduringastressevent.SeeLehman,SecuredLiquidityRiskModel
(Jan.2006)[LBEXDOCID1313333].Thecashcapitalsurplusprincipallymeasuredtheamountbywhich
thesumofLehmanslongtermdebtandequitycapitalexceededLehmansestimatesofitslessliquidand
illiquid assets as well as the aggregate haircuts applied to such assets. In this sense, the cash capital
model built upon the assumptions of the reliable secured funding model, insofar as the assessment of

1675

LehmansFundingFrameworkwastheLBHIliquiditypool.6313Theliquiditypoolwas
designedtocoverthelossofunsecureddebt,specifically,therollingoffofcommercial
paperandthematurityofthecurrentportionoflongtermdebt.6314Lehmanreporteda
recordliquiditypoolof$44.6billionandarecordcashcapitalsurplusof$15.0billionas
ofMay31,2008.6315
However, Lehmans liquidity pool was not, at least prior to the Bear Stearns
event, primarily designed or sized to address a loss of repo funding. In its Annual
Report for fiscal year 2007, Lehman disclosed that [e]ven within the oneyear time
frame contemplated by our liquidity pool, we depend on continuous access to secured
financing in the repurchase and securities lending markets, which could be impaired by
factors that are not specific to Lehman Brothers, such as a severe disruption of the
financialmarkets.6316InaMarch2008presentationtotheFederalReserveandtheSEC,
Lehman noted that the liquidity pool was primarily designed to cover the inability to

which assets were less liquid (and therefore needed to be matchfunded with cash capital). The
liquiditypoolwasdesignedtocoverthelossofunsecureddebt,specifically,therollingoffofcommercial
paperandthematurityofthecurrentportionoflongtermdebt.SeeLehman,LiquidityManagementAt
LehmanBrothers,PresentationtotheChicagoMercantileExchange,[Draft](June5,2008),atp.10[LBEX
DOCID1300305](describingtheMCOormaximumcumulativeoutflowassumptions).
6313Lehman, Project Green Liquidity & Liquidity Management [Draft] (June 2008), at p. 2
[LBHI_SEC07940_844120].
6314Lehman, Presentation to the Chicago Mercantile Exchange, Liquidity Management At Lehman
Brothers [Draft] (June 5, 2008), at p. 10 [LBEXDOCID 1300305] (describing the MCO or maximum
cumulativeoutflowassumptions).
6315LBHI10Q(July10,2008),atpp.8182.
6316LBHI200710K,atp.17(emphasisadded).

1676

roll maturing, unsecured debt for one year, not the loss or reduction of repo funding,
whichwastobeaddressedwith[o]verfundingoflessliquidassetclasses.6317
FollowingtheBearStearnsevent,Lehmanmadeaseriesofmodificationstoits
funding framework to bolster its liquidity fortress and to manage the liquidity risk
presented by short term secured funding.6318 Although Lehman acknowledged that a
lossofshorttermsecuredfundingcouldresultinanimpairmentofthefranchise,its
liquidity pool was not part of its risk mitigation plan against the potential loss of
securedfunding:LehmanBrothersmanagesitssecuredliquidityusingafourpronged
risk mitigation strategy, which conservatively assumes: (a) no reliance on Holdings
liquidity;(b)norelianceoncustomercollateralorfreecredits.6319

6317Lehman, Presentation to Federal Reserve & SEC: Liquidity Management At Lehman Brothers (Mar.

26,2008),atp.10[LBHI_SEC07940_057097].Lehmanwouldlaterdescribeoverfundingastheability
to absorb adverse changes in secured funding capacity in times of stress by reducing total collateral
borrowedinorreallocatingthehigherquality,easytofundtreasuryoragencysecurities.SeeLBHI10Q
(July10,2008),atp.84.
6318Lehman, Liquidity Management At Lehman Brothers (May 15, 2008), at pp. 12, 23 [LBEXDOCID
008669].Lehmanstatedthatitwouldmitigateitssecuredfundingriskbyincreasingoverfundingofless
liquid asset classes, increasing its use of its captive banking entities, especially Lehman Brothers
Bankhaus, and transforming its balance sheet through the use of securitization to create liquid,
investment grade securities out of a pool of less liquid collateral. Id at p. 12. Of these three
modifications, overfunding was a major part of Lehmans postBearStearns funding framework. Inits
Form 10Q for the second quarter of 2008, Lehman reported that it had an overfunding cushion of $27
billion. LBHI 10Q (July 10, 2008), at p. 84. By comparison, Lehman estimated that it could fund
approximately$3billionofitslostrepocapacitythroughitscaptivebankingentities,whichisafraction
of the amount of overfunding it projected. See Lehman, Liquidity Management At Lehman Brothers
(May 15, 2008), at pp. 12, 14 [LBEXDOCID 008669]. Lehman noted that its ability to transform the
balance sheet through the securitization and structured finance markets (which were largely moribund
bysummer2008)wouldtake1to2weeks.Id.at24.
6319Lehman, Presentation to Federal Reserve & SEC: Liquidity Management At Lehman Brothers (Mar.
26,2008),atp.11[LBHI_SEC07940_057097](emphasisadded);seealsoLehman,LiquidityManagementAt
LehmanBrothers(May15,2008),atp.12[LBEXDOCID008669].

1677

However, in its quarterly report for the second quarter of 2008, Lehman
disclosed,forthefirsttime,thattheLBHIliquiditypoolcouldbeavailable,[a]salast
resort, as a mitigant against the loss of secured funding capacity.6320 Lehman
providedanassessmentofitsrepobookatrisk,startingwithitsnongovernment,non
agencyrepobookof$105billion,andexcludingcertainassetclassesthatitconsidered
to be relatively liquid even under stressed conditions, and disclosed that its projected
lossof$32billionofrepocapacitymaybemitigatedbytheliquiditypoolavailableto
theCompany.6321
(ii) LiquidityStressTests
FollowingtheBearStearnsevent,LehmanmetwiththeFRBNYandtheSECon
several occasions to discuss the results of successive versions of its liquidity stress
tests.6322Withoneexceptionnotedbelow,Lehmanreportedthatitsurvivedthestress
tests, and beginning with its May 28, 2008 stress test report, Lehman reported that it

6320LBHI 10Q (July 10, 2008), at p. 84. Previously, Lehman had only made general statements that its

liquidity pool was sized to cover expected cash outflows associated with an anticipated impact of
adversechangesonsecuredfunding,eitherintheformofagreaterdifferencebetweenthemarketand
pledge value of the assets (also known as haircuts) or in the form of reduced borrowingavailability.
See,e.g.,LBHI200710K,atp.56;LBHI10Q(Apr.9,2008),atp.65.
6321LBHI10Q(July10,2008),atpp.8485.
6322Email from Michael Hsu, SEC, to Paolo Tonucci, Lehman, et al. (Apr. 9, 2008)
[LBHI_SEC07940_477096](notingthattheSECwaslookingforLehmananditspeerstoagreeuponthe
principle of a new liquidity standard which he described as a 30day bulletproof liquidity survival
window); Joint Request of SEC and FRBNY: Liquidity Scenarios for CSEs (May 20, 2008)
[LBHI_SEC07940_505195]; see also Lehman, Liquidity Stress Scenario Analysis (Apr. 21, 2008), at p. 5
[LBEXDOCID 008608]; Lehman, Presentation to the Federal Reserve Update on Capital, Leverage &
Liquidity(May28,2008),atp.13[LBHI_SEC07940_062581];Lehman,PresentationtotheFederalReserve
& SEC: Updated Stressed Liquidity Scenario (July 2, 2008), at p. 10 [LBEXDOCID 1300104]; Lehman,
LiquidityStressTestsAtLehmanBrothers(Aug.8,2008),atp.3[LBEXDOCID3211633].

1678

survivedthestresstestsbyamarginexceeding$10billionattheendofthefourweek
projectionperiod.6323
These stress tests were based on Lehmans own projections, and in substantial
part,employedassumptionsdeterminedbyLehman.6324Courtshaverecognizedthata
companysownprojectionstendtobeoptimistic,andtherefore,afactfindershould
not simply take them at face value.6325 Accordingly, the key inquiry is whether the
projectionitselfwasbaseduponprudentandreasonableassumptions.6326
Theassumptionsemployedbythestresstestshadamaterialimpactonthetest
results.Forexample,LehmansstresstestpresentedtotheFRBNYandtheSEConMay
28, 2008, assumed that Lehmans liquidity position would benefit over the fourweek
projection period due to the positive impact of $16.0 billion of balance sheet
reduction, and a $10.0 billion reduction in prime broker customer funding.6327 This

6323TheApril21stresstest,whichwasthefirstthatLehmanpresentedtotheFederalReserveandSEC,

showed Lehman surviving a fourweek stress scenario with less than $500 million left of its original
liquidity position. Lehman, Liquidity Stress Scenario Analysis (Apr. 21, 2008), at p. 5 [LBEXDOCID
008608].Lehmansnextstresstest,presentedtotheFederalReserveandSEConMay28,2008,showed
Lehman surviving the fourweek stress event with more than $20 billion left in its liquidity pool.
Lehman,PresentationtotheFederalReserveUpdateonCapital,Leverage&Liquidity(May28,2008),at
p.13[LBHI_SEC07940_062581].However,LehmanBrotherswasaskedtorestateitsMay28thstresstest
results using more conservative assumptions, and as restated, Lehman Brothers would have shown
failure by approximately $6 billion. See Lehman, Liquidity Stress Tests At Lehman Brothers (Aug. 8,
2008),atp.3[LBEXDOCID3211633].
6324Examiners Interview of Irina Veksler, Sept. 11, 2009, at. p. 6; Examiners Interview of Laura M.
VecchioApr.16,2009,atp.5.
6325Moodyv.SecurityPac.Bus.Credit,Inc.,971F.2d1056,1073(3rdCir.1992).
6326MFS/Sun Life TrustHigh Yield Series v. Van Dusen Airport Servs. Co., 910 F. Supp 913, 944 (S.D.N.Y.
1995);seealsoInReIridiumOperatingLLC,373B.R.at347.
6327Lehman,PresentationtotheFederalReserveUpdateonCapital,Leverage&Liquidity(May28,2008),
atpp.1314[LBHI_SEC07940_062581].

1679

stress test projected that Lehman would survive a liquidity stress event with $20.7
billionofitsavailableliquidityattheendofthefourweekperiod.6328Attherequestof
the regulators, Lehman subsequently conducted the stress test without these
assumptions.6329 Without the benefit of these assumptions, the restated stress test
demonstrated that Lehman would have failed the May 28, 2008 stress test by $6
billion.6330 In this manner, altering two assumptions had a $26.7 billion effect on the
testsresult.
Aseconddemonstrationoftheimpactofaliquiditystresstestsassumptionson
the result can be found in the independent stress tests developed by the FRBNY. In
May2008,theFRBNYgeneratedtwostresstestscenarioswhichmodeledhowLehman
wouldrespondtoa BearStearnsand BearLight scenarios.6331TheBearStearns
scenarioassumedarunonthebankinallbusinessareas,andtheBearLightscenario
assumedthattherunwas35percentasstrongastheBearStearnsscenario.6332These
stresstestsprojectedthatLehmanwouldfailtheBearStearnsscenarioby$84billion
and the Bear Light scenario by $15 billion.6333 In June 2008, the FRBNY ran another

6328Id.atp.13.
6329Lehman,LiquidityStressTestsAtLehmanBrothers(Aug.8,2008),atp.3[LBEXDOCID3211633];see

also email from Robert Azerad, Lehman, to Laura M. Vecchio, Lehman, et al. (Aug. 8, 2008) [LBEX
DOCID3207542](notingthattherestatedstresstestwasthefollowuptolastweeksmeetingwiththe
Fed.).
6330Lehman,LiquidityStressTestsAtLehmanBrothers(Aug.8,2008),atp.1[LBEXDOCID3211633].
6331BillBrodows,FRBNY,etal.,PrimaryDealerMonitoring:InitialAssessmentofCSEs(May12,2008),at
p.9[FRBNYtoExam000017].
6332Id.
6333Id.atp.11.

1680

stress test with assumptions that were generally consistent with the May 2008 Bear
Light scenario.6334 According to the FRBNYs projections, the June 2008 stress test
showedthatLehmanwouldfailinareasonablyforeseeablestresseventbyamarginof
$15billion.6335
There is sufficient evidence to support the determination that certain of the
material assumptions employed in Lehmans tests were not reasonable. For example,
Lehman assumed that it would not be able to issue any unsecured commercial paper
during the term of the fourweek stress event. This assumption was based on the
reasonable determination that Lehman would not be able to obtain unsecured debt
during a liquidity stress event. Lehman, however, did not apply this determination
consistentlythroughoutthescenario.AsdiscussedinSectionIII.A.5.iofthisReport,at
thetimethestresstestswereconducted,Lehmansclearingbanksprovidedameasure
of unsecured credit on an intraday basis.6336 Given that Lehman deemed the loss of
unsecured financing a reasonable and necessary assumption under its stress
scenarios,6337 it was inconsistent not to apply that assumption to the unsecured credit
providedbytheclearingbanks.

6334FRBNY,Primary DealerMonitoring:LiquidityStress Analysis(June 25,2008, revisedJune 26,2008)

[FRBNYtoExam000033].
6335Id.atp.2.
6336See Section III.A.5.b.1.b, noting that the Net Free Equity metric was the market value of Lehman
securitiespledgedtoJPMorganplusanyunsecuredcreditlineJPMorganextendedtoLehmanminuscash
advancedbyJPMorgantoLehman.
6337See, e.g., LBHI 10Q (July 10, 2008), at p. 85. (Most of the Companys [stress] scenarios assume
completedisruptionofunsecuredfundingmarkets(i.e.theinabilitytoissuenewunsecureddebt).)See

1681

Furthermore,therearesufficientfactstodemonstratethatitsassumptionthatits
clearingbankswouldcontinuetoprovideunsecuredcreditonanintradaybasisduring
a stress event was unreasonable. By February 2008, Lehmans primary clearing bank
JPMorganhadexpressedconcerntoLehmanaboutitsintradayexposuretoLehman.6338
Additionally, as noted above, on June 12, 2008, Lehmans foreign exchange clearing
bank, Citigroup, initially requested that Lehman provide it a comfort deposit of
between $3 billion and $5 billion to mitigate Citigroups perceived intraday
exposure.6339 Further, on June 19, 2008, Lehman provided $5.4 billion in collateral to

alsoLehman,LiquidityStressScenarioAnalysis(Apr.21,2008),atp.3[LBEXDOCID008608](notingthat
lossofunsecuredfundingisakeyassumption.);Lehman,PresentationtotheFederalReserveUpdate
on Capital, Leverage & Liquidity (May 28, 2008), at p. 6 [LBHI_SEC07940_062581] (distinguishing the
BearStearnseventbynotingthatLehmanhad[n]orelianceonshorttermunsecuredfundingandthat
its liquidity framework assumes that unsecured debt cannot be rolled in a liquidity event); Lehman,
Presentation to the Federal Reserve & SEC: Updated Stressed Liquidity Scenario (July 2, 2008), at p. 5
[LBEXDOCID1300104](notingacompleteinabilitytorollunsecureddebtsuchascommercialpaperand
lettersofcreditatmaturity).
6338Email from Janet Birney, Lehman, to Daniel J. Fleming, Lehman, et al. (Feb. 26, 2008)
[LBHI_SEC07940_436414].JPMorganwasspecificallyconcernedthatLehmansrepocounterpartieswere
not valuing the collateral correctly, and assessed increasing haircuts against the repo collateral in the
tripartyrepobookaccordingly.
6339See email from Thomas Fontana, Citigroup, to Christopher Foskett, Citigroup, et al. (June 12, 2008)
[CITILBHIEXAM00074930](AfterspeakingwiththeCFOandTreasurer,wemadearequestfor$5Bin
a cash deposit.); see also email from Christopher Foskett, Citigroup, to John Havens, Citigroup, et al.
(June 12, 2008) [CITILBHIEXAM 00074930] (I have been on the phone this morning with Ian Lowitt,
newCFOofLehmanandPaoloTonucci,globalTreasurer.Inordertokeepourclearingcapabilitiesat
levelstheyrequiretoefficientlyoperate,IhaveaskedthemtoputupacashdepositaswedidwithBear
Stearns last summer to offset any intraday or end of day shortages that may occur. While
disappointed, they have directed their team to put it in place.); cf. email from Daniel J. Fleming,
Lehman,toIanLowitt,Lehman(June12,2008)[LBEXAM008609008610](Citibankisaskingfora$3bn
cash deposit tonight to cover intraday exposures.). Ultimately, Lehman provided and Citigroup
accepted a deposit in the amount of $2 billion. See email from Thomas Fontana, Citigroup, to Richard
Blaszkowski,Citigroup,etal.(June12,2008)[CITILBHIEXAM00051023](AlotofstressontheLehman
nameinthemarkettoday.Wetookina$2Bdepositandresizedtheclearinglines.);emailfromDaniel
J.Fleming,Lehman,toIanLowitt,Lehman,etal.(June12,2008)[LBEXAM008608](Willbedepositing
$2bnwithCititonight.Nolienorrightofoffset,astraightovernightfedfundsdeposit.).

1682

address JPMorgans intraday exposure.6340 In fact, at the time of LBHIs bankruptcy,

Lehman had provided more than $16 billion in the aggregate to its clearing banks to
securetheirintradayexposurealiquidityoutflowthatLehmanfailedtoaccountfor
inanyamountinitsliquiditystresstests.6341
Lehman also failed to take into account the temporary liquidity cost of
operational friction, which Lehman knew would be present in a stress event.
Operational friction includes the temporary impact on liquidity arising from the
difference in timing between Lehmans delivery of payment of the account balance to
clientsandthetimeittookLehmantosellandprocesspaymentfortheseassets.6342
Azerad acknowledged that Lehman was aware that operational friction would
getworseinastressevent.6343Intheordinarycourseofitsbusiness,Lehmanemployed
twosourcesoffundingtoaddressthetemporaryliquidityimpactofoperationalfriction
commercialpaperandthebrokerdealersoperationalcashcushion.6344Whilethese

6340EmailfromCraigJones,LehmantoJohnFeraca,Lehman(June19,2008)[LBEXAM001775].Jones

informed Feraca: Today we moved several unencumbered assets (Sasco, Spruce, Pine, Fenway) to
LCPIs DTC box at Chase to generate an additional $5.4 billion of NFE. This will help us absorb the
increaseinintradaymarginingthatChasewantsustoimplement.
6341Paolo Tonucci & Robert Azerad, Liquidity Of Lehman Brothers (Oct. 7, 2008), at p.
9[LBHI_SEC07940_844701].
6342Lehman, Presentation to S&P, Liquidity Management At Lehman Brothers (May 15, 2008), at p. 17
[LBEXDOCID008669](definingoperationalfrictionaschangeinlockups,transferofpositionsacross
depots,changeinsecuredfunding,etc.).
6343ExaminersInterviewofRobertAzerad,Sept.23,2009(secondinterview),atp.9.
6344Lehman, Presentation to the Chicago Mercantile Exchange, Liquidity Management At Lehman
Brothers [Draft] (June 5, 2008), at p. 24 [LBEXDOCID 1300305] (Lehman assumed that it could [u]se
termcommercialpapertomitigateshorttermliquidityoutflowssuchasunforeseenoperationalfriction
(fails));seealsoLehman,PresentationtotheFederalReserveUpdateonCapital,Leverage,andLiquidity

1683

sourceswereavailableoutsideofastressevent,Lehmansownstresstestsassumedthat
neitherofthesewouldbeavailableduringastressevent.
As noted above, the tests assumed that Lehman would not be able to issue
commercialpaperduringthestressevent.6345Lehmansbrokerdealerswerestructured
tonotrequireliquidityinfusionsfromLBHIinordertooperateintheordinarycourse
of their business, and their prime broker business, in particular, was designed to be
selfsufficient.6346 However, in a stress event, Lehman projected that the largest
liquidity stress would be felt at the broker dealers, which because they could not roll
maturing repos, would experience significant cash outflows.6347 For example, in the
April21scenario,Lehmanprojectedthatitsmainbrokerdealers,LBIandLBIE,would
lose$33.1billionofrepocapacityonthefirstdayofaliquiditystresseventandatotal
of$57.3billionafterfourweeks.6348InaninternalversionofthestresstestdoneonJune
12,2008,LehmanprojectedthatLBIandLBIEwouldlose$21.8billionofrepocapacity

(May28,2008),atpp.7,16[LBHI_SEC07940_062581](statingthatLehman[i]ncreasedourCPprogram
tomitigateriskofoperationalfrictioninaveryvolatileenvironmentfollowingBearStearns).
6345See, e.g., Lehman, Presentation to the Federal Reserve & SEC Updated Stressed Liquidity Scenario
(July2,2008),atp.3[LBEXDOCID1300104](Inabilitytorollunsecureddebt);seealsoJointRequestof
SEC and FRBNY: Liquidity Scenarios for CSEs (May 20, 2008), at p. 2 [LBHI_SEC07940_50519596]
(identifyingcommercialpaperasanareaofpotentialimpactinastressevent).
6346Lehman, Presentation to S&P, Liquidity Management At Lehman Brothers (May 15, 2008), at p. 17
[LBEXDOCID008669].
6347Lehman, Liquidity Stress Scenario Analysis (Apr. 21, 2008), at p. 5 [LBEXDOCID 008608]; see also
ApocalypseNowliquiditystressscenarioasofJune12,2008[LBEXDOCID022363];cf.PaoloTonucci
& Robert Azerad, Change In Liquidity Week Of September 8, 2008 (Sept. 24, 2008), at p. 4
[LBHI_SEC07940_740011] (During the week of September 8, LBI and LBIE, Lehmans U.S. and
European broker dealers, respectively, experienced a loss of liquidity, which required Holdings to
provideliquiditysupport,resultinginanincreaseoftheirpayablestoHoldings.).
6348Lehman,LiquidityStressScenarioAnalysis(Apr.21,2008),atp.5[LBEXDOCID008608].

1684

on thefirst day ofa liquidityevent,and $33.9billionover fourweeks.6349AsLehman

acknowledgedinitsApril21stresstest,LBIandLBIEwouldhavetoborrowcashfrom
the Holding companies to compensate for the lost repo funding.6350 Thus, it was
unreasonable for Lehman to assume that brokerdealers, which it projected would
require substantial infusions of liquidity during the stress event, would have the
necessaryliquiditytomitigatetheimpactofoperationalfriction.
Despite the absence of these funding sources, and the foreseeable logistical
challenges ofcoveringtheconcurrentwithdrawalofassetsbyLehmansprimebroker
customers in a stress event, Lehmans stress test projections made no allowance for
operational friction. Azerad acknowledged that Lehman believed there would be a
liquidity impact due to operational friction, but because it was difficult for them to
model or estimate precisely, they did not take it into account at all in their
projections.6351DuringtheweekpriortoLBHIsbankruptcyfiling,Lehmanexperienced
a$4billionliquidityoutflowarisingfromthetemporaryimpactoftheunwindingof
theprimebrokerbusiness.6352OnSeptember24,2008,TonucciandAzeradprepareda
postmortem analysis after the bankruptcy petition showing that after it released its

6349ApocalypseNowliquiditystressscenarioasofJune12,2008[LBEXDOCID022363].
6350Lehman,LiquidityStressScenarioAnalysis(Apr.21,2008),atp.5[LBEXDOCID008608].
6351ExaminersInterviewofRobertAzerad,Sept.23,2009(secondinterview),atpp.910.
6352PaoloTonucci&RobertAzerad,ChangeInLiquidityWeekOfSeptember8,2008(Sept.24,2008),atp.

4[LBHI_SEC07940_740011].ApostmortempreparedbyAzeradandTonuccishowedtherewasatotal
$9 billion loss attributable to operational friction, including the $4 billion prime broker unwind, a $3
billionliquidityoutflowdueto[p]endingpaymentsbetweenLBIandLBIE,a$1billion[i]ncreasein
marginrequirements,anda$1billioneffectofreporebalancing.Id.

1685

third quarter2008earnings onSeptember9, 2008,itsprime broker customers started

pullingtheirlongandshortbalancesfromLBIEtootherprimebrokers,thatthespeed
of their withdrawal coupled with their request for sameday transfers . . . resulted in
operational frictions as Lehmans operations group was struggling processing these
requests, and that the resulting operational friction worsened our liquidity position
atacriticalpointforLehman.6353
Therefore, because there is sufficient evidence to support a determination that
Lehman could have reasonably foreseen the substantial effect that operational friction
arisingfromthewithdrawalofcustomeraccountswouldhaveonitsliquidity,evenif
on a temporary basis, it was unreasonable for Lehman not to take the impact of
operationalfrictionintoaccountinitsliquiditystresseventplanning.Lehmanknewor
should have known that the factors that it assumed would mitigate an increase in
operational friction would not have that effect in a stress event. In view of the
foregoing, there is sufficient evidence to support a determination that the stress tests
employedtwoassumptionswhich,giventheinformationavailabletoLehmanwhenthe
tests were developed, were not reasonably constructed and that LBHI and the LBHI
Affiliates identified below were operating with unreasonably small capital during the
period beginning early in the third quarter of 2008 and ending the date of each
respectivebankruptcyfiling.

6353See

Paolo Tonucci & Robert Azerad, Liquidity Of Lehman Brothers (Oct. 7, 2008), at p. 13
[LBHI_SEC07940_844701].

1686

(iii) OtherCapitalAdequacyMetrics
There are other metrics bearing upon capital adequacy such as Lehmans cash
capitalsurplus,whichwas ata record $15.0billionasofSeptember2, 2008 andnear
record levels as of September 10, 2008,6354 its Equity Adequacy Framework, which
showedthatithadsufficientequitytoavoidbankruptcyprovideditcouldliquidateall
its assets in an orderly winddown,6355 and its CSE Capital Ratio, which had
substantially improved by the end of the second quarter of 2008.6356 Although these
metrics provide some evidence that Lehman could have reasonably believed it was
engaged in business with adequate capital, these metrics do not preclude a
determination that Lehman was not adequately capitalized against the specific,
foreseeableandlikelyliquidityriskarisingfromitsrelianceonshorttermrepofunding
tosupportlessliquidandilliquidinventory,andtheothercontingentcoststhatmight
ariseinaliquiditystressevent.
a.

CashCapitalSurplus

Lehmantrackedandreportedametricofcapitaladequacycalleditscashcapital
surplus,whichitdefinedasitsmeasureoflongtermfundingsourcesoverlongterm

6354Lehman,2008Q3LiquidityMetrics,Version1(Sept.2,2008),atp.8[LBEXDOCID1300336];Lehman,

FundingLehmanBrothers(Sept.10,2008),atp.10[LBHI_SEC07940_739985].
6355Lehman,EquityAdequacyFramework(May19,2008),atp.1[LBEXDOCID1302799].
6356CompareLBHI10Q(July10,2008),atp.103(showingaTier1CSECapitalratioof10.7percentanda

TotalRiskBasedCapitalRatioof16.1percent),withLehman,PresentationtotheExecutiveCommittee,
The Firms Equity Adequacy [Draft] (Oct. 2007), at p. 15 [LBEXDOCID 2489685] (showing a Tier 1
CapitalRatioof7.0percentandaTotalCapitalRatioof10.5percent).

1687

funding requirements.6357 In theory, if a companys longterm capital needs are

covered by sources of longterm capital (including debt and equity), its risk of a
liquidity mismatch is manageable because its longterm needs mature with its long
termcapitalsources.6358
The existence of Lehmans cash capital surplus does not preclude a
determinationthatLehmanwasengagedinbusinesswithunreasonablysmallcapital
becauseitwasbasedonassumptionsaboutthenormalfunctioningoftherepomarket
to support less liquid inventory even under adverse market conditions.6359 Lehmans
Cash Capital Model explicitly assumed that there would only be an impairment of
securedfunding,notacompletelossforcertainassetclasses,andthatsuchimpairment
wouldbeaddressedbytheliquiditypool.6360
b. EquityAdequacyFramework
Another measure of capital adequacy was Lehmans Equity Adequacy
Framework. The Equity Adequacy Framework was an attempt to measure the
estimatedamountofcapitalrequiredtoallowtheFirmtoreorganizeandrestructure

6357LBHI10Q(July10,2008),atp.82.
6358Lehman,

Presentation to the Chicago Mercantile Exchange, Liquidity Management At Lehman

Brothers[Draft](June5,2008),atp.7[LBEXDOCID1300305](notingthatunderitsprincipleofmatch
funding,itsassetsandliabilitieswouldhaveselffundingandselfliquidatingcharacteristics.).
6359Lehman calculated the size of the long inventory haircut as the average difference between the
market value of the collateral pledged and secured financing proceeds received for a specific asset
categoryinanormalmarketenvironment.Lehman,GFSTraining:CashCapitalModule(Jan.2006),at
pp. 4, 15 [LBEXDOCID 1682556]. Lehmans cash capital model did not assume that Lehmans repo
counterpartieswouldsimplystopfundingcertainassetclassesentirely.
6360SinceCashCapitalisraisedtofundonlythenormalmarkethaircut...,Lehmanfundscontingent
haircutwideningrequirementwithshorttermfunds(currentportionofLTDorSTD).Id.at27.

1688

without resorting to bankruptcy in case of a severe and prolonged crisis.6361 An

importantassumptionbehindthisorderlyliquidationscenariowasthatLehmanrelied
uponthesufficiencyofitsliquiditypooltoensure[]wehavesufficienttime(oneyear)
toarrangefordispositionofassetsorrestructuringofliabilities.6362
Although the orderly liquidation scenario envisioned by the Equity Adequacy
Framework is some evidence that Lehman was adequately capitalized, the Equity
Adequacy Framework analysis did not properly account for the market reaction in a
stressedliquidityevent,givenLehmansbusinessmodelandtheimportanceofmarket
confidence to its daytoday operation and survival.6363 Lehman could not expect to
conduct an orderly and complete liquidation of its inventory and assets without a
market reaction, especially given the swiftness of the near collapse of Bear Stearns.6364

6361Lehman,EquityAdequacyFramework(May19,2008),atp.2[LBEXDOCID1302799].
6362Id.at3.
6363Matthew

Albrecht, S&P, Investment Services Industry Survey (May 29, 2008), at p. 1 (noting that
investmentbanksrelyontheirreputationsinallaspectsoftheirbusiness,fromfacilitatingtradingand
financial advisory work, to finding new investments, to borrowing capital, and that the most
troublesomecrisisthatthesefirmscanface...isacrisisofconfidenceinthefirm.).
6364Although following the Bear Stearns event, the Federal Reserve created new facilities designed to
supporttheliquidityofnoncommercialbanksnamely,thePrimaryDealerCreditFacility(PDCF)and
the Term Securities Lending Facility (TSLF) through which financial institutions holding less liquid
collateralcouldobtaintemporaryloansortemporaryexchangesformoreliquidformsofcollateral,such
asgovernmentandagencysecurities,Lehmanadmittedthatuseofsuchfacilitieswasseenascarryinga
stigma that would undermine market confidence. Examiners Interview of Robert Azerad, Sept. 23,
2009(secondinterview),atp.11(notingthatuseofthePDCFwindowcarriedastigma.);seealsoU.S.
DepartmentoftheTreasury,OfficeofThriftSupervision,ExaminerinChargeRonaldS.Marcus,Report
ofExaminationofLehmanBrothersHoldingsInc.(May19,2008),atp.2(describingthePDCFasalast
resortlineofcredit.);emailfromDonaldKohn,FRBNY,toBenS.Bernanke,FederalReserve(June11,
2008) [FRB to LEH Examiner 000069] (noting that if Lehman accessed the PDCF window, such usage
might be the kiss of death in any case.). Further evidence shows that in its final week prior to its
bankruptcy filing, Lehman did not utilize the PDCF window to stave off bankruptcy. The SEC and
FederalReserve,intheirjointrequesttoCSEstoperformliquiditystresstestsfollowingtheBearStearns

1689

Thus, the mere fact of a reported equity adequacy surplus does not, without more,
precludeadeterminationofunreasonablysmallcapital.
c.

CSECapitalRatio

In December 2005, Lehman submitted itself to supervision under the SEC as a

CSE. This supervision subjected Lehman to certain minimum capital requirements,
including the reporting of a capital adequacy measurement consistent with the
standards adopted by the Basel Committee on Banking Supervision.6365 By 2008,
LehmanwasrequiredtomeasureanddiscloseitsTotalRiskBasedCapitalRatio,which
wasessentiallyameasureofLehmansequitycapitalandsubordinateddebtdividedby
itsriskweightedassets,althoughitalsomeasureditsTier1CapitalRatio,whichwasa
similar metric that used a narrower definition of equity capital.6366 Lehman was also
requiredtonotifytheSECifitsTotalRiskBasedCapitalRatiofellbelow10percent.6367

event, asked CSEs to model their stress test projections without reliance upon the PDCF or TSLF. See
Joint Request of SEC and FRBNY: Liquidity Scenarios for CSEs (May 20, 2008), at p. 1
[LBHI_SEC07940_505195].
6365LBHI10Q(July10,2008),atp.102.
6366Id.atp.101.
6367Id.TotalRiskBasedCapitalwasthesumbothTier1andTier2capital.Tier1Capitalwascomposed
ofLehmanscommonstockholdersequity,less(i)Lehmansidentifiableintangibleassetsandgoodwill;
(ii) deferred tax assets dependent upon future taxable income; (iii) cumulative gains or losses, net of
taxes, that arise from application of fair value accounting on Lehmans financial debt liabilities, and
which are attributable to Lehmans credit spread, and (iv) other deductions, including Lehmans
investments in insurance subsidiaries, but plus (x) unrestricted securities issued by Lehman, including
perpetual, noncumulative preferred securities and (y) restricted securities used by Lehman. Tier 2
CapitalincludesallcomponentsofTier1Capitalplusseniorandsubordinatednotes,generallyincluding
qualifyingseniorandunsecurednotesthatareunsecuredandhavematuritiesgreaterthanfiveyears.Id.
at101102.

1690

There was substantial correlation between Lehmans Equity Adequacy, CSE Capital
AdequacyandNetLeverageRatiometrics.6368
However,likeitsimprovednetleverageratiosasofthesecondquarterof2008,
Lehmans CSE Capital Ratio metrics do not preclude a finding that Lehman was
engagedinbusinesswithunreasonablysmallcapital.GiventhenatureofLehmans
enterprise,Lehmansabilitytooperatewasprimarilyafunctionofitsliquidityrisk,not
necessarily the value of its assets as compared to its liabilities.6369 Metrics of capital
adequacy such as the CSE Capital Ratio, the net leverage ratio, the Equity Adequacy
Framework and the Cash Capital Surplus were essentially snapshots of Lehmans
capitalstructureatagivenpointintime.However,itisdifficulttomeasureliquidity
riskwithsuchmetrics.6370AsPaulShotton,oneofLehmansmostseniorriskmanagers,
recognizedintheaftermathoftheBearStearnsevent,[e]quitysufficiencymetricsneed

6368Lehman,EquityAdequacyFramework(May19,2008),atp.8[LBEXDOCID1302799](recognizinga

close alignment between [the] EAF and CSE metrics); Lehman, Presentation to the Executive
Committee,TheFirmsEquityAdequacy[Draft](Oct.2007),atp.12[LBEXDOCID2489685](notingthat
thenetleverageratioandCSECapitalratiowerecomplementarycapitaladequacymetrics).
6369Email
from Paul Shotton, Lehman, to Chris OMeara, Lehman (Apr. 15, 2008)
[LBHI_SEC07940_768467](Liquidityismoreimportantthancapital;mostentitieswhichgobankruptdo
sobecausetheyrunoutoffinancing,notbecausethevalueoftheirassetsfallsbelowthevalueoftheir
liabilities.).
6370SeePeterNeu&LeonardMaltz,LiquidityRiskManagement3(JohnWiley&Sons2007)(Retrospective
and concurrent measuresof liquidity have little value. Prospective viewsare critical.). See also Ethan
Penner, Can the Financial Markets Make a Comeback? Wall Street Journal, Aug. 27, 2007, p. A11
(attributing maxim, liquidity is an illusion always there when you dont need it, and rarely there
when you do, to former Drexel Burnham Lambert CEO Michael Milken). A similar statement was
voicedbyLehmansPaulShottoninhisApril15,2008emailtoChrisOMeara:Liquidityistheultimate
uselessconceptplentifullyavailablewhenitsnotneeded,neverpresentwhenitis.Seeemailfrom
Paul Shotton, Lehman, to Chris OMeara, Lehman (Apr. 15, 2008) [LBHI_SEC07940_768467]. Both
commentsillustratetheprinciplethatliquiditycannotbemeasuredwithastaticmetric.

1691

tobebasedonanticipatedliquidityavailabilityduringstressedmarketperiods,noton
normalmarket experience.6371 Therefore, these static capital adequacy metrics do not
preclude a determination that Lehman was engaged in business with unreasonably
small capital to the extent they are not based upon projections of liquidity under
stressedmarketconditions.
(g) LBHIAffiliateUnreasonablySmallCapitalAnalysis
IntheprecedingSectionoftheReport,theExaminerconcludesthat,pursuantto
adebtorbydebtoranalysis,thereissufficientevidencetosupportadeterminationthat
certainLBHIAffiliateswereeithersolventorinsolvent,butthattherewasinsufficient
evidence to determine the solvency of others.6372 However, the financial condition of
unreasonably small capital is distinct from insolvency, such that an entity might be
solventandyetstillhaveunreasonablysmallcapital.6373Thus,aseparatedebtorby

6371Email

from Paul Shotton, Lehman, to Chris OMeara, Lehman (Apr. 15, 2008)
[LBHI_SEC07940_768467](Liquidityismoreimportantthancapital;mostentitieswhichgobankruptdo
sobecausetheyrunoutoffinancing,notbecausethevalueoftheirassetsfallsbelowthevalueoftheir
liabilities.).
6372SeeSectionIII.B.3.cofthisReportforadiscussionofLBHIAffiliatesolvency.
6373Boyerv.CrownStockDistrib.,Inc.,587F.3d787,794(7thCir.2009)(Thedifferencebetweeninsolvency
andunreasonablysmallassetsintheLBOcontextisthedifferencebetweenbeingbankruptontheday
the LBO is consummated and having at that moment such meager assets that bankruptcy is a
consequence both likely and foreseeable.); see also Moody, 971 F.2d at 1070 (Because an inability to
generate enough cash flow to sustain operations must precede an inability to pay obligations as they
comedue,unreasonablysmallcapitalwouldseemtoencompassfinancialdifficultiesshortofequitable
insolvency.);Brandtv.Hicks,Muse&Co.,Inc.(InreHealthcoIntl),208B.R.288,302(Bankr.D.Mass.1997)
(describing the unreasonably small capital standard as connot[ing] a condition of financial debility
short of insolvency (in either the bankruptcy or equity sense), but which makes insolvency reasonably
foreseeable); MFS/Sun Life Trust, 910 F. Supp. at 944 (The test is aimed at transferees that leave the
transferor technically solvent but doomed to fail.); In re Vadnais Lumber Supply, Inc., 100 B.R. 127, 137
(Bankr.D.Mass.1989)(notingthatunreasonablysmallcapital[]...encompassesdifficultieswhichare
shortofinsolvencyinanysensebutarelikelytoleadtoinsolvencyatsometimeinthefuture).

1692

debtor analysis is warranted to determine which, if any, of the LBHI Affiliates was
engagedinbusinesswithunreasonablysmallcapital.
AdeterminationthatLBHIwasoperatingwithunreasonablysmallcapitalhas
implications upon whether any of LBHIs Affiliates were also operating with
unreasonably small capital. Courts have held that where a parent company is left
withunreasonablysmallcapitaltooperateitsbusiness,itssubsidiarieswouldalsobe
left in that same financial condition to the extent they were not independently
funded.6374Thisisespeciallytrueincaseswherethereisacentralizedcashmanagement
systembetweenparentcompanyandaffiliatesonaconsolidatedenterprisebasis,6375or
where there is direct or indirect funding support from a parent to its subsidiaries or
affiliates.6376
The Examiners analysis of whether the LBHI Affiliates may have had
unreasonably small capital focused on those entities that had significant operations
dependent on funding and/or capital support from LBHI since the LBHI Affiliates
capitaladequacyisdirectlylinkedtothatofLBHI.6377TheExaminerfindsthattheeight

6374In re TOUSA, Inc., B.R. , Bankr. No. 0810928, 2009 WL 3519403, at 14 (Bankr. S.D. Fla. Oct. 30,

2009).SeealsoIngallsv.SMTCCorp.(InreSMTCMfg.ofTex.),Bankr.No.0416354CAG,Adv.No.06
1283,2009WL2940161,at*5658(Bankr.W.D.Tex.Sept.11,2009).
6375InreTOUSA,Inc.,2009WL3519403,at*31.
6376SeeTeleglobeUSA,Inc.v.BCEInc.(InreTeleglobeCommcnsCorp.),392B.R.561,602603(Bankr.D.Del.
2008) (holding that the test for subsidiary solvency should not exclude the funding support actually
given by the immediate corporate parent until the point when it would no longer be reasonable to
expectsuchsupport).
6377 See Section III.B.3.c of this Report, which provides the Examiners DebtorbyDebtor analysis of the
solvencyoftheLBHIAffiliates.

1693

LBHI Affiliates that relied on LBHI for funding and/or credit support were CES
Aviation,CESAviationV,CESAviationIX,LCPI,LBSF,LBCS,LOTCandLBCC.The
Examiner therefore concludes that there is sufficient evidence to support a colorable
basisforfindingthattheseentitieshadunreasonablysmallcapitalbeginningearlyin
the third quarter of 2008 and at all times through each applicable petition date. The
Examiner also observes that there exists evidence that would support a contrary
finding.Asconflictingevidenceexists,afinderoffactwillneedtoconsidercarefullyall
available evidence in determining whether LBHI and the LBHI Affiliates had
unreasonably small capital. The Examiner expresses no opinion as to what
determinationafinderoffactwouldmakeinconsideringthiselement.
e) InsiderPreferencesAgainstLBHI(ThirdBullet)
(1) Summary
This Section of the Report discusses insider preferences against LBHI. The
Examiner identified LBSF, LBCS and LCPI as those LBHI Affiliates for which a
determinationcouldbemadeofinsolvencyorborderlinesolvencybeginningonJune1,
2008.TheExaminertailoredthepreferenceanalysistocolorableclaimsthattheseLBHI
AffiliatesmighthaveagainstLBHI.Generally,theExamineridentifiedcashtransfersto
LBHI not in connection with safeharbored activity as preferential if the cash was
transferredfororonaccountofanantecedentdebt.TheExaminersfindingsareas
follows:

1694

There is evidence to support a finding for each element of a preference claim

underSection547(b)oftheBankruptcyCodeinanactionbyLBSFagainstLBHI.There
is also evidence to support a finding for each element of the new value and ordinary
coursedefensesthatLBHIcouldassert.Anyconclusionwouldbedeterminedbyatrier
offact.
There is evidence to support a finding for each element of a preference claim
underSection547(b)oftheBankruptcyCodeinanactionbyLBCSagainstLBHI.There
is also evidence to support a finding for each element of the new value and ordinary
coursedefensesthatLBHIcouldassert.Anyconclusionwouldbedeterminedbyatrier
offact.
TheExaminerhasbeenunabletodeterminewhetherthereisevidencetosupport
afindingforeachelementofapreferenceclaimunderSection547(b)oftheBankruptcy
CodeinanactionbyLCPIagainstLBHIbecausetheExaminer,asdiscussedbelow,has
beenunabletotracethematerialmovementofmoneybetweenLCPIandLBHIthatwas
notinconnectionwithasafeharboredevent.
The Examiner has not analyzed whether CES Aviation LLC, CES Aviation V
LLC,andCESAviationIXLLChavecolorablepreferenceclaimsagainstLBHIbecause
theseentitiesclaimswouldberelativelyinsignificantcomparedtothepotentialclaims
ofotherLBHIAffiliates;theExaminerdeterminesthatitwouldbeanimprudentuseof
estateresourcestofurtherinvestigateanypotentialclaims.

1695

Because the Examiner determined that the remaining LBHI Affiliates were not
insolvent oron theborderline of solvency onMay31, 2008,the Examiner,forreasons
statedbelow,didnotinvestigatewhethertherewasevidencetosupporteachelement
ofapreferenceclaimunderSection547(b)oftheBankruptcyCodeinanactionagainst
LBHI.
(2) LegalSummary
This Section addresses whether any LBHI Affiliate has colorable claims against
LBHI for potential insider preferences arising under the Bankruptcy Code or state
law.6378TheLBHIAffiliateisthedebtorseekingtoavoidapreferencepayment;LBHIis
theinsiderorcreditorreceivingthatpayment.6379Asuccessfulpreferenceclaimunder

6378Some

courts have found that state preference law is an adjunct to, and supplemental of, those
powers specifically provided for in the Bankruptcy Code which enable the trustee to avoid certain
transfers.Perkinsv.PetroSupplyCo.(InreRexploreDrilling,Inc.),971F.2d1219,1222(6thCir.1992);see
alsoProvidentHosp.TrainingAssnv.GMACMortgageCorp.(InreProvidentHosp.&TrainingAssn),79B.R.
374,379(Bankr.N.D.Ill.1987)(recognizingavailabilityofstatepreferencelawasameansofattackinga
transferundersection544(b));AssociatedGrocersofNeb.Coop.,Inc.v.AmHomeProd.Corp.(InreAssociated
GrocersofNeb.Coop.,Inc.),62B.R439,445(D.Neb.1986).ButseeSherwoodPartners,Inc.v.Lycos,Inc.,394
F.3d1198(9thCir.2005)(findingthatstatepreferencelawwaspreemptedbysection547).
The Examiner reviewed preference law in New York and Delaware. The Examiner concluded
that New York does not have a preference statute available to the trustee. Cf. Sharp Intl Corp. v. State
Street Bank and Trust Co. (In re Sharp Intl Corp.), 403 F.3d 43, 5455 (2d Cir. 2005) (explaining that
preferentialpaymentstononinsidersarenotfraudulentconveyancesandarenotavoidableunderNew
York law). Delaware does have a preference statute, see DEL. CODE 10 7387 (1995), but it is unclear
whether the Delaware statute could be used by the trustee in these cases because it has been applied
narrowlybyDelawarecourts.SeeDodgev.WilmingtonTrustCo.,1995WL106380,at*24(Del.Ch.1995)
(noting that Delawares preference statute had not been cited by a Delaware court since 1917 and
refusing to broaden its reach beyond assignments in trust). The Examiners focus in identifying
potentiallypreferentialtransfers,therefore,isontransferssubjecttoavoidanceunderSection547ofthe
BankruptcyCode.
6379See11U.S.C.101(2)(A),(31)(B)(iii),(31)(E).

1696

Section547oftheBankruptcyCoderequires6380thedebtor6381toprove:atransferofan
interest of the debtor in property (1) to or for the benefit of a creditor; (2) for or on
account of an antecedent debt owed by the debtor before such transfer was made; (3)
madewhilethedebtorwasinsolvent;(4)made(A)onorwithin90daysbeforethedate
offilingofthepetition;or(B)betweenninetydaysandoneyearbeforethedateofthe
filingofthepetition,ifsuchcreditoratthetimeofsuchtransferwasaninsider;and(5)
that enables such creditor to receive more than such creditor would receive if (A) the
casewereacaseunderChapter7ofthistitle;(B)thetransferhadnotbeenmade;and
(C) such creditor received payment of such debt to the extent provided by the
provisions of this title.6382 LBHI is an insider of LBHI Affiliates. Consequently, the
applicablereachbackperiodforinsiderpreferencesisoneyear.
The Bankruptcy Code presumes insolvency on and during the 90 days
immediatelyprecedingthedateofthefilingofthepetition.6383Thecreditorcanrebut
thepresumptionofinsolvencybyintroducingevidencethattendstosuggestthatthe
debtorwassolventatthetimethetransferwasmade.6384

6380For a more detailed discussion of the law of preferences, see Appendix 1, Legal Issues, at Section

IV.A.D.
6381Section 1107 of the Bankruptcy Code gives the debtor in possession all the rights of a trustee with
exceptionsnotrelevanthere.
638211U.S.C.547(b).
638311U.S.C.547(f).SeeSectionIII.B.3.cofthisReport,whichdiscusseseachDebtorssolvency.
63845CollieronBankruptcy,547.12(15thed.2005).

1697

The Examiner Order refers to colorable claims against LBHI and does not
mention any potential defenses that LBHI could assert. The Examiner recognizes,
however,thatinthecontextofpreferenceclaimsunderSection547(b)oftheBankruptcy
Code,itisimportanttoconsiderpotentialdefensesthatcouldberaisedbyadefendant
underSection547(c).Thedebtorhastheburdenofprovingtheelementsofapreference
claim,andthecreditorhastheburdenofprovinganydefensetosuchaclaim.6385There
are many potential defenses that defendantcreditors may assert,6386 but the Examiner
has limited the discussion of potential defenses to those that appear to be colorable
basedonareviewoftheDebtorsbooksandrecords.
Inadditiontothedefensesdiscussedabove,thesafeharborsoftheBankruptcy
Codeprotectqualifyingtransfersfrombeingavoidedaspreferential.6387
(3) SourcesofPotentialPreferentialActivity
Upon initial investigation, most of the activity at Lehman was in respect of
transfersthatwereprotected,orexemptfromavoidance,bytheBankruptcyCodessafe
harborprovisions.Therefore,evenifsuchtransferssatisfiedthecriteriaforpreferential
transfers pursuant to Section 547 of the Bankruptcy Code, they could not be avoided
pursuant to Section 546. In light of this determination, the Examiner focused the
investigationonactivitynotinconnectionwithtransfersprotectedbythesafeharbors.

638511U.S.C.547(g).
6386See11U.S.C.547(c).
6387For a more detailed discussion of the Bankruptcy Codes safe harbor provisions, see Appendix 1,

LegalIssues,atSectionIV.E.

1698

TheExamineridentifiedthemovementofcashbetweenLBHIanditsAffiliatesfororon
account of an antecedent debt that was not in connection with securities contracts,
commodities contracts, forward contracts, repo agreements, or swap agreements.6388
The Examiner identified three sources of cash transfers that are potentially not in
connectionwithsafeharboredactivity:(1)fundingactivity6389inGCCM,whichwas
the manual movement of cash between bank accounts owned by affiliates and bank
accounts owned by LBHI; (2) quasifunding activity, which was automatic funding
like activity occurring in GCCM when LBHI acted as central banker by receiving or
extendingvalueonbehalfofitsaffiliates;and(3)trustreceiptactivity,whichwasthe
movementofmoneyrecordedthroughLehmansMTStradingsystem.Eachsourceof
activitywillbediscussedinturn.
First, GCCM funding activity refers to the manual movement of cash between
bank accounts owned by affiliates and bank accounts owned by LBHI.6390 Although

6388See

Section III.B.2.c of this Report, which addresses the operation of Lehmans cash management
system.
6389Fundingactivity,asreferredtointhisSectionoftheReport,issimilartowhatisoftenreferredtoas
cash sweeps, but it is nondirectional. As discussed in Section III.B.2.b of this Report, the Examiner
defines cash sweeps to mean the transfer of cash that occurred between September 15, 2008 and the
datethattheapplicableLBHIAffiliatecommenceditsChapter11casefrom(i)anLBHIAffiliatetoLBHI
or(ii)athirdpartytoLBHIforthebenefitofanLBHIAffiliate(itdoesnotincludethesettlementofpre
existingobligations).
6390TheExaminersinvestigationofpotentialpreferencesrelatedtofundingactivityassumesthatmoney
transferredfromanLBHIAffiliatetoLBHIremovedthemoneyfromtheaffiliatesestate.TheExaminer,
forthepurposesofthispreferenceanalysis,assumesthattheaffiliatewouldnothaveasection541/542
claimagainstLBHI.SeeAmduraNatlDistrib.Co.v.AmduraCorp.(InreAmduraCorp.),75F.3d1447(10th
Cir.1996)(concludingthatmoneyheldbyparentdebtorinacashmanagementsystemwasnotproperty
ofsubsidiarydebtorundersection541oftheBankruptcyCode);SouthmarkCorp.v.Grosz(InreSouthmark
Corp.), 49 F.3d 1111 (5th Cir. 1995) (concluding that money held by parent debtor pursuant to a cash

1699

GCCM referred to such activity as funding activity, which this Section of the Report
adopts,theExaminerbifurcatesfundingactivityintothefollowingtwocategories:up
funding,whichreferstotransfersofmoneyfromaffiliatestoLBHI(commonlyreferred
toascashsweeps),anddownfunding,whichreferstotransfersfromLBHItoaffiliates.
The purpose of upfunding was to concentrate Lehmans cash at LBHI. Lehmans
TreasuryGroupsoughttofundeachaffiliatesaccountto$0.00bytheendoftheday.6391
Although Lehman invested the concentrated money overnight, the Examiner has
observedno evidence suggestingthatupfunding activity was in connectionwithany
safeharbored event.6392 The Examiner expresses no opinion in this Section of the
Report, however, on whether downfunding is protected by the safe harbors, as the
ExaminerOrderdoesnottasktheExaminertoinvestigateclaimsthatLBHImayhave
againstaffiliatesforpotentialinsiderpreferences.6393

management system was property of parentdebtors estate for purposes of preference analysis when
parentdebtormadepaymentonbehalfofsubsidiarydebtor);EnronCorp.v.PortofHoustonAuth.(Inre
EnronCorp.),2006WL2385194,at*67(Bankr.S.D.N.Y.June2,2006);cf.R2Inv.v.WorldAccess,Inc.(Inre
World Access, Inc.), 301 B.R. 217, 26371 (Bankr. N.D. Ill. 2003) (discussing at length ownership of
concentration account); Cassirer ex rel. Estate of Schick v. Herskowitz (In re Schick), 234 B.R. 337 (Bankr.
S.D.N.Y.1999);seegenerallyDerekFeagans,ConcentrationAccountsandBankruptcy:WhereOWheredidthe
BankruptcyEstateGo?,67U.MO.KAN.CITYL.Rev.145(1998).
6391ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.2.Flemingnotedmanyexceptionsto
thegeneralpolicyoffundingaccountstozero.Forexample,ifLBIhadextramoneyattheendoftheday
itwastrappedbecauseLBIcouldnotlendtoLBHIonanunsecuredbasislikeotherLehmanentities.
6392Id. The Examiner has observed no evidence suggesting that upfunding is in connection with a
ProtectedContract.ForamoredetaileddiscussionoftheBankruptcyCodessafeharborprovisions,see
Appendix1,LegalIssues,atSectionIV.E.
6393See 11 U.S.C. 741(7)(A)(v) (extension of credit to settle a securities transaction is a securities
contract). No reported cases have been found interpreting Section 741(7)(A)(v). The Examiner
addressed downfunding in the context of LBHIs new value defense, however, because newvalue
calculationsdonotexcludesafeharboredactivity.See11U.S.C.547(c)(4).

1700

Second,quasifundingactivityreferstoautomaticfundinglikeactivityoccurring
inGCCMwhenLBHIactedascentralbankerbyreceivingorextendingvalueonbehalf
ofaffiliates.Inotherwords,whenLBHIactedascentralbanker,GCCMcreatedmany
automaticquasifundingtransactionsthatwerecoupledwithactivitythatispotentially
protectedbythesafeharbors.Quasifundingactivitytakesmanyforms,butitfollows
the basic premise that Lehman attempted to reduce the movement of cash between
bankaccountsthateventuallyupfundedtoLBHI.6394Quasifundingactivityiscoupled
with an event that, absent GCCM, would have required the movement of cash in a
different way.6395 The Examiner and his financial advisors have been unable to
catalogue all types of quasifunding activity,6396 but several examples are described in
thefollowingparagraphs.

6394SeeSectionIII.B.2ofthisReport,whichdiscussestheconceptoffundingtreesinGCCM.
6395GCCMreferredtothisactivityasintercompanyactivity.ExaminersInterviewofDanielJ.Fleming,

Dec.17,2009,atpp.34.
6396The Examiner has not categorically determined whether quasifunding is in connection with safe

harboredactivitybecausetherearesomanypermutationsofactivitygeneratedbyGCCM.Whetherthe
safeharborsapplytoquasifundingactivitywilldependonhowexpansivelythephraseinconnection
withfoundineachofthesafeharborprovisionsofSections546(e),(f),(g),and(j)isinterpreted.One
court has stated that a natural reading of in connection with suggests a broader meaning similar to
relatedto.Interbulk,Ltd.v.LouisDreyfusCorp.(InreInterbulkLtd.),240B.R.195,202(Bankr.S.D.N.Y.
1999).Anothercourt,ininterpretingthisphrase,heldthatprejudgmentattachmentsthatapartytopre
petition swap agreements obtained in state court actions brought to recover for the debtors alleged
breach of the swap agreements were transfers made in connection with swap agreements, and were
thereforeprotectedbySection546(g)becausetheactionstakenbythepartystemmedfromthefailureof
theswapagreements.CasadeCambioMajaparaS.A.deC.V.v.WachoviaBank,N.A.(InreCasadeCambio
Majapara S.A. de C.V.), 390 B.R. 595 (Bankr. N.D. Ill. 2008). Although no court has addressed any
limitationontheinconnectionwithlanguage,itcannotbeboundless.Inanyevent,theExaminernotes
the tension between the safeharbors expansive in connection with language and the general
propositionthatcourtslooktosubstanceoverforminthecontextofpreferenceidentification.E.g.,Dean
v.Davis,242U.S.438,443(1917)(Merecircuityofarrangementwillnotsaveatransferwhicheffectsa
preferencefrombeinginvalidassuch.);NatlBankofNewportv.NatlHerkimerCountyBank,225U.S.178,

1701

When Lehman implemented GCCM, it sought to limit the number of bank

accounts that it needed to maintain. But Lehman determined that it was less
cumbersometoconvertexistingaffiliatebankaccountsintonocreditaccountsthanit
was to close them and provide new payment instructions to thirdparties.6397 When
moneywasdepositedintonocreditbankaccounts,itwasautomaticallyforwardedto
and deposited into an LBHI bank account. In substance, therefore, deposits into no
creditaccountsrepresentedtwodistincttransactions:acounterpartyremitsapayment
to the affiliate (transaction number one, which is potentially a safeharbored activity),
and Lehman upfunds the money to LBHI at the end of the day (transaction number
two, which is an upfunding activity).6398 Indeed, Lehman employees noted that it
would be a distinction without a difference to consider quasifunding activity to be

184(1912)(Itisnotthemereformormethodofthetransactionthatthe[bankruptcy]actcondemns,but
theappropriationbytheinsolventdebtorofaportionofhispropertytothepaymentofacreditorsclaim,
sothattherebytheestateisdepletedandthecreditorobtainsanadvantageoverothercreditors.);Pacific
N. Oil, Inc.v. Erickson (Inre Seaway Express Corp.),940F.2d 669 (Table), 1991WL 136238, at *2 (9th Cir.
1991)(Indeterminingwhetheratransferhasbeenapreference,abankruptcycourtmustlookthrough
formtosubstance,andtreatthetransactionaccordingtoitsrealnature.(citationsomitted));Katzv.First
Natl Bank of Glen Head, 568 F.2d 964, 97071 (2d Cir. 1977) (looking beyond form to substance in
preferenceaction);cf.Orrv.KinderhillCorp.,991F.2d31,35(2dCir.1993)(notingincontextoffraudulent
transfer under New York law that [i]n equity, substance will not give way to form, and technical
considerationswillnotpreventsubstantialjusticefrombeingdone(citationomitted)).
6397TheExaminerunderstandsthattheseaccountsmayalsobereferredtoassubaccounts.
6398Quasifunding activity could work in the opposite direction that is, LBHI could pay an obligation
owedbyanaffiliate.Inotherwords,thisfunctionedinthesamewayashavingLBHIforwardthemoney
onanunsecuredbasistotheLBHIAffiliate(transactionnumberone),andthenhavingtheLBHIAffiliate
remitthepaymenttothecounterparty(transactionnumbertwo).

1702

anythingotherthanfundingactivity,6399andtheresultingaccountingentrieswouldbe
thesame.Infact,beforeLehmanimplementedGCCM,activityoccurredthisway.6400
There aremany otherexamplesofquasifundingactivity outside thecontext of
nocredit accounts. For example, it was common practice for an affiliate to direct
counterpartiestoremitsettlementpaymentstoLBHIbecauseitwaseasierforLBHIto
keepthecashandadjusttheaffiliatesintercompanyobligationtoLBHIthanitwasto
directcounterpartiestopaytheaffiliateandupfundlater.Or,forexample,ifthepayor
and payee ofatransaction were bothLehmanaffiliates, andtheirbank accountswere
onthesamefundingtree(thatis,theirrespectivebankaccountswouldultimatelyup
fundtoLBHIattheendoftheday),cashwouldnotmoveinrespectofthattransaction
andeachaffiliatesintercompanyobligationtoLBHIwouldbeadjustedaccordingly.
TheExaminerbifurcatesquasifundingactivityintothefollowingtwocategories:
quasiupfunding, which refers to GCCM activity that caused an affiliates antecedent
debttoLBHItoshrinkbecauseLBHIkeptmoneyorvaluethatwasowedtoanaffiliate,
and quasidownfunding, which refers to GCCM activity that caused an affiliates
antecedentdebttoLBHItogrowbecauseitrepresentsanextensionofcreditgivenby
LBHI.

6399ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.4.SeeSectionIII.B.2.c.3ofthisReport,

whichdiscussesthedistinctionsbetweeninhousevirtualbankaccountsandrealworldbankaccounts.
6400ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.4.

1703

Third,theExaminersfinancialadvisorsreviewedMTS,Lehmansageoldfixed
income trading platform, for potential preferential activity that occurred outside of
GCCM. Although Lehmans goal was to move all of Lehmans cash management
functionstoGCCM,6401LBHIcontinuedtofunditsaffiliatesindifferentwaysthrougha
multitudeofextraordinarilycomplexsourcesystemsandtradingplatformsatthetime
ofitsbankruptcy.6402LehmancreatedsecuritiesknownastrustreceiptsinMTSthat
fundedcertainaffiliatebank accountstiedto thatsystem.6403TheExaminers financial
advisorsreviewedMTS,whereappropriate,toidentifypotentialpreferentialactivity.
Theidentificationofcashtransfersnotinconnectionwithsafeharboredactivity
wasverydifficultoutsideofGCCM,andDanielJ.Fleming,LehmansformerHeadof
Global Cash and Collateral Management, could not identify all potential sources of
fundingactivity,norcouldheidentifyallthesystemsusedtotransfermoneybetween
Lehmans3000plusbankaccounts.6404Notwithstandingthescopeanddiligenceofthe
investigation,theExaminerrecognizesthatthedataavailablearelikelyincompleteand

6401ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.3.
6402SeeSectionIII.B.2.cofthisReport,whichdiscussesLehmanscashmanagementsystem.GCCMwas

fullyintegratedinEuropeandpartiallyintegratedintheUnitedStates.ItwasnotintegratedinAsia.
6403ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.6;ExaminersInterviewofAdaShek,
Nov. 24, 2009,at p.8. The Examiner hasfound noevidence that funding throughtrust receipts was
improper.TheuseoftrustreceiptsisdiscussedingreaterdetaillaterintheReport.TheLECforLCPI,
which was a primary LBHI Affiliate that utilized trust receipts, would manually allocate the funding
associated with trust receipts to the general ledger intercompany funding account between LCPI and
LBHIattheendofeachmonth.ExaminersInterviewofAdaShek,Nov.24,2009,atpp.89.Moreover,
the trade detail in the MTS system labels these transactions as unsecured intercompany funding.
Appendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010).
6404ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.8.

1704

thatmoneymovedthroughLehmaninwaysnotidentifiedinthisSectionoftheReport.
Accordingly,itispossiblethatpotentialpreferentialactivitymayhaveoccurredoutside
whatiscapturedbyfundingandquasifundingactivityinGCCM,andtrustreceiptsin
MTS.
(4) DeterminationsandAssumptionsonSection547(b)Elements
TheExaminerdeterminedthatitwasprudenttofocusthepreferenceanalysison
LBHI Affiliates that were either insolvent or on the borderline of insolvency, because
proofofinsolvencyatthetimeanypreferentialtransferismadeisarequiredelementof
a preference claim. Only six LBHI Affiliates were insolvent or on the borderline of
insolvency for significant portions of the twelve months before their respective filing
dates,whichisillustratedbythefollowingchart:6405
Balance Sheet Solvency for Borderline and Insolvent Debtor Entities
Fiscal Years 2007 and 2008

September-07
October-07
November-07
December-07
January-08
February-08
March-08
April-08
May-08
June-08
July-08
August-08

CES Aviation
Solvency
Determination
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Insolvent
Insolvent

CES Aviation V
Solvency
Determination
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent

CES Aviation IX
Solvency
Determination
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent
Insolvent

LBCS
Solvency
Determination
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline

LBSF
Solvency
Determination
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline
Borderline

LCPI
Solvency
Determination
Borderline
Borderline
Borderline
Borderline
Borderline
Insolvent
Borderline
Insolvent
Insolvent
Insolvent
Insolvent
Borderline

6405See Section III.B.3.c of this Report, which discusses each LBHI Affiliates solvency during the pre

petitionperiod.

1705

GiventhecomplexityofLehmansnumeroussourcesystemsandthesubstantial
costofanalyzingthem,theExaminerhasdeterminedthatitwouldbeprudenttolimit
the analysis to the period between June 1, 2008 and each debtors respective filing
date,6406whichisreferredtoastheDefinedPreferencePeriod.Moreover,becausethe
assetsoftheaviationentitieswererelativelyinsignificantwhencomparedtotheother
LBHI Affiliates, the Examiner focused the analysis on LBSF, LBCS, and LCPI. As the
ExamineralsofocusedhisanalysisontheDefinedPreferencePeriod,thisReportdoes
not address colorable preference claims that LBSF, LBCS, and LCPI may have against
LBHIinrespectofpreDefinedPreferencePeriodtransfers.
Inlight ofthe Examinersconclusion that there is insufficient evidenceto rebut
thepresumptionofinsolvencypursuanttoSection547(g)oftheBankruptcyCodewith
respect to LOTC and LBCC after September 12, 2008, the Examiner considered
conducting a preference analysis with respect to those LBHI Affiliates. The Examiner
notes, as the Defined Preference Period for LBSF, LBCS, and LCPI began on June 1,
2008,therewasasufficientuniverseofpotentiallypreferentialtransferstowarrantthe
expenditure of resources to analyze such transfers. Conversely, the applicable period
for LOTC and LBCC would only begin after September 12, 2008; thus the universe of

6406As discussed in greater detail in Appendix 22, Duff & Phelps, Preferences Against LBHI and Other

LehmanEntities(Feb.1,2010),p.4,therewasnofundingactivityrecordedinGCCMduringOctober
2008.TherewassomeactivityinGCCMrelatingtoquasifundinginOctober2008thatdidnotexceed
$10 million for LBSF and LBCS combined. Id. at pp. 13, 16. The Examiners financial advisors
disregardedactivityinOctober2008forthepurposesofthispreferenceanalysis.

1706

potentialpreferentialtransfersforLOTCandLBCCwouldbemuchsmallerandwould
consistofatypelikelytobeshieldedbythesafeharborprovisionsoftheBankruptcy
Code. At the same time, the cost of conducting such a review for LOTC and LBCC
wouldbematerialbecauseofthecomplexityofLehmansfinancialreportingsystems,
the dislocation caused by LBHIs bankruptcy filing on September 15, 2008, and the
resulting disruption in Lehmans financial reporting systems. Consequently, the
Examiner determined that it would not be a prudent use of resources to conduct a
preferenceanalysisforLOTCandLBCC.
The Examiner made the following determinations with respect to certain
elementsofaSection547(b)claim(thesedeterminationsapplytoallpreferenceclaims
that could be asserted by LBSF, LBCS, and LCPI, as discussed herein). First, the
Examinerconcludes,inthecontextoffunding,thatthetransferringLBHIAffiliatehada
colorable interest . . . in [the] property transferred. This was evidenced by the
accounting records6407 (including virtual account titles in the cash management
system6408),andthelackofanyevidencesuggestingthatthetransferringentitydidnot
haveaninterestinthepropertytransferred.
Second, LBSF, LBCS, and LCPI had significant antecedent debt obligations to
LBHI.Thisisevidencedbyintercompanycreditbalanceswith,orobligationsto,LBHI

6407E.g.,InreSchick,234B.R.at34243(discussingwhetherfundsindebtorsbankaccountwereownedby

debtorforpurposesofsection541oftheBankruptcyCode).
6408SeeSectionIII.B.2.cofthisReport,whichdiscussesinhousevirtualaccountsinGCCM.

1707

onthebooksandrecordsofLBSF,LBCS,andLCPI.Similarly,thebooksandrecordsof
LBHI reflect debit balances with, or receivables from, LBSF, LBCS, and LCPI. The
Examiner has observed no evidence suggesting these intercompany payables to LBHI
representedanythingotherthandebtobligations.6409
Third, the Examiner concludes that upfunding and quasiupfunding
transactionsrepresentedpaymentsfororonaccountoftheantecedentdebtbecause
theliabilityonthebooksandrecordsofLBSF,LBCS,andLCPIwasreducedwhenthe
transfers were made. Similarly, the receivable on thebooks and records ofLBHI was
reducedwhenthetransfersweremade.6410Forthesamereason,theExaminerconcludes
thatthepaymentsmadebyLBSF,LBCS,andLCPIbenefitedLBHI.6411
Furthermore,theExaminerassumedforthepurposesofthisanalysisthatLBHI
received more from any preferential activity than it would have received under a
hypothetical Chapter 7 liquidation. Before making this assumption, however, the
Examinerfirstconsideredwhetheralloranypartofthedebtthatwassatisfiedwould
havebeenonaccountofasecuredobligationbyvirtueofSection553spreservationof

6409See,e.g.,CelotexCorp.v.HillsboroughHoldingsCorp.(InreHillsboroughHoldingsCorp.),176B.R.223,248

50(M.D.Fla.1994)(findingthat,underthecircumstancesofthecase,theintercompanyaccountpayables
were debt obligations and not equity investments); cf. Amdura Corp. v. Ryder Truck Rental, Inc. (In re
AmduraCorp.),151B.R.557,55960(Bankr.D.Colo.1993).
6410LCPI,LBSF,andLBCS(aswellastheotherLBHIAffiliates)hadmultipleintercompanyaccountswith
LBHI. However, unsecured funding was always recorded in the same intercompany account on the
books and records (the account numbers all began with 12620). Ernst and Young Walkthrough
Template(Nov.30,2009),atp.6[EYSECLBHICORPGAMX07033384].
6411See generally Bank of Am. Natl Trust & Sav. Assoc. v. 203 N. LaSalle St. Pship, 526 U.S. 434 (1999)
(discussingonaccountoflanguageinadifferentcontextundertheBankruptcyCode).

1708

setoff rights. Braniff Airways, Inc. v. Exxon Co., U.S.A.6412 addressed the concept of
permissible preference[s]byvirtueofSection506(a)oftheBankruptcy Code,which
affords secured status to claims of setoff under Section 553(a).6413 The Examiner
concludesthatLBHIdoesnothaveanargumentthatsuchpreferentialtransferswould
be on account of a secured claim by virtue of any setoff right under the rationale of
BraniffAirways.6414

6412814F.2d1030(5thCir.1987).
6413Id.at1034.
6414LBHIsbooksandrecordsreflectmultipleintercompanyaccountswithitsaffiliates.Similarly,many

of the affiliates books and records reflect multiple intercompany accounts with LBHI. In many cases,
however,thebooksandrecordsofanaffiliatereflectbothpayablesandreceivableswithLBHIandthe
books and records of LBHI reflect both payables and receivables with any particular affiliate. The
apparent mutuality of obligations raises the question of whether an LBHI Affiliate could prove the
hypotheticalliquidationanalysisunderSection547(b)(5)oftheBankruptcyCodegiventhesecuredstatus
ofmutualdebtsunderSections553and506.Inotherwords,ifLBHIwasindebtedtoanaffiliateformore
thantheaffiliatewasindebtedtoLBHI,theaffiliatemaynotsatisfyitsSection547(b)(5)burdenbecause
LBHIsrightofsetoffunderSection553wouldhaveencompassedanypreferencepaymentamounthad
thepreferencenotbeenmade.SeeBraniffAirways,814F.2dat1035;cf.BrooksFarmsv.U.S.DeptofAgric.
(InreBrooksFarms),70B.R.368,37273(Bankr.E.D.Wis.1987);InreRevereCopperandBrass,Inc.,32B.R.
577, 583 n.3 (Bankr. S.D.N.Y. 1983). The Examiner reviewed the intercompany account balances on
LBHIsbooksandrecordsagainsttheintercompanyaccountbalancesonLBSF,LBCS,andLCPIsbooks
andrecordsforAugustandSeptember2008.TheExamineralsoreviewedSchedulesBandFfromLBHI,
LBSF, LBCS, and LCPIs Amended Schedules and Statements, which address inter alia intercompany
receivables and unsecured intercompany payables, respectively. The schedules for LBCS, LBSF, and
LCPIcanbefoundatdocketnumbers3061,3066,and3067,respectively,andtheAmendedSchedulesfor
LBCS,LBSF,andLCPIcanbefoundatdocketnumbers3939,3921,and3927,respectively.Asillustrated
inAppendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010)atex.
1, LBSF, LBCS, and LCPI all owed LBHI significantly more than LBHI owed LBSF, LBCS, or LCPI,
respectively,attheendofSeptember2008.Assuch,theExaminerhasobservednoevidencesuggesting
that LBHI owed LBSF, LBCS, and LCPI more than it was owed on September 15, 2008. Therefore, the
ExaminerhasconcludedthatLBSF,LBCS,andLCPIwillnotbeprecludedfromprovingahypothetical
liquidationanalysisasrequiredbySection547(b)(5)oftheBankruptcyCodeundertherationaleofBraniff
Airways.

1709

(5) ScopeofDefensesUnderSection547(c)
TheExamineranalyzedthenewvalueandordinarycoursedefensesunder
Sections 547(c)(4) and 547(c)(2) of the Bankruptcy Code, respectively, for funding and
quasifundingactivity,whereappropriate.6415
New Value Defense. The new value defense provides that a creditor may
deduct from any liability it owes a debtor as a result of a preferential transfer any
amountofnewvaluethatitgavethedebtorafterthepreferentialtransferoccurred.6416
For example, if a debtor pays a creditor $100 on day one in respect of an antecedent
debt and all other criteria for a preference are satisfied, and on day two, the creditor
extendsnewcreditworth$90thatisnotsubsequentlyrepaidbythedebtor,only$10of
the$100paymentisapreference.6417

6415TheExaminerdoesnotaddresswhetherLBHImayassertmultipledefensesunderSection547(c)of

theBankruptcyCode.SeeG.H.LeidenheimerBakingCo.v.Sharp(InreSGSMAcquisitionCo.,LLC),439F.3d
233,242n.7(5thCir.2006).
6416Section547(c)(4)providesthat[t]hetrusteemaynotavoidunderthissectionatransfer...(4)toor
forthebenefitofacreditor,totheextentthat,aftersuchtransfer,suchcreditorgavenewvaluetoorfor
the benefit of the debtor (A) not secured by an otherwise unavoidable security interest; and (B) on
account of which new value the debtor did not make an otherwise unavoidable transfer to or for the
benefitofsuchcreditor.
6417If there were multiple extensions of new value, the Examiner applied the wellestablished rule that
extensionscanbeappliedtoanyprecedingpreferentialtransferandnotjusttheimmediatelypreceding
preferentialtransfer.SeeWilliamsv.AgamaSys.,Inc.(InreMicroInnovationsCorp.),185F.3d329,33637
(5thCir.1999)(discussingthemajorityandminorityrulesfornewvalue,andadoptingmajorityrule,
which permits the crediting of new value against any prior preference and not only the immediately
precedingone);seealsoInreSGSMAcquisitionCo.,LLC,439F.3dat24143;Katzv.StarkTrust(InreVan
Dyck/ColumbiaPrinting),289B.R.304,315(D.Conn.2003);5CollieronBankruptcy547.04[4][d](15thed.
2008);cf.InreAdelphiaBus.Solutions,Inc.,341B.R.415,426(Bankr.S.D.N.Y.2003)(recognizingnewvalue
defenseinthecontextofacashmanagementsystem).

1710

Howquasifundingwillbecharacterizedinrelationtothesafeharbors,however,
appears to be an issue of first impression that is, whether such funding is safe
harbored, not safeharbored, or somewhere inbetween.6418 Therefore, the Examiners
financialadvisorsconstructedthreemodelstocalculateLBHIspreferenceexposurenet
of new value.6419 First, the Examiners financial advisors calculated LBHIs preference
exposure solely by considering upfunding activity as preferential and downfunding
activity as new value. Second, the Examiners financial advisors calculated LBHIs
preference exposure by considering only upfunding activity as preferential, but gave
LBHI new value credit for both downfunding and quasidownfunding activity. The
followingchartillustratesthiscalculation:

AntecedentDebt
PreferenceExposure
(upfunding)

$0

$10

$20

SafeHarboredActivity
(Quasiupfunding
excludedasnon
preferential)

NewValue
(Downfunding+
quasidown
funding)

Antecedent
debt
obligation

Time

Third, the Examiners financial advisors calculated LBHIs preference exposure

by considering upfunding and quasiupfunding as preferential, but gave LBHI new

6418EachdaythereweremanyquasifundingtransactionsbetweenLBHIandLBSF,LBCSandLCPI.For

thepurposesofthisanalysis,however,theExaminergroupedthemalltogether,eventhougheachoneis
potentiallyunique.
6419These are referred to as models one, two, and three in Appendix 22, Duff & Phelps, Preferences
AgainstLBHIandOtherLehmanEntities(Feb.1,2010).

1711

value credit for both downfunding and quasidownfunding activity. The following
illustratesthiscalculation:

AntecedentDebt

$0

$10

$20

Preference
Exposure(Up
funding+
quasiup
funding)

NewValue
(Downfunding+
quasidown
funding)

Antecedent
debt
obligation

Time

Ordinary Course Defense. The ordinary course defense permits creditors to

argue that debts were incurred in the ordinary course and payments on account of
thosedebtsweremadeintheordinarycourseofbusinessbetweentheparties.6420The

6420Section547(c)(2)providesthat[t]hetrusteemaynotavoidunderthissectionatransfer...(2)to

theextentthatsuchtransferwasinpaymentofadebtincurredbythedebtorintheordinarycourseof
business or financial affairs of the debtor and the transferee, and such transfer was (A) made in the
ordinarycourseofbusinessorfinancialaffairsofthedebtorandthetransferee;or(B)madeaccordingto
ordinarybusinessterms.11U.S.C.547(c)(2).TheExamineraddressedsubsection547(c)(2)(A)andnot
subsection (B), which discusses whether the payments were made according to ordinary business
terms.
The purpose of section 547(c)(2) is to leave undisturbed normal financial relations, because it
doesnotdetractfromthegeneralpolicyofthepreferencesectiontodiscourageunusualactionbyeither
the debtor or his creditors during the debtors slide into bankruptcy. Savage & Assocs., P.C. ex rel.
Teligent,Inc.v.Mandl(InreTeligent,Inc.),380B.R.324,340(Bankr.S.D.N.Y.2008)(quotingH.R.Rep.No.
95595,at373(1977)).Indeterminingwhetherthedebtwasincurredintheordinarycourseofbusiness,
the court will look to other transactions between the parties. Jacobs v. Matrix Cap. Bank (In re
AppOnline.com,Inc.),315B.R.259,283(Bankr.E.D.N.Y.2004).Indeterminingwhetheratransferismade
in the ordinary course of business, a court may consider (i) the prior course of dealing between the
parties, (ii) the amount of the payment, (iii) the timing of the payment, (iv) the circumstances of the
payment, (v) the presence of unusual debt collection practices, and (vi) changes in the means of
payment.InreTeligent,380B.R.at340.[T]hecornerstoneofthiselementofapreferencedefenseisthat
thecreditorneeds[to]demonstratesomeconsistencywithotherbusinesstransactionsbetweenthedebtor
andthecreditor.InreSchick,234B.R.at348(quotingWJM,Inc.v.Mass.DeptofPub.Welfare,840F.2d
996,1011(1stCir.1988))(alterationinoriginal).Thecreditormustestablishabaselineofdealingsto

1712

Examiner has not located any authority that discusses ordinary course defenses in
preference actions asserted by debtoraffiliates against their debtorparents in the
contextofcomplexcashmanagementsystems,whichistheprimarysourceofpotential
preferential activity here.6421 Nonetheless, repeated transfers made to a debtors
corporate parent on account of an antecedent debt that resulted from continual
extensionsofcreditforoperatingpurposeshavebeenupheldasunavoidableordinary
coursetransfersinothercases.6422
(6) FindingsforLBSF
The following chart illustrates LBHIs preference exposure to LBSF during the
DefinedPreferencePeriod:

enablethecourttocomparethepaymentpracticesduringthepreferenceperiodwiththepriorcourseof
dealing.Id.
6421Cf.InreAdelphiaBus.Solutions,Inc.,341B.R.at426(recognizingordinarycoursedefenseinthecontext
ofacashmanagementsystem);InreHillsboroughHoldingsCorp.,176B.R.at24750(recognizingordinary
coursedefenseincontextofpiercingthecorporateveilwhenparentsweptcashfromsubsidiaries).
6422E.g., Waldschmidt v. Ranier (In re Fulghum Constr. Corp.), 872 F.2d 739 (6th Cir. 1989) (upholding
ordinary course defense when debtor made repeated payments to parentpartnership to reduce
antecedentdebtobligationthatwascreatedbymorethan100extensionsofcreditforvariouspurposes
includingoperatingexpenses);CCIConstr.Inc.v.AllfirstBank(InreCCIConstr.Co.),371B.R.83(Bankr.
M.D.Pa.2007)(discussingordinarycoursedefenseincontextofrevolvingunsecuredcashmanagement
facilitywithbanklender);Redmondv.EllisCountyAbstract&TitleCo.(InreLibertyLivestockCo.),198B.R.
365 (Bankr. D. Kan. 1996) (discussing ordinary course and new value defenses on running account
balancebetweenrelatedcompanies).

1713


Preferential
Activity

Preference
Exposurewithout
NewValueduring
theDefined
PreferencePeriod

PreferenceExposureNetofNewValue
duringtheDefinedPreferencePeriod
Downfunding
Downfunding
NewValueOnly
andQuasidown
fundingNew
Value
$3.8billion
$636million
n/a
$718million

UpfundingOnly
$19.4billion
Upfundingand
$29.4billion
Quasiupfunding

In addition, there is evidence supporting LBHIs ordinary course defense. In short,

there is evidence to support each element of a preference claim, but there is also
evidencetosupporteachelementofthenewvalueandordinarycoursedefenses.6423
DiscussionofPreferentialTransfers.OnJune1,2008,LBSFhadanantecedent
debt owed to LBHI of approximately $7.5 billion.6424 The intercompany accounts
between LBSF and LBHI experienced significant activity after that day. The
intercompany account activity resulted from funding and quasifunding activity that

6423SeeAppendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010)

for a detailed and lengthy discussion of the models developed, methodologies used, and assumptions
madeinreachingthesecalculations.
6424AsillustratedinAppendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities
(Feb. 1, 2010) at ex. 2, LBHI and LBSF had multiple intercompany accounts. Not every intercompany
accountwasusedforfundingactivitiesthatis,someaccountsrepresentedrepoorderivativeliabilities
or receivables, and they were generally in connection with safeharbored activity. The $7.5 billion
obligation noted above was derived from the sum of the intercompany obligations based on the two
accounts in the general ledger that were used for funding and quasifunding activities in GCCM. One
account was between LBHINew York and LBSF, and the other account was between LBHI (UK) and
LBSF.IftheotherintercompanyaccountsbetweenLBSFandLBHIwereincluded,theobligationwould
belarger.Inclusionoftheotheraccountswasunnecessaryforthepreferenceanalysis,however,because
thetotaldollaramountofeverypotentialpreferentialtransferwaslessthantheoutstandingliabilityfrom
thesumofthesetwofundingaccountsonthedayeachtransferwasmade.

1714

was observed in GCCM.6425 The Examiner has observed nothing suggesting that up
fundingwasrelatedtotrades,repos,orsimilaractivity,andtheExaminerunderstands
that it was performed on an unsecured basis for the purpose of concentrating cash at
LBHI.DuringtheDefinedPreferencePeriod,therewas$19.4billionand$10.1billionin
upfunding and quasiupfunding activity, respectively.6426 Together, this amounts to
$29.4billioninpotentiallypreferentialactivity.
NewValueDefense.LBHIsnewvaluedefensecapturesthemajorityofLBSFs
preference claim. The Examiners financial advisors calculated LBHIs new value
defense in three ways as noted above. First, the Examiners financial advisors
calculated LBHIs preference exposure solely by considering upfunding activity as
preferentialanddownfundingactivityasnewvalue.LBHIsexposuretoLBSFduring
the Defined Preference Period under this calculation is $3.8 billion.6427 Second, the
ExaminersfinancialadvisorscalculatedLBHIspreferenceexposurebyconsideringup
fundingactivityaspreferential,butgaveLBHInewvaluecreditforbothdownfunding
and quasidownfunding activity. LBHIs exposure to LBSF during the Defined

6425Daniel J. Fleming noted that funding activity for LBSF occurred in an LBI bank account in which

LBSF was clearing its derivative payment activity from RISC, another Lehman trading platform (it is
unclearwhetherLBHIorLBHI(UK)providedthefundsforthisaccount).Thisfundingactivitywould
notbecapturedinthefundingcolumnbecauseLBSFdidnotowntheaccountintoandfromwhichthe
moneywastransferred.Nonetheless,Flemingnotedthatthisactivitywaslikelycapturedinthequasi
funding activity column. As for LBSF generally, Fleming noted that funding activity may have
occurredinotherregions,buthecouldnotidentifyhowitmayhavebeencapturedbyLehmanssystems.
ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.8.
6426Appendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010).
6427Id.

1715

Preference Period under this calculation is $636 million.6428 Third, the Examiners
financial advisors calculated LBHIs preference exposure by considering upfunding
andquasiupfundingaspreferential,butgaveLBHInewvaluecreditforbothdown
funding and quasidownfunding activity. LBHIs exposure to LBSF during the
DefinedPreferencePeriodunderthiscalculationis$718million.6429
Ordinary Course Defense. There is evidence for LBHI to assert an ordinary
coursedefenseevenifthenewvaluedefensedoesnotprecluderecovery.
Based on LBHI and LBSFs books and records, the debts incurred by LBSF
appear to be in the ordinary course of business between LBHI and LBSF. There is
consistent funding activity between LBHI and LBSF during the two years prior to
LBSFsbankruptcy.Duringtheyearpriortobankruptcy,thenumberofdownfunding
transactionsrangedfromthirtytwotosixtythreepermonth,andduringthetwoyears
prior to bankruptcy, the number of downfunding transactions ranged from seven to
sixtythreepermonth.6430SuchdownfundingactivityisconsistentwithLBHIsroleas
centralbankerwithintheLehmanenterprise.Similarly,thereisconsistentquasidown

6428Id.
6429Id. LBHIs preference exposure to LBSF under the second and third calculations resulted from up

fundingthatoccurredattheendofthedayonSeptember12,2008.Althoughsuchapotentialpreference
may not be covered under the new value defense, this fact pattern is similar to that described in In re
FulghumConstr.Corp.872F.2d739,whichaddressedthisissueundertheordinarycoursedefense.
6430Appendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010)at
exs.1821.Thelownumberoffundingtransactions(eitherupordownfunding)priortoMay2007is
consistentwiththeExaminersunderstandingthatGCCMwasintheimplementationphases.

1716

funding activity.6431 The Examiner has observed no evidence suggesting that down
funding or quasidownfunding was not in the ordinary course of business between
LBHIandLBSF.
Similarly,theExaminerhasreviewedthenonexhaustivefactorscourtsusewhen
determining whether payments made on account of an antecedent debt are in the
ordinarycourseofbusinessbetweenthedebtorandthetransferee.6432Uponreviewof
those factors, there is evidence to support LBHIs defense. As a threshold matter,
formerLehmanemployeesstatedthatitwasLehmansgoaltoupfundeachaffiliates
bankaccountto$0.00attheendofeachday,6433whichisnotinconsistentwiththebooks
andrecords.TheExaminerandhisfinancialadvisorsreviewedfundingactivitydating
backtoJune2006;fundingactivity(bothupanddownfunding)regularlyoccurredin
significantamountsineverymonthbeforeLBSFsbankruptcy.6434TheExaminerhasnot
identified anything inthe DefinedPreferencePeriodthat deviated from thishistorical
practice. Finally, the Examiner has observed no evidence that LBSFs potentially
preferentialtransfersweremadeinanticipationofbankruptcy,orthattheyweredone
because of unusual debt practices by LBHI. In short, there is evidence to support a

6431Appendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010)at

ex.1.
6432TheExaminerhasnotreviewedthealternativegroundsforreliefunderSection547(c)(2)(B),namely
whetherthepurportedpreferencepaymentsweremadeaccordingtoordinarybusinessterms.
6433ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.2.Thenotableexceptiontothispractice
waswithLBI.
6434Appendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010)at
exs.1820.

1717

findingthatsuchactivitywasrecurring,customary,anddesignedtofacilitateLBSFs
business.6435TheExaminerhasthereforedeterminedthatthereisevidenceforLBHIto
assertadefenseunderSection547(c)(2)oftheBankruptcyCode.Anyconclusionwould
bedeterminedbyatrieroffact.
(7) FindingsforLBCS
The following chart illustrates LBHIs preference exposure to LBCS during the
DefinedPreferencePeriod:
Preferential
Activity

Preference
Exposurewithout
NewValueduring
theDefined
PreferencePeriod

PreferenceExposureNetofNewValue
duringtheDefinedPreferencePeriod
Downfunding
Downfunding
NewValueOnly
andQuasidown
fundingNew
Value
$643million
$15million
n/a
$633million

UpfundingOnly
$3.3billion
Upfundingand
$4.3billion
Quasiupfunding

In addition, there is evidence supporting LBHIs ordinary course defense. In short,

there is evidence to support each element of a preference claim, but there is also
evidencetosupporteachelementofthenewvalueandordinarycoursedefenses.6436
DiscussionofPreferentialTransfers.OnJune1,2008,LBCShadanantecedent
debt owed to LBHI of approximately $2.2 billion.6437 The intercompany accounts

6435InreFulghumConstr.Corp.,872F.2dat745.
6436SeeAppendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010)

for a detailed and lengthy discussion of the models developed, methodologies used, and assumptions
madeinreachingthesecalculations.

1718

between LBCS and LBHI experienced significant activity after that day. The
intercompany account activity resulted from funding and quasifunding activity that
was observed in GCCM. The Examiner has observed nothing to suggest that up
funding was related to trades, repos, or similar activity, and evidence suggests that it
was performed on an unsecured basis for the purpose of concentrating cash at LBHI.
During the Defined Preference Period, there was $3.3 billion and $1.0 billion in up
fundingandquasiupfundingactivity,respectively.6438Together,therewas$4.3billion
inpotentiallypreferentialactivity.
New Value Defense. LBHIs new value defense captures the majority of the
amount of LBCSs preference claim. The Examiners financial advisors calculated
LBHIsnewvaluedefenseinthreewaysasnotedabove.First,theExaminersfinancial
advisors calculated LBHIs preference exposure solely by considering upfunding
activity as preferential and downfunding activity as new value. LBHIs liability to

6437AsillustratedinAppendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities

(Feb. 1, 2010) at ex. 1, LBCS and LBHI had multiple intercompany accounts. Not every intercompany
accountwasusedforfundingactivitiesthatis,someaccountsrepresentedrepoorderivativeliabilities
or receivables, and they were generally in connection with safeharbored activity. The $2.2 billion
obligation noted above was derived from the sum of the intercompany obligations based on the two
accountsinthegeneralledgerthatwereusedforfundingandquasifundingactivitiesinGCCM.Ifthe
other intercompany accounts between LBCS and LBHI were included, the obligation would be larger.
Inclusionoftheotheraccountswasunnecessaryforthepreferenceanalysis,however,becausethetotal
dollaramountofeverypotentialpreferentialtransferwaslessthantheoutstandingliabilityfromthesum
ofthesetwofundingaccountsonthedayeachtransferwasmade.
6438Appendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010),at
ex.6.

1719

LBCS during the Defined Preference Period under this calculation is $642 million.6439
Second, the Examiners financial advisors calculated LBHIs preference exposure by
considering upfunding activity as preferential, but gave LBHI new value credit for
bothdownfundingandquasidownfundingactivity.LBHIsexposuretoLBCSduring
the Defined Preference Period under this calculation is $15 million.6440 Third, the
ExaminersfinancialadvisorscalculatedLBHIspreferenceexposurebyconsideringup
fundingandquasiupfundingaspreferential,butgaveLBHInewvaluecreditforboth
downfundingandquasidownfundingactivity.LBHIsexposuretoLBCSduringthe
DefinedPreferencePeriodunderthiscalculationis$633million.6441
Ordinary Course Defense. There is evidence for LBHI to assert an ordinary
coursedefenseintheeventthatthenewvaluedefensedoesnotprecluderecovery.
Based on LBHI and LBCSs books and records, the debts incurred by LBCS
appear to be in the ordinary course of business between LBHI and LBCS. There is
consistentfundingactivitybetweenLBHIandLBCSduringthesixteenmonthspriorto
LBCSs bankruptcy. During the sixteen months prior to bankruptcy, the number of
downfundingtransactionsrangedfromninetothirtysevenpermonth.6442Thisdown
funding activity is consistent with LBHIs role as central banker within the Lehman

6439Id.
6440Id.
6441Id.
6442Id.atexhs.911.Thelownumberoffundingtransactions(eitherupordownfunding)priortoMay

2007isconsistentwiththeExaminersunderstandingthatGCCMwasintheimplementationphases.

1720

enterprise. Similarly, there is consistent quasidownfunding, although such activity

was less frequent before February 2008.6443 The Examiner has observed no evidence
suggestingthatdownfundingorquasidownfundingwasnotintheordinarycourseof
businessbetweenLBHIandLBCS.
Similarly,theExaminerhasreviewedthenonexhaustivefactorscourtsusewhen
determining whether payments made on account of an antecedent debt are in the
ordinarycourseofbusinessbetweenthedebtorandthetransferee.6444Uponareviewof
those factors, there is evidence to support LBHIs ordinary course defense. As a
threshold matter, former Lehman employees stated that it was Lehmans goal to up
fund each affiliates bank account to $0.00 at the end of each day,6445 which is not
inconsistent with the books and records. The Examiner reviewed funding activity
dating back to April 2007; funding activity (both up and downfunding) regularly
occurred in every month before LBCSs bankruptcy. The Examiner has not identified
anything in the Defined Preference Period that deviated from this historical practice.
TheExaminerdoesnote,however,thatquasiupfundingexceedsquasidownfunding

6443Appendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010)at

ex. 12. The low number of quasifunding transactions (either up or downquasifunding) prior to
February 2008 is consistent with the Examiners understanding that GCCM was in the implementation
phases.
6444TheExaminerhasnotreviewedthealternativegroundsforreliefunderSection547(c)(2)(B),whichis
whetherthepurportedpreferencepaymentsweremadeaccordingtoordinarybusinessterms.
6445ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.2.Thenotableexceptiontothispractice
waswithLBI.

1721

forthefirsttimeinAugust2008,whichdeviatesfromthepriormonths.6446Finally,the
ExaminerhasobservednoevidencethatLBCSspotentiallypreferentialtransferswere
made in anticipation of bankruptcy, or that they were done because of unusual debt
practicesbyLBHI.Inshort,thereisevidencetosupportafindingthatsuchactivitywas
recurring, customary, and designed to facilitate LBCSs business.6447 The Examiner
thus determines that there is evidence for LBHI to assert a defense under Section
547(c)(2) of the Bankruptcy Code. Any conclusion would be determined by a trier of
fact.
(8) FindingsforLCPI
TheExaminerhasbeenunabletodeterminewhetherthereisevidencetosupport
afindingforeachelementofapreferenceclaimunderSection547(b)oftheBankruptcy
CodeinanactionbyLCPIagainstLBHIbecausetheExaminersfinancialadvisorshave
beenunabletotracethematerialmovementofmoneybetweenLCPIandLBHIthatwas
notinconnectionwithasafeharboredevent.
Discussion of Preferential Activity. On June 1, 2008, LCPI had an antecedent
debt of at least $35.2 billion to LBHI,6448 and there was significant activity in the

6446Appendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010)at

ex.22.
6447InreFulghumConstr.Corp.,872F.2dat745.
6448AsillustratedinAppendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities
(Feb. 1, 2010) ex. 3, LCPI and LBHI had multiple intercompany accounts. Not every intercompany
accountwasusedforfundingactivitiesthatis,someaccountsrepresentedrepoorderivativeliabilities
orreceivables.The$35.2billionobligationnotedabovewasderivedfromthesumoftheintercompany
obligationsbasedonthetwoaccountsinthegeneralledgerthatwereusedforfundingandquasifunding

1722

intercompany accounts between LCPI and LBHI after that day. Similar to LBSF and
LBCS, the Examiner attempted to identify funding and quasifunding activity as the
primary source of potential preferential activity. However, identifying and analyzing
potentialpreferentialactivityforLCPIprovedconsiderablymorecomplicatedthanfor
LBSFandLBCS.Consequently,theExaminerhasbeenunabletoidentifyandanalyze
allpotentialsourcesofpreferentialactivity.
As a threshold matter, LCPIs main operating account was not tied to GCCM,
andtherefore,therewasnofundingactivityinGCCMduringtheDefinedPreference
Period. There was, however, significant quasifunding activity flowing through
GCCM,whichprimarilycamefromasourcesystemcalledLoanIQ.6449TheExaminer
concludes not to include quasifunding activity in the preference analysis for LCPI,
however, because payments flowing from Loan IQ through GCCM consisted of
principal and interest payments, among other things, on loans in which LCPI had a
nominal interest. Moreover, other quasifunding activity was de minimis when
comparedtotheothersourcesofpotentialpreferentialactivitytheExamineridentified.
Unlike LBSF and LBCS, the Examiner looked beyond GCCM and focused on two
specific sources of potential preferential activity: transfers made on account of trust

activities.ExaminersInterviewofAdaShek,Nov.24,2009,atpp.89.OneaccountwasbetweenLBHI
NewYorkandLCPI,andtheotheraccountwasbetweenLBHI(UK)andLCPI.Iftheotherintercompany
accountsbetweenLCPIandLBHIwereincluded,theobligationwouldbelarger.
6449LoanIQisafullyintegratedglobal,multicurrencysystemfortheprocessingandadministrationof
the commercial bank loan product. Lehman, GTS: Operations Technology Loan IQ Homepage on
LehmanLive,atp.1[LBEXLL3356457].

1723

receiptsintheMTStradingsystem,andpaymentsmadetoLBHIresultingfromcapital
infusionsmadeintoLCPIbyLBI.
Trust Receipts. As noted in Section III.B.2.c of this Report, prior to 2002,
Lehmans infrastructure for cash management was decentralized and fragmented.6450
There were numerous systems used to transfer and manage cash,6451 and this
fragmentationwasadrivingfactorbehindthecreationofGCCM.AtthetimeofLBHIs
bankruptcy, however, GCCM was only partially integrated, and the implementation
process was rolledout by source system or trading platform. MTS, one of Lehmans
primarytradingplatformsusedprimarilyfordomesticfixedincomesecurities,wasnot
integratedintoGCCM.MTSwasanantiquatedtradingplatform6452anditsfunctionality
waslimitedtobuys,sells,repos,reverserepos,borrowings,andpledgings.6453MTSdid
nothavepaymentfunctionality,andunlikesomeofLehmansothertradingplatforms
thatsettledtransactionsthroughGCCM,settlementsfromMTSflowedthroughFPS,an
entirelyseparatepaymentandsettlementsystem.
BecauseMTSwasoutdated,Lehmanusedtrustreceipts,whichweredummy
securitiescreatedinMTS,tofundcertainbankaccountsthatweretiedtoMTS.6454Trust

6450ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.3.
6451Id.
6452MTSwasusedbyLehmanbeforeitmergedwithShearsonin1984.Id.at6.
6453Id.
6454Id.atp.7.

1724

receiptswereusedtoovercomeMTSslimitedfunctionalityasatradingsystem,6455and
theExaminerhasdiscoverednoevidencesuggestingthattheirusewasforanimproper
purpose. Trust receipts had different security names or IDs, which were used for
different funding and recordation purposes, and some examples include Trust 01,
Trust 15, or Trust 24.6456 During the Defined Preference Period, LCPI primarily
usedTrust86andTrust89.
Historically,LCPIsmainoperatingaccountwasresidentinMTS,althoughLCPI
opened accountson othersystems overtime.6457Therefore,theExaminerunderstands
that to move cash between LBHI and LCPI, a funding transaction needed to be
executed in MTS.BecauseMTS hadlimitedfunctionality,however,Lehmanused the
repoandreverserepofunctions.TheExaminerhasdiscoverednoevidencesuggesting
that anyone at Lehman considered trust receipts to be repos or reverse repos, and all
evidence points to the contrary. The Examiner understands that settlements from the
MTS system into LCPIs bank account occurred through the FPS settlement system.6458
ThisprocessisroughlyequivalenttothefundingfunctionsthatexistedinGCCM.
TheExaminersfinancialadvisorsidentifiedallTrust86andTrust89activityin
MTS during the Defined Preference Period and have performed an analysis on such

6455Id.atp.6.
6456Lehmanusedmorethanahundreddifferenttrustreceiptsandeventuallystartedrecyclingthem.Id.

atp.6n.2.
6457Id.atp.7.
6458ThetransactionwasalsobookedinTreasuryWorkstation,asoftwareplatformutilizedbyLehmans
TreasuryGroup.

1725

activity, which is discussed in considerable detail in the attached appendix.6459 The

Examiners financial advisors reviewed data in GCCM (for LBHI cash receipt
information, even though MTS and GCCM were not tied together), GSSR (Lehmans
bankaccountreconciliationsoftwarethatshowedbankaccounttransactions),Treasury
Workstation (a suite of applications utilized by Lehman Treasury Group for various
fundingfunctions),andMTS(Lehmansfixedincometradingsystem).TheExaminers
financial advisors attempted to trace the movement of money and to identify the
purposeassociatedwithtrustreceiptsusedbyLCPI.Tocompletethistask,accessto
certain FPS data, which contained settlement and payment data for MTS, as well as
certain presettlement data, is required because this information is understood to
containnettinginformationbeforetransferinstructionswerecreatedbetweenLCPIand
LBHIbankaccounts.BarclayswouldnotgranttheExaminersfinancialadvisorsaccess
toFPSbecausetheExaminerunderstandsthatBarclayscouldnotadequatelysegregate
Lehmanlegacydata.6460TheExaminersfinancialadvisorshavefurtheradvisedthata
review of the presettlement data could potentially require a lengthy and costly
investigation.Accordingly,theExaminercannotmakeadeterminationaboutwhether
LCPIhasacolorablepreferenceclaimagainstLBHIonaccountoftrustreceipts.

6459Appendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010)at

pp.1822.
6460Appendix6,Duff&Phelps,DataSystemsAccess(Feb.1,2010),atp.33.

1726

LCPI Capital Infusions. As noted above, LCPI received multiple capital

infusions from LBI, its parent, over the course of the several months prior to its
bankruptcyfiling.6461Generally,whenacompanyreceivesacapitalinfusionitrecords
anasset(inmanyinstancescash)andpaidincapitalonitsbooksandrecords.When
LBIinfusedcapitalintoLCPI,however,LCPIneverreceivedanassetonitsbooksand
records because the individuals instructing the transfer indicated that LCPI did not
have a bank account to receive LBIs infusion.6462 Instead, LBI transferred the cash in
respect of the capital infusion to LBHI, which received the cash on LCPIs behalf.6463
BecauseLCPIhadasignificantintercompanyobligationtoLBHI,thetransferfromLBI
toLBHIwasrecordedassatisfyingpartofthatobligationintheamountofthecapital
infusion.6464Thefollowingillustratestheflowofcashandjournalentries:

6461SeeSectionIII.B.3.c.3.a,whichdiscussescapitalinfusions.
6462EmailfromJeffreySu,Lehman,toArthurMiller,Lehman,etal.,(May30,2008),atp.1[LBEXDOCID

276482]; email from Hui Wang, Lehman, to Helen Chu, et al., Lehman (Aug., 28, 2008), at p. 1
[LBHI_SEC07940_552712].Itwasconfirmedonmultipleoccasions,however,thatLCPIdidhaveitsown
bankaccounts.ExaminersInterviewofDanielF.Fleming,Dec.17,2009,atp.8.LCPIsschedulesthat
were filed with the U.S. Bankruptcy Court also confirm that LCPI had bank accounts. See Amended
SchedulesofAssetsandLiabilitiesforLehmanCommercialPaperInc.,InreLehmanBros.Holdings,Inc.,
No.0813555(Bankr.S.D.N.Y.June15,2009).
6463Daniel J. Fleming noted that if LCPI had received the cash it would have eventually upfunded to
LBHI anyway. In other words, he noted that it did not matter if LCPI or LBHI received the money
becauseLBHIwouldeventuallyreceivethemoneyattheendoftheday.ExaminersInterviewofDaniel
J.Fleming,Dec.17,2009,atp.8.
6464See Email from Hui Wang, Lehman, to Helen Chu Lehman, et al., (Aug. 28, 2008), at pp. 12
[LBHI_SEC07940_552712].

1727

LBHI

Potential
Indirect
Preference

LBHIreceiveswire
on behalf of LCPI
LBI

LCPI

RelevantJournalEntries:

LBIincreasesinvestment
assetinLCPIandreduces
cash;LBHIincreasescash
andreducesreceivable
fromLCPI.
LCPIreducesitsdebt
obligationtoLBHIand
creditspaidincapital
(fromLBIsinfusion).

There were two capital infusionsduring the Defined Preference Period: one in
July2008for$275millionandoneinAugust2008for$900million.6465TheExaminerhas
located internal emails relating to the $900 million infusion.6466 The $900 million
transfercouldrepresentanindirectpreferenceevenifLCPIneverhadtheinfusedcash
in its bank account because the transfer reduced LCPIs antecedent debt owed to
LBHI.6467
Although the Examiner Order did not direct the Examiner to analyze potential
defensestoclaims,itisimportanttonotethatmoneyflowedbetweenLCPIandLBHI
(and between LBI and LBHI) in significant amounts on an almost daily basis through

6465Asnotedabove,theseamountsweredeterminedbynotingthechangeinAdditionalPaidInCapital

asreportedinLehmansHyperionfinancialsystem.
6466TheExaminerlocateddocumentationfortheMay2008capitalinfusionbutitwasoutsidetheDefined
PreferencePeriod.SeeEmailfromJeffreySu,Lehman,toArthurMiller,Lehman,etal.,(May30,2008),at
p.1[LBEXDOCID276482].
6467E.g.,Warscov.PreferredTechnicalGroup,258F.3d557,564(7thCir.2001)(Astheexplicitlanguageof
theBankruptcyCodemakesclear,however,thetransferneednotbemadedirectlybythedebtor;indirect
transfers made by third parities to a creditor on behalf of the debtor may also be avoidable under the
Code. (citing Dean v. Davis, 242 U.S. 438, 443 (1917) (Mere circuity of arrangement will not save a
transferwhicheffectsapreferencefrombeinginvalidassuch.)).

1728

trust receipts and potentially other means. For example, $900 million was a common
dollar amount for transfers between affiliates, and the Examiners financial advisors
identifiedatleastthree$900millionpaymentsfromLBItoLBHIonAugust28,2008.6468
The Examiners financial advisors also identified two transfers from LCPI to LBHI on
August29,2008(one was for$900 million and one was for $104million).6469 Assuch,
the $900 million potential indirect preference is likely one in a very large series of
transfersbetweenLCPIandLBHI(andbetweenLBIandLBHI).Thismakesanalysesof
newvalueandordinarycoursedefensesveryrelevantforpurposesofdeterminingthe
benefit of a claim to recover these transfers. Because the costs of performing this
accounting would be substantial, the Examiner did not trace the movement of cash
associated with trust receipts (nor has it been confirmed whether the $900 million
potentialpreferenceismutuallyexclusiveoftransfersoccurringthroughtheuseoftrust
receipts)orperformtheotheraccountingnecessarytoconcludeanewvalueorordinary
courseanalysisunderSections547(c)(2)or(4)withrespecttothesetransfers.6470

6468SeeAppendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010),

atex.25.
6469Id. The $900 million transfer from LCPI to LBHI was between different bank accounts than those
identifiedontheemailsinstructingthewiretransfers.
6470AsdiscussedinSectionIII.B.3.c.3ofthisReport,theExaminerconcludedthattheAugust2008capital
infusion was sufficient to render LCPI solvent. Indeed, members of Lehmans LEC group would meet
regularlytopredicttheamountofcapitalthatLCPIandotherentitiesneeded.ExaminersInterviewof
AdaShek,Nov.24,2009,atp.7.TheMayandJuly2008infusionswereinsufficienttoestablishsolvency,
but in August 2008 infusion was sufficient. The Examiner concluded, however, that the August 2008
capitalinfusionwassufficienttorenderLCPIborderlinesolvent,suchthatitsratioofequitytoassets
was0.4%.TheExaminerhasnot,however,obtainedsufficientandreliablepostAugust2008information
tomakeadeterminationastoLCPIssolvencyafterAugust31,2008.Thus,theExaminerrecognizesthat

1729

f)

PreferencesAgainstNonLBHILehmanAffiliates(FourthBullet)

As with the previous Section discussing insider preferences against LBHI, the
ExamineridentifiedLBSF,LBCSandLCPIasthoseLBHIAffiliatesthatwereinsolvent
or on the borderline of insolvency beginning on June 1, 2008. There is a significantly
larger population of potential intercompany relationships from which potential
preferences could be identified, however. Although LBSF, LBCS and LCPI did not
maintain extensive intercompany accounts with each affiliate, the list of potential
intercompanyrelationshipsisextensive.
The approach for identifying nonLBHI preferences was similar to that with
LBHI,asdiscussedabove,butLBHIAffiliatesgenerallydidnotprovidefundingtoeach
other.6471 This created problems in identifying potential preferences that were not in
connection with safeharbored activity. To be sure, the Examiners financial advisors
reviewed GCCM and confirmed that no funding activity for LBSF, LBCS, and LCPI
was located in that system. Fleming did note, however, that LCPI may have funded
some of its subsidiaries through MTS, and there was significant trust receipt activity

all postAugust 2008 transfers may be subject to an extensive solvency determination by a trier of fact.
See, e.g., Matson v. Strickland (In re Strickland), 230 B.R. 276, 283 (Bankr. E.D. Va. 1999) (noting that
[e]videnceofinsolvencyonthedateoftheallegedpreferenceisthecriticalissueandproofofinsolvency
on any other date is insufficient). Because the Examiner has observed that Lehman may have over
markedsomeofitsassets,theExaminerincludedpostinfusiontransferswithinthepreferenceanalysis
and makes no distinction between transfers made while LCPI was insolvent or while it was
borderlinesolvent.
6471Examiners Interview of Daniel J. Fleming, Dec. 17, 2009, at p. 2. Funding activities, as described
under the section addressing insider preferences against LBHI, were the primary source of interest for
insiderpreferencesbecausemostactivityatLehmanwasinrespectofsafeharboredactivity.SeeSection
III.B.3.eofthisReport,whichdiscussestherationaleforidentifyingfundingactivities.

1730

involving LCPI with both LBHI and other affiliates.6472 The Examiners financial
advisors identified every counterparty for trust receipts involving LCPI and other
Lehman entities during the Defined Preference Period, which can be found in the
attachedappendix.6473
The Examiners financial advisors attempted to trace the movement of cash
associated with trust receipts between LCPI and LBHI. The Examiners financial
advisors primarily reviewed GCCM, GSSR, Treasury Workstation, and MTS. The
ExaminerdidnothaveaccesstocertainFPSdata,whichwouldpurportedlycontainthe
settlementandpaymentdataforMTS.Asexplainedabove,theExaminerreceiveddata
regardingLehmanspresettlementfunctionverylateintheinvestigationandhasnot
reviewedsuchdataforthesepurposes.
g) AvoidanceAnalysisofLBHIandLBHIAffiliatesAgainst
FinancialParticipantsandPreChapter11Lenders(Fourthand
EighthBullets)
(1) Summary
ThisSectionoftheReportaddresses:(1)thefourthbulletoftheExaminerOrder,
regarding whether any LBHI Affiliate has colorable claims against LBHI or any other
entitiesforpotentiallyvoidabletransfersorincurrencesofdebt;and(2)theeighthbullet
oftheExaminerOrder,whichcoversthetransactionsandtransfers,includingbutnot

6472SeeSectionIII.B.3.e.8ofthisReport,whichdiscussestrustreceiptactivityandhowitwastheresultof

asoftwarelimitationinMTS.
6473Appendix22,Duff&Phelps,PreferencesAgainstLBHIandOtherLehmanEntities(Feb.1,2010),at

ex.26.

1731

limitedtothepledgingorgrantingofcollateralsecurityinterestamongthedebtorand
the preChapter 11 lenders and/or financial participants including but not limited to,
JPMorgan Chase, Citigroup, Inc., Bank of America, the Federal Reserve Bank of New
Yorkandothers.6474TheExaminerhasconsultedwiththepartiesininterest,reviewed
issues identified by those parties, conducted his own independent review and
examinationandexercisedhisdiscretionastowhichissuestoincludeinthisanalysis.
First,withrespecttothefourthbullet,theExaminerhasnotidentifiedanyLBHI
AffiliatethathasacolorableclaimagainstLBHIunderSections548or544andstatelaw
for potentially voidabletransfers orincurrencesofdebt.Because ofthe magnitudeof
the data and the costs involved in reviewing every transfer that occurred during the
applicablelookbackperiods,theExaminerandhisfinancialadvisorsdevelopedasetof
criteriadesignedtopullsuspecttransfersfromtheinformationcontainedinLehmans
APB trading database (APB). The APB contains over five terabytes of data. The
Examiners financial advisors applied their methodology to determine whether any
tradesorotheractivitycouldpotentiallybeavoidableasagainstanidentifiedgroupof
counterparties.Uponreviewofthatanalysis,theExaminerdidnotfindanycolorable
claims belonging to an LBHI Affiliate or LBHI. The Examiner did, however, identify
trades involving thirtyseven securities that belonged to LBI that warranted further
investigation and has provided that information to the SIPA Trustee. The Examiner

6474AcompletediscussionofLehmansdealingswithpreChapter11lendersand/orfinancialparticipants

andpotentialcolorablestatelawclaimsagainstthemisdiscussedinSectionIII.A.5ofthisReport.

1732

concluded that further analysis of data in the APB would not be costeffective. The
Examiner also sought to test his review of the Debtors transfers by examining cash
disbursementsidentifiedontheDebtorsStatementofFinancialAffairs(SOFA).The
ExaminerwasnotabletocompletehisanalysisbecausetheDebtorshavebeenunable
toprovidethebackupdataforthesetransfersinthetimeframenecessarytoallowthe
ExaminertoreachconclusionsaboutthetransfersidentifiedontheSOFA.
Second, with respect to the eighth bullet, the Examiner reviewed various
guaranties entered into by LBHI shortly before its bankruptcy filing and transfers of
collateral in connection with those guaranties and concludes that there are colorable
claimsagainstJPMorganandCititoavoidtheguarantiesthattheyreceivedfromLBHI
and certain related transfers under Sections 547(b), 548 and 544 and state law. The
Examinerbelievesthatsuchclaimsaresubjecttosubstantialdefensesincluding,butnot
limited to, that the transfers of collateral to JPMorgan or Citi are protected from
avoidance based upon the safeharbor provisions of the Bankruptcy Code. The
Examinerfindsinsufficientevidencetosupporttheexistenceofcolorableclaimsagainst
FRBNY, BNYM, HSBC and the CME Group (CME). The Examiner elected not to
examine the BofA transactions for purposes of determining whether colorable claims
exist with respect to these transactions due to the fact that these transactions are the
subject of ongoing litigation. The Examiner was unable to reach a conclusion with
respect to a $200 million collateral transfer to Standard Bank because of the lack of

1733

information showing whether a Lehman Chapter 11 Debtor was the source of this
collateraltransfer.6475
(2) APBAnalysis
Lehman kept systematic records of trades in its APB database, which
consolidatedtraderecordsfrommultipleLehmantradingsystems.TheAPBdatabase
is extensive and it contains over five terabytes of data.6476 When the Examiners
financial advisors obtained access to the database, the scope of information that the
database contained was unclear. The Examiners objective was to identify patterns of
tradingbehavior,tradesofinterestorotheractivityafterAugust1,2008thatwarranted
further investigation, such as trades with indicia of actual fraud under Section
548(a)(1)(A)orotherpotentiallyavoidableactivity.TheExaminersfinancialadvisors
methodology is described in detail in Appendix 23, Duff & Phelps, Analysis of APB,
JournalEntry,CashDisbursementandJPMorganCollateral(Feb.1,2010).
TheExaminerfirstidentifiedapopulationoftradingcounterpartiesconsistingof
largebanksandclearinghouses,potentiallyrelatedparties,andcounterpartiestrading

6475TheExaminernotesthatclaimsanalyzedhereinarisingunderSections547(b),548and544andstate

law are dependent upon an analysis of Lehmans financial condition as of the time of these transfers.
Because the Examiner was directed only to determine if these claims were colorable, the Examiners
financialadvisorshavelimitedtheiranalysistoadeterminationastowhetherevidenceexiststosupport
afindingoftherequisitefinancialcondition.
6476 Appendix 23, Duff & Phelps, Analysis of APB, Journal Entry, Cash Disbursement and JPMorgan
Collateral(Feb.1,2010).

1734

in illiquid assets.6477 The Examiners financial advisors then applied two selection
methodologies. First, the Examiners financial advisors excluded all nonprincipal
trades, Level 1 and most Level 2 assets, and trades involving exchangelisted assets.
Thisyielded30,000tradesforfurtherreview.Second,theExaminersfinancialadvisors
identified trades involving either (1) assetbacked securities, (2) noninvestment grade
debt securities, or (3) Lehmans own debt or equity securities as being the most
appropriatetoreview.Further,theExaminersfinancialadvisorsscrutinizedindividual
transactions exceeding $50 million regardless of these criteria and generally included
suchtradesforsubsequenttesting.Thisyielded5,100tradesforfurtherreview.
Afterthispopulationoftradeswasidentified,theExaminersfinancialadvisors
classified the trades by counterparty; this analysis is discussed at length in Appendix
23, Duff&Phelps, Analysisof APB,Journal Entry,Cash DisbursementandJPMorgan
Collateral (Feb. 1, 2010). From these approximately 5,100 trades, the Examiners
financialadvisorsthenidentifiedthosetradeswhereapricediscrepancyofover30%to
thethencurrentmarketvalueexistedtoLehmansdetriment.Thisyieldedthirtyseven
tradesofinterestthatrequiredfurtherinvestigation.
Thefirststepininvestigatingthesethirtyseventradeswastoidentifytheprior
ownerofthesecuritiestodeterminewhichLehmanentityreceivedapotentiallyunfair

6477ThefourteenselectedcounterpartieswereBankofAmerica,Barclays,Citi,HSBC,JPMorgan,BNYM,

FRBNY, Standard Bank, R3 Capital Management, One William Street, Fortress Investment Group,
Blackrock, BlueMountain Capital and Stark Investments. Narrowing the field of APB by date only,
beginningAugust1,2008,yieldedoveronemilliontrades.

1735

price(theAPBdatabasedidnotpermitthisquerytobeconductedinthefirstinstance).
The Examiners financial advisors discovered, however, that no LBHI Chapter 11
Affiliate owned any of the thirtyseven securities identified under this methodology
betweenAugust1andSeptember19,2008.Inmanycases,however,LBI(aChapter7
Affiliate) was the owner. Because this matter is outside of the scope of the Examiner
Order, the Examiner contacted the SIPA Trustee and provided him with the
information that the Examiner discovered so that he may investigate these trades
further. Because this methodology did not yield any LBHI Affiliate transactions
warranting further review (i.e., there was never an interest of the Debtor in the
property), the Examiner ceased the analysis under the APB Approach as it did not
appear that further analysis would be costeffective or result in the identification of
colorableclaims.6478

6478TheExaminersfinancialadvisorsalsoattemptedtoanalyzesignificantmanualjournalentries(witha

grossbalanceofgreaterthan$500million)thatwereenteredintothegeneralledgerbetweenSeptember
1,2007andSeptember12,2008.Therewere138manualjournalentriesthatsatisfiedthiscriteriaandit
was determined that they potentially could represent one or more of the following activities: (1) third
partyassettransfers;(2)forgivenessofdebt;(3)equitytransfers;or(4)anyunusualorindistinguishable
activity.CompletionofthisanalysiswasdependentuponassistancefromBarclaysandtheDebtorswith
specific knowledge regarding the purpose of the entries. The Examiner attempted to gain such
supporting documentation for the 138 selected entries and to schedule interviews with the controllers
responsible for preparation of these entries. Based on communications with the Debtors and the
conclusion that the Examiners financial advisors would be too reliant on third parties to complete this
analysis, the Examiner ceased this methodology prior to completion. For a complete discussion of the
analysis conducted by the Examiners financial advisors, see Appendix 23, Duff & Phelps, Analysis of
APB,JournalEntry,CashDisbursementandJPMorganCollateral(Feb.1,2010).

1736

(3) CashDisbursementAnalysis

In addition to the APB analysis, the Examiner and his financial advisors

reviewed the Debtors SOFA schedules. In order to identify payments most likely to
represent avoidable transactions, the following selection criteria were applied to
identifyactivityofinterest.First,theExaminersfinancialadvisorsidentifiedpayments
made to counterparties that satisfy one or more of the following criteria: (1) the
counterpartyisamajorbank/clearinghouse,(2)thecounterpartyconductsasignificant
volume of trades, and (3) the counterparty is involved in transactions with illiquid
assets. There were thirteen such counterparties. Second, the Examiners financial
advisors identified payments to creditors that were opaquely described (for example,
ATTN FUNDS MANAGEMENT) or that received $1 billion or more in total
paymentsduringtheperiodreflectedintheSOFASchedules3b.Third,theExaminers
financialadvisorsidentifiedsixadditionalpaymentsbecausethetermcollateralwas
includedinthecreditorsname.
The foregoing selection criteria yielded 416 payments representing
disbursements of approximately $160 billion. The Debtors provided assistance to the
ExaminersfinancialadvisorsinidentifyingtheLehmancashsettlementsystemusedto
transact each payment. Pursuant to an analysis of the cash settlement systems,
however, the Examiners financial advisors determined that 192 of the 416 payments
were likely related to transactions subject to the safeharbor provisions of the

1737

BankruptcyCodebecausethereisevidencethatthesepaymentspertaintoeitherrepo
transactions(51)orderivativespayments(141).TheExaminersfinancialadvisorswere
unable to resolve the remaining selected payments (224) because the Debtors post
petitionmanagerswereunabletoprovidetheExaminerwiththenecessarydatapriorto
thefilingofthisReport.Forthecompletediscussionoftheanalysisconductedbythe
Examiners financial advisors, see Appendix 23, Duff & Phelps, Analysis of APB,
JournalEntry,CashDisbursementandJPMorganCollateral(Feb.1,2010).
(4) PledgedCollateralAccountsAnalysis
In the period prior to the bankruptcy, certain counterparties that provided
clearingservicesorothercredittoLehmanrequestedincreasesinpledgedcollateralasa
prerequisite for continuingto extendcredit.Such pledgesofcollateralofteninvolved
cashdisbursements,whicharesubjecttotheCashDisbursementAnalysis.However,in
circumstanceswhereassetswereseizedfromaccountssubjecttolien,nocashortrade
record exists. With access to a firms pledged collateral accounts, it is possible to
identifyseizedassetsandtracetheassetsbacktotheoriginallegalentitythatprovided
theassetsusedforcollateral.TheExaminerwasprovidedwithlimitedaccesstocertain
LehmanpledgedaccountsatJPMorgan.Forasummaryoffindingsrelatingtotracing
certainsecuritiesbelievedtobeheldinpledgedaccountsatJPMorganatSeptember12,
2008, see Appendix 23, Duff & Phelps, Analysis of APB, Journal Entry, Cash

1738

DisbursementandJPMorganCollateral(Feb.1,2010).Thispledgedcollateralaccount
analysisalsodidnotyieldanycolorableavoidanceclaims.6479
(5) AvoidanceAnalysisforCertainPreChapter11Lendersand
FinancialParticipants
(a) JPMorganAvoidanceAnalysis
(i) Background
JPMorgan acted as LBIs (LBHIs U.S. brokerdealer subsidiary) principal
clearing bank for securities trading and triparty repo agreements. In that role,
JPMorgan assisted LBIs clearance and settlement of securities and LBIs funding
throughtripartyrepos.
Beginninginearly2008,JPMorganbegantheprocessofrevampingitsapproach
to dealing with its credit risk to Lehman. To protect itself, JPMorgan requested
additionalcollateral,soughtamendmentstoitsagreementswithLehmantostrengthen
its rights in the event of a Lehman default and made changes to its procedures for
dealingwithLehman.TheExaminersanalysisofclaimsarisingundertheBankruptcy
Codetoavoidthetransfersofthisadditionalcollateralortheincurrenceofobligations
focusedontwosetsofagreementsthatJPMorganandLBHIenteredintoonAugust29,

The pledged collateral account analysis provides further detail with respect to LBHIs pledge of
Spruce,Freedom,Pine,Kingfisher,andVerano,allassetbackedsecurities,toJPMorgan.SeeAppendix
23,Duff&Phelps,AnalysisofAPB,JournalEntry,CashDisbursementandJPMorganCollateral(Feb.1,
2010);seealsoAppendix18,LehmanCollateralatJPM.LCPIappearstohavesoldthesesecuritiestoLBHI
viaprincipaltrades.SeeAppendix23,Duff&Phelps,AnalysisofAPB,JournalEntry,CashDisbursement
and JPMorgan Collateral (Feb. 1, 2010) (containing trade information for many of these securities). As
such,thetransfersofthesesecuritiesfromLCPItoLBHIwouldbeprotectedfromavoidancebythesafe
harborprovisionsoftheBankruptcyCodeasatransferinconnectionwithasecuritiescontract.
6479

1739

2008andSeptember10,2008.Thefactsuponwhichthisanalysisisbasedaresetforth
ingreaterdetailinSectionIII.A.5.b,butaresummarizedhereintotheextentnecessary
toassistthereaderinunderstandingtheExaminersconclusions.
InAugust2008,JPMorganrequestedthatLehmanenterintonewagreementsin
part because JPMorgan wanted a guaranty from LBHI. In addition, JPMorgan
requestedthenewagreementsgivenconcernbyJPMorganandLehmancounterparties
that additional Lehman subsidiaries that were not party to the Clearance Agreement
were conducting operations through JPMorgans clearing system.6480 The parties
ultimately executed three documents on August 29, 2008 (though dated August 26,
2008):6481 (1) an amendmenttoaclearanceagreement(the AugustAmendment tothe
ClearanceAgreement);6482(2)aguaranty(theAugustGuaranty);6483and(3)asecurity
agreement

(the

August

Security

Agreement,

collectively,

the

August

Agreements).6484
In late August and September 2008, Lehmans deteriorating financial condition
became increasingly apparent.6485 Reports began to surface that The Korea

6480 Examiners Interview of Daniel J. Fleming, Apr. 22, 2009, at p. 5; Examiners Interview of Paul W.

Hespel,Apr.23,2009,atp.3.
6481SeeemailfromPaulW.Hespel,GoodwinProcter,toNikkiG.Appel,JPMorgan,etal.(Aug.29,2008)
[JPM20040004629].
6482SeeAmendmenttoClearanceAgreement(Aug.26,2008)[JPM20040005856].
6483Guaranty(Aug.26,2008)[JPM20040005879].
6484SecurityAgreement(Aug.26,2008)[JPM20040005867].
6485 See e.g., Andrew Ross Sorkin, Struggling Lehman Plans to Lay Off 1,500, N.Y. Times, Aug. 28, 2008
(Lehmanshareslost73%oftheirvaluebetweenJanuary2008andtheendofAugust2008);seealsoemail
from Ricardo S. Chiavenato, JPMorgan, to David A. Weisbrod, JPMorgan (Aug. 22, 2008) [JPM2004

1740

DevelopmentBank(KDB)had abandoned(orwas likely to abandon)its acquisition

talkswithLehman,6486andLehmansstockpricehaddroppedsignificantly.6487Shortly
before9:00p.m.onSeptember9,JPMorgansentdraftguarantyandsecurityagreements
toAndrewYeung,inhousecounselatLehman.6488AdraftamendmenttotheClearance
Agreement arrived later that night.6489 The parties ultimately executed three key
documentsonSeptember10,2008:(1)anAmendmenttotheClearanceAgreement(the
September Amendment to the Clearance Agreement);6490 (2) an amended Guaranty
(the September Guaranty);6491 and (3) an amended Security Agreement (the
SeptemberSecurityAgreement,andcollectively,theSeptemberAgreements).6492
The Examiner concludes that there are colorable claims to avoid the September
and August Guaranties as constructive fraudulent obligations under Sections 548 and

0061226] (Lehman may face serious problems next week if it is not acquired . . . and its losses are
large.).
6486 Francesco Guerrera, et al., Equities Suffer as Lehman Shares Fall 45%, Fin. Times, Sept. 9, 2008
(LehmanssharesfellafteranewswirereportcitedanunnamedKoreangovernmentofficialassaying
thatKoreaDevelopmentBank,astaterunlender,haddecidednottoinvestinLehman.);SusanneCraig,
et al., Korean Remarks Hit Lehman, Wall St. J., Sept. 9, 2008 (A KDB official said the comments [by the
ChairmanofSouthKoreasFinancialServicesCommission]wouldlikelybestrongenoughtodeterthe
bankfrompursuingaLehmandeal....).
6487 Examiners Interview of Richard S. Fuld, Jr., May 6, 2009, at p. 11; Examiners Interview of Donna
Dellosso,Feb.27,2009,atp.4;SusanneCraig,etal.,LehmanFacesMountingPressures,WallSt.J.,Sept.10,
2008,atA1;SusanneCraig,etal.,KoreanRemarksHitLehman,WallSt.J.,Sept.9,2008.
6488 Email fromJeffreyAronson, JPMorgan, to Andrew Yeung,Lehman, et al.(Sept. 9,2008) [JPM2004
0005594];ExaminersInterviewofAndrewYeung,Mar.13,2009,atp.4.
6489 Email fromJeffreyAronson, JPMorgan, to Andrew Yeung,Lehman, et al.(Sept. 9,2008) [JPM2004
0005039].AdraftAuroraGuarantyanddraftControlAgreementweresentwiththedraftAmendmentto
theClearanceAgreementaswell.Seeid.
6490AmendmenttoClearanceAgreement(Sept.9,2008)[JPM20040005861].
6491Guaranty(Sept.9,2008)[JPM20040005813].
6492SecurityAgreement(Sept.9,2008)[JPM20040005873].

1741

544 and New York state law.6493 In addition, the Examiner concludes that there are
colorable claims to avoid as much as $6.9 billion of the $8.6 billion in collateral that
LBHItransferredtoJPMorgantosecuretheSeptemberGuarantyunderSections547(b),
548and 544andstate law, butthat theclaimsto avoidthecollateral transfersmaybe
defeatedbythedefensesunderSections546(e),(f),(g)and(j).6494
(ii) AvoidabilityoftheSeptemberAgreementsand
TransfersinConnectionwiththeSeptember
Agreements
The September Amendment to the Clearance Agreement expanded JPMorgans
lienontheLehmanpartiesaccountsandsecuredtheirexistingorfutureindebtedness,
obligationsandliabilitiesofanykindtoJPMorgan,whetherarisingundertheClearance
Agreementornot.6495TheSeptemberGuarantyexpandedLBHIsliabilitytoJPMorgan
making it the guarantor of all obligations and liabilities of all direct or indirect
subsidiaries of LBHI to JPMorgan and its affiliates of whatever nature, irrespective of

6493 Although Section 548 of the Code authorizes the avoidance of the incurrence of an obligation as

constructivelyfraudulentiflessthanreasonablyequivalentvalueisexchangedandthedebtoriseither
(a)insolvent,or(b)undercapitalizedor(c)unabletopayitsdebtsassuchdebtsareexpectedtomature,
theNewYorkUniformFraudulentConveyanceActonlyallowsfortheavoidanceoftheincurrenceofan
obligation if the debtor is insolvent or has a subjective intent not to pay such debts as such debts are
expected to come due. Compare 11 U.S.C. 548(a), with McKinneys Debtor and Creditor Law 274
(2010);seealsoInreM.Fabrikant&Sons,Inc.,394B.R.721,734n.13(Bankr.S.D.N.Y.2008)(Byitsterms,
section 274 (unreasonably small capital) applies to conveyances but not obligations ....). For a more
detaileddiscussionoftheelementsofafraudulenttransferorapreferenceclaim,seeAppendix1,Legal
Issues,atSectionsIV.A,IV.D.
6494 For a complete discussion of potential colorable state law claims against JPMorgan, see Section
III.A.5.b.
6495AmendmenttoClearanceAgreement(Sept.9,2008),atp.1[JPM20040005861].

1742

whethertheyaccruedpursuanttotheClearanceAgreement.6496TheSeptemberSecurity
Agreement expanded the definition of accounts in which JPMorgan held a security
interesttoincludeallLehmanaccountsatJPMorganoritsaffiliates.6497
a.

AvoidabilityoftheSeptemberGuarantyasa
ConstructiveFraudulentObligation
1.

ThereIsEvidenceToSupportAFindingThat
LBHIIncurredanObligationWithinthe
ApplicableLookBackPeriodsWhenit
ExecutedtheSeptemberGuaranty

The Examiner has concluded that there is evidence to support a finding that
LBHIincurredanobligationwithintheapplicablelookbackperiodssetforthinSection
548 or New York state law when it entered into the September Guaranty. Rubin v.
Manufacturers Hanover Trust Co.6498 is the seminal decision addressing whether the
incurrenceofobligationsunderaguarantymaybeavoidedasaconstructivefraudulent
obligation.Rubinheldthattheexecutionofaguarantyitselfisnottheincurrenceofan
obligation but that the obligation is incurred when the loan is made to the primary
obligor,therebycreatingacontingentliabilityfortheguarantor.6499Here,theSeptember
GuarantyrequiredLBHItoguaranteeallobligationsandliabilitiesoftheBorrowersto
the Bank of whatever nature, whether now existing or hereafter incurred.6500 As of

6496Guaranty(Sept.9,2008),atp.12[JPM20040005813].
6497SecurityAgreement(Sept.9,2008),atp.1[JPM20040005873].
6498Rubinv.ManufacturersHanoverTrustCo.,661F.2d979(2dCir.1981).
6499Id.at99091.
6500Guaranty(Sept.9,2008),atp.1[JPM20040005813].

1743

September9,2008,theLehmanentities(whichincludedLBIandallofLBHIsdirector
indirect subsidiaries) owed obligations to JPMorgan. Thus, upon execution of the
September Guaranty on September 10, 2008, LBHI had a contingent liability to repay
JPMorgan if one of the Lehman entities could not repay JPMorgan. Thus, LBHI
incurred an obligation to JPMorgan within the twoyear look back period of Section
548(a)andthesixyearlookbackperiodunderNewYorklaw.6501
2.

ThereIsEvidenceToSupportAFindingThat
LBHIReceivedLessThanReasonably
EquivalentValueorDidNotReceiveFair
ConsiderationinExchangeforGranting
JPMorgantheSeptemberGuaranty

The Examiner has concluded that there is evidence to support a finding that
LBHIdidnotreceivereasonablyequivalentvalueorfairconsiderationinexchangefor
incurring the additional obligations imposed upon it by the September Guaranty.
Reasonablyequivalentvalueorfairconsiderationmeansmorethanjustthegoodand
valuableconsiderationneededtosupportasimplecontract.6502Instead,consideration
is fair or reasonably equivalent if, in exchange for incurring the obligation, the
debtorreceivespropertyofareasonablyequivalentvalueorisrelievedofanantecedent
obligation.6503 The focus of this analysis is upon LBHI and whether LBHI and its

6501McKinneysCivilPracticeLawandRules213(2010);IslandHolding,LLCv.OBrien,775N.Y.S.2d72,

74(Sup.Ct.2004).
6502Rubin,661F.2dat991.
6503Id.;seealsoLiebowitzv.ParkwayBank&TrustCo.(InreImageWorldwide,Ltd.),139F.3d574,580(7thCir.
1998).Section548definesvaluetomeanproperty,orsatisfactionorsecuringofapresentorantecedent
debtofthedebtor11U.S.C.548(d).

1744

creditors received something of value when, on the eve of its Chapter 11 filing, LBHI
tookonadditionaldebt.Inthisanalysis,Rubinpermitstheconsiderationofbothdirect
and indirect benefits received by the entity that incurs the obligation, and subsequent
caselawhasexpandedthatconcept.6504Theeconomicbenefits,bothdirectandindirect,
must be measured and then compared to the obligations that the bankrupt
incurred.6505 The touchstone is whether the transaction conferred realizable
commercial value on the debtor reasonably equivalent to the realizable commercial
valueoftheassetstransferred[orobligationincurred].Thus,whenadebtorisagoing
concern and its realizable going concern value after the transaction is equal to or
exceedsitsgoingconcernvaluebeforethetransaction,reasonablyequivalentvaluehas
beenreceived.6506 Inthiscase,thatmeasurementwouldoccuronSeptember10,2008,
becauseasoftheexecutionoftheSeptemberGuarantyonSeptember10,JPMorganhad
madeoutstandingloanstoLBHIsubsidiaries.6507
AlthoughLBHIbecameaCustomerundertheJPMorganClearanceAgreement
when that Agreement was amended on August 29, 2008, the clearance services
providedundertheAugustAmendmentstotheClearanceAgreementwereprovidedto
LBHI subsidiaries and affiliates. Because the services JPMorgan provided under the

6504See,e.g.,Liebowitz,139F.3dat57782(generaldiscussionofdirectandindirectbenefitsinthecontext

ofcorporatefamilyguaranties).
6505MellonBank,N.A.v.MetroCommcns,Inc.,945F.2d635,647(3dCir.1991).
6506Id.at647.
6507Rubin,661F.2dat99091.

1745

ClearanceAgreementwereallusedbyLBHIssubsidiaries,thepossibledirectbenefits
to LBHI from the September Guaranty are limited to (1) the potential increase in the
value of its subsidiaries stock as a result of LBHIs credit support of the subsidiaries
obligationstoJPMorganand(2)anyadditionalcapitalthatthesubsidiarieswereableto
accessasaresultofanyloansthatwereguaranteed.PossibleindirectbenefitstoLBHI
may include (1) the strengthening of the corporate group as a whole and (2) the
increasedabilitytoaccessothercapitalasaresultofJPMorganscontinuedagreement
to extend credit to LBI in connection with clearing trades and otherwise.6508 Possible
indirect benefits also may include the additional time provided to LBHI to find a
solution to its financial problems as a result of forestalling JPMorgans possible
withdrawalofcreditfromLBI.6509Prospectivebenefits,however,mustbemeasuredby
thelikelihoodthatthedebtorwillactuallyrealizethosebenefits.6510Thus,abuyingof

6508Cf.Liebowitz,139F.3dat581(notingthatingeneralcourtsupholdcrossstreamguaranteeswhenthe

transactionstrengthenstheviabilityofthecorporategroup).
6509 See Commerce Bank of Kansas City, N.A. v. Achtenberg, No. 900950CVW6, 1993 WL 476510, *4 n.5
(W.D. Mo. Nov. 10, 1993) (suggesting that a parent company may benefit in the form of giving a
subsidiary a fighting chance to escape insolvency by guaranteeing a large loan to marginally
insolventcompany.);butseeLiebowitz,139F.3dat58182(findingnoreasonablyequivalentvaluewhere,
bypayingoftheaffiliatesdebts,thedebtorkepttheaffiliateoutofbankruptcybutbankrupteditself).
6510 Silverman v. Pauls Landmark (In re Nirvana Restaurant Inc.), 337 B.R. 495, 504 (Bankr. S.D.N.Y. 2006)
(citationsomitted);butseeOfficialCommitteeofUnsecuredCreditorsofTousa,Inc.v.CiticorpNorthAmerica,
Inc.(InreTousa,Inc.),No.0810928JKO,2009WL3519403at*78(Bankr.S.D.Fla.Oct.30,2009)(hoped
forbenefitsinsufficient).

1746

timebenefitneedstobemeasuredbythelikelihoodthatLBHIwouldfindasolutionto
itsfinancialproblems.6511
Tobeconsideredinareasonablyequivalentvalueanalysis,indirectbenefits,like
direct benefits, must be quantifiable.6512 With respect to the benefits realized from the
ability to borrow additional money, the Third Circuit has stated this additional
borrowingability
hasconsiderablevalueinthecommercialworld.Toquantifythatvalue,
however, is difficult. Quantification depends on the business
opportunities the additional credit makes available to the borrowing
corporationandonotherimponderablesintheoperationorexpansionof
itsbusiness.6513
Inthiscase,LBHIprovidedadownstreamguarantyaguarantybyaparent
corporationofthedebtsofitswhollyownedsubsidiaries.Downstreamguarantiesare
typicallyviewedaslessvulnerabletoavoidancethanfraudulenttransfersastheparent
corporation presumably increases its own value (through the increased value of its
subsidiaries) by providing a guaranty to a lender so that capital can flow to its
subsidiaries.6514

6511See337B.R.at504.(holdingthatguarantywasasunkcostanddebtordidnotreceiveabenefitby

throwinggoodmoneyafterbadwherechancethataffiliate,arestaurant,wouldopenandmakeenough
topayitsownexpenses,includingthoseguaranteedbythedebtor,washighlyspeculative).
6512SeeLiebowitz,139F.3dat578;MetroCommcns,945F.2dat64648.
6513 Metro Commcns, 945 F.2d at 64648. The Third Circuit found that by failing to present evidence of
what the indirect benefit of an increased ability to borrow money was worth and instead contending,
withoutexpertsupport,thattheindirectbenefitshadnovalue,theplaintifffailedtosatisfyitsburdenof
proofastolackofreasonablyequivalentvalue.Id.at650.
6514SeeAchtenberg,1993WL476510at*4(downstreamguarantiestoasolventsubsidiaryarepresumedto
be reasonably equivalent value); see also Lawrence Paperboard Corp. v. Arlington Trust Co. (In re Lawrence

1747

If, however, the subsidiaries were insolvent at the time of the guaranty, the
guarantymaynotprovidedirectvaluetotheparentastheguarantywouldnotincrease
thevalueofthesubsidiariesandwouldinsteadonlyservetocreateanadditionalclaim
againsttheparentthatwoulddilutetherecoveryoftheparentguarantorscreditors.6515
The Seventh Circuit noted in a recent case that [o]ne theme that permeates the
authoritiesupholdingguarantyobligations:thattheguarantyatissuewastheresultof
arms length negotiations at a time when the common enterprise was commercially
viable.6516
ThefirstquestiontobeaskediswhatLBHIgaveupasaresultofenteringinto
the September Guaranty. Previously, on August 29, 2008, LBHI had agreed to
guarantee the obligations of onlycertainofitssubsidiaries (LBI,LBCPI,LBOTC,LBIE
and LBJ) under the AugustAmendment to the Clearance Agreement. The September
Guaranty expanded the subsidiaries covered by LBHIs guaranty to include all of its
subsidiaries and expanded its obligations to include all of their obligations, not just
those arising under the Clearance Agreement.6517 The ex post effect of the September

PaperboardCorp.),76B.R.866,871(Bankr.D.Mass.1987);Garrettv.Falkner(InreRoyalCrownBottlersof
NorthAla.,Inc.),23B.R.28,30(Bankr.N.D.Ga.1982).
6515 See, e.g., Achtenberg, 1993 WL 476510 at *4 (stating that it can hardly be said that the debtors net
worthhasbeenpreservedandtheinterestsofthecreditorsnotinjuredwhenthedebtorguaranteesaloan
toaninsolvententity).
6516Liebowitz,139F.3dat57778(quotingWilliams,TheFallaciesofContemporaryFraudulentTransferModels
asAppliedtoIntercorporateGuaranties:FraudulentTransferLawasaFuzzySystem,15CardozoL.Rev.1403,
1438(1994)).
6517ExaminersInterviewofAndrewYeung,Mar.13,2009,atp.4.CompareGuaranty(Sept.9,2008),atp.
1[JPM20040005813],withGuaranty(Aug.26,2008),atp.1[JPM20040005879].

1748

GuarantywasanincreaseofLBHIsexposurebyanestimated$4.2billion,assumingthe
validityofJPMorgansunderlyingclaims.6518
LBHIs increased exposure as a result of the expanded September Guaranty
occurredintwoways.First,inthecaseofLBHIsobligationswithrespecttoJPMorgan
derivativescontracts,LBHIhadalreadyguaranteedsuchclaimsonanunsecuredbasis
andtheSeptemberAgreementstransformedthispreexistingobligationintoasecured
debt.6519 Second, the September Guaranty imposed upon LBHI new obligations for
which it previously had no responsibility. The estimated $4.2 billion increase in
exposure was principally attributable to: (1) JPMorgan derivatives claims of $3.08
billion; (2) other investment bank and treasury and security services claims of $390
million;and(3)assetmanagementexposureclaimsof$750million.6520
The $4.2 billion increase in exposure (assuming the validity of JPMorgans
underlying claims) represents the total additional debt guaranteed, or that became
secured, as a result of the September Agreements. In analyzing this increase in

6518JPMorgan,Exposure,CollateralandSetoffSummary(Oct.27,2009)[LBEXJPMC000199].
6519SeeISDAMasterAgreementbetweenJPMCBandLBCC(Nov.15,1993),atp.25[JPM20040000368]

(providingaguarantybyLBHI);ISDAMasterAgreementbetweenJPMMandLBIE(Aug.26,1997),atp.
14 [JPM2004 0086169] (providing a guarantyby LBHI);ISDA Master Agreement between JPMCB and
LBFSA(Nov.15,1993),atp.24[JPM2004000850](providingaguarantybyLBHI);Amendmenttothe
ISDA Master Agreement between JPMM and LBFSA (July 11, 2008), at p. 35 [JPM2004 0086103]
(providingguarantybyLBHI);ISDAMasterAgreementbetweenJPMCBandLBSF(Dec.20,1995),atp.
22 [JPM2004 0000345] (providing guaranty by LBHI); ISDA Master Agreement between JPMBD and
LBIE (Feb. 23, 1998), at p. 21 [JPM2004 0086072]; Guarantee of LBHI for ISDAMaster
Agreementbetween WMB and LBSF (May 28, 1998) [LBEXJPM 0000210]; Guarantee of LBHI for ISDA
MasterAgreementbetweenJPMMandLBSF(June7,2002)[LBEXJPM0000212].
6520Id.TheassetmanagementclaimsarediscussedindetailinSectionIII.B.3.g.5.a.viofthisReport.

1749

exposure, it is important to note that the September Guaranty was for payment, not
collection, such that JPMorgan could look first to LBHI for payment without being
required to exhaust its collection efforts against the subsidiaries.6521 As such, the $4.2
billion estimate of the exposure would find support in the September Agreements
themselves.Thismeasureofexposure,however,doesnotaccountforcollateralowned
byLBHIssubsidiaries.AlthoughitistheoreticallypossiblethatJPMorgancouldlook
to LBHI alone to satisfy the obligations, this would be unlikely. The subsidiaries
themselves had assets to pay JPMorgan and collateral pledged to support their direct
obligations to JPMorgan.6522 Thus, JPMorgan would have no reason to look solely to
LBHI,butwouldlikelycollectfromallsourcesatonce(whichiswhatitinfactdidto
the extent it was able to apply its collateral to reduce its claims postpetition relying
uponthesafeharborprovisions ofSection362).6523Further,evenifJPMorganwereto
collectonlyfromLBHI,LBHIwouldhaveasubrogationclaimagainstitssubsidiaries,
reducing the September Guarantys impact on LBHI and its creditors.6524 For this
reason, the increased exposure should not be measured by the full difference in gross
exposure, but should be discounted by two factors: (1) the probability that the

6521SeeGuaranty(Sept.9,2008)atp.1(TheGuarantorunconditionallyandirrevocablyguaranteestothe

Bank the punctual payment of all obligations and liabilities of the Borrowers to the Bank.) [JPM2004
0005813].
6522JPMorgan,Exposure,CollateralandSetoffSummary(Oct.27,2009)[LBEXJMPC000199].
6523Id.
6524UnderSection5oftheSeptemberGuaranty,LBHIsrightofsubrogationcouldnotbeexerciseduntil
JPMorganwaspaidinfull,allLehmanaccountswereclosedandallofLehmansobligationsunderany
agreementswithJPMorganwerefulfilled.SeeGuaranty(Sept.9,2008),atp.23[JPM20040005813].

1750

September Guaranty would be called at all; and (2) the value of the collateral that
secured the obligations at the subsidiary level and the ability of each subsidiary to
contributetoaJPMorgandeficiencyclaimarisingundertheSeptemberGuaranty.
BecauseofthepotentialovercollateralizationofJPMorgan,6525thenetexposureto
LBHI,afteraccountingforthecollateralpledgedbythesubsidiariesandassumingthat
the subsidiaries would not pay anything on account of any general unsecured
deficiencyclaimheldbyJPMorganafterapplicationofthatcollateral,wastheoretically
zeroundertheSeptemberGuaranty.
Conflicting evidence exists as to whether a zero value net exposure under the
SeptemberGuarantyisreasonable.SomedocumentsindicatethatJPMorganbelievedit
was fully collateralized against Lehman, but those documents do not address all non
clearing obligations.6526Inaddition,interviews with JPMorgan personnelindicate that
JPMorgan was concerned over the adequacy of Lehmans collateral, suggesting that
JPMorgan believed the guaranties were necessary to protect itself.6527 Other evidence
suggeststhatJPMorganwasunsurehowmuchcollateralitneededatanygiventimeto
cover its exposure.6528 Determining the amount of appropriate collateral was art, not

6525SeeIII.A.5.b.foradiscussionoftheissueofovercollateralization.
6526SeeJPMorgan,TriPartyRepoMarginGapAnalysisLehman9/10/2008(Sept.10,2008)[JPM2004

002988689];seealsoSectionIII.A.5.bofthisReport.
6527 Examiners Interview of Donna Dellosso, Feb. 27, 2009, at pp. 45; see also Section III.A.5.b of this
ReportforamoredetaileddiscussionofthebasisofJPMorganscollateraldemands.
6528ExaminersInterviewofGailInaba,Apr.28,2009,atpp.1112.

1751

science,6529andwasdependentuponestimates.6530EvenifLBHIsnetexposureunder
the September Guaranty could reasonably be valued at zero, the September Guaranty
stillimposedacostuponLBHI:namely,theriskthattheactualsaleofcollateralwould
generateproceedslessthanthegrossexposuretoJPMorgan,triggeringLBHIsliability
asaguarantor.
Postbankruptcy events suggest that: (1) these values were incorrect, or (2) the
value of the collateral significantly declined following the execution of the September
Guaranty.AfterSeptember15,2008,JPMorganliquidatedapproximately$1.95billion
of the $8.6 billion in cash collateral LBHI posted on or after September 9, 2008.6531
JPMorgan claims a right to an additional $943 million of collateral in connection with
the September Guaranty.6532 As of October 27, 2009, JPMorgan asserted $7.6 billion in
remaining claims and had $7.14 billion remaining in cash, money market funds, and
other collateral. Thus, if all the remaining collateral were liquidated to pay the
remaining obligations that JPMorgan asserts are still due, JPMorgan would have
approximately $459 million in remaining claims on account of obligations guaranteed
bytheSeptemberGuaranty.Giventhatapproximately$1.95billion of the$8.6 billion
LBHIcollateralhasbeenusedtopayJPMorganalreadyandadditionalLBHIcollateral
maybeusedtoreducetheclaimtozero,thenetexposureonSeptember10,2008was

6529ExaminersInterviewwithStevenD.Black,Sept.23,2009,atp.6.
6530ExaminersInterviewofMarkG.Doctoroff,Apr.29,2009,atp.3.
6531JPMorgan,Exposure,CollateralandSetoffSummary(Oct.27,2009)[LBEXJPMC000199].
6532Id.

1752

eithergreaterthanzero(assumingthatJPMorgansclaimsand valuationsofcollateral
are correct) or JPMorgan was overcollateralized prebankruptcy and the value of
collateral posted by the subsidiaries fell after September 10, 2008 by these amounts.
Thus,theExaminerconcludesthatthereisevidencetosupportafindingthatLBHIdid
infactincreaseitsexposuretoJPMorganbyenteringintotheSeptemberGuaranty.
The next step of the less than reasonably equivalent value inquiry is to
determinewhatLBHIreceivedinexchangeforincreasingitsexposuretoJPMorganand
whetherwhatitreceivedwasapproximateinvaluetowhatitgaveup.Inanalyzingthe
likely direct benefits, the starting point for determining whether the September
Guaranty increased the value of the subsidiaries is to determine whether the
subsidiaries had any value at the time of the September Guaranty. Section III.B.3.c
discussesthefindingsoftheExaminerwithregardtothesolvencyofthesubsidiariesof
LBHI.Tosummarize,theExaminerhasconcludedthatthereisevidencetosupporta
finding of insolvency for the following subsidiaries as of May 31, 2008: LCPI, CES
Aviation IX and CES Aviation V. Two of these entities, CES Aviation IX and CES
Aviation V, remained insolvent through filing for bankruptcy. LCPI was insolvent
throughmuchof2008,butreceiveda$900millioncapitalinfusiononAugust29,2008,
which allowed it to become borderline solvent and to apparently maintain this status
untilitsbankruptcyfiling.6533ThreeLBHIAffiliatesLBSF,LBCSandCESAviation

6533SeeSectionIII.B.3.cofthisReportforadiscussionofthesolvencyofLCPI.

1753

wereborderlinesolventasofMay31,2008,meaningthattheirbalancesheetsshowed
assetsjustslightlyinexcessofliabilitiesandthataminimalwritedownofassetvalues
or a small unaccountedfor liability would render these entities insolvent. The small
marginbywhichtheseentitiesweresolventcreatesafactualissuetoberesolvedbythe
court on a casebycase basis.6534 Nine LBHI Affiliates LOTC, LB 745, LBDP, LBCC,
BNC Mortgage LLC, LBFP, East Dover Limited, LSF and LRP were solvent as of as
May 31, 2008, and there is insufficient evidence to support a claim that any of these
LBHIAffiliatesbecameinsolventduringtheperiodendinguponthecommencementof
the applicable Chapter 11 case.6535 There is insufficient evidence to reach a
determinationastothesolvencyofDebtorentityPAMIStatlerArms.6536PAMIStatler
ArmsisasubsidiaryofPropertyAssetManagement,Inc.(PAMI),anditssoleassetis

6534 The Examiner did not conduct an assetbyasset valuation of each asset owned by LBHI Affiliates

becauseofthetimeandcostrequiredforsuchanexercise.Rather,positionsacrossanumberofdifferent
asset classes were reviewed for several Debtors. An entitys equitytototalassets ratio, as well as the
relative likelihood of a misstatement of the value of an entitys assets, is considered in determining
whether an entity that posted positive equity might nonetheless be borderline solvent. As the term is
used here, a low equitytototalassets ratio would make an entity borderline solvent unless the
compositionofitsassetswassuchthatmisstatementoftheirvaluewasveryunlikely.Inlightofthecost
andtimenecessarytoevaluatethevaluationofalloftheassetsofeachoftheborderlinesolvententities,
the Examiner determined that it would not be beneficial to perform such an exercise. For purposes of
analyzingwhethertheseLBHIAffiliateshavecolorableavoidanceclaims,theExaminerassumedthatthe
borderlineentitieswereinsolvent.
6535LRPwasestablishedinMay2008anddidnotpostabalancesheetuntilJune2008.LRPwassolvent
asofAugust31,2008andthereisinsufficientevidencetosupportaclaimthatitbecameinsolventatany
timebetweenitsincorporationandthecommencementofitsChapter11case.
6536 A motion to dismiss PAMI Statler Arms LLCs bankruptcy petition was filed on May 26, 2009. See
Motion of Debtors Seeking Entry of an Order Pursuant to Section 1112(b) of the Bankruptcy Code
DismissingChapter11CaseofPAMIStatlerArmsLLC,DocketNo.3650,InreLehmanBros.HoldingsInc.,
No.0813555(Bankr.S.D.N.Y.May26,2009).Thehearingonthemotionhasbeenadjournedwithouta
date. See Notice of Adjournment of Motion of Debtors Seeking Entry of an Order Pursuant to Section
1112(b)oftheBankruptcyCodeDismissingChapter11CaseofPAMIStatlerArmsLLC,DocketNo.4060,
InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.June20,2009).

1754

anapartmentcomplexinCleveland,Ohio.Lehmandidnotmaintainseparatefinancial
statementsforPAMIStatlerArmsinitsgeneralledgersoftwareprogram.
TheExaminerdidnotmakeafindingastothesolvencyofLBIinasmuchasthis
issueislikelybeingexaminedbytheSIPATrustee.TheExaminer,forthepurposesof
this analysis, assumes that LBI was insolvent on September 10, 2008. As set forth in
SectionIII.C,thisassumptionissupportedbythesaleofLBItoBarclaysfivedayslater
thatdidnotresultinLBHIreceivinganyvalueforLBI.
Because there is evidence that supports a finding that some of LBHIs
subsidiariesincludingLBIwereinsolventandnotlikelytogenerateanyvalueforLBHI,
there is a colorable basis to claim that LBHI did not receive any direct quantifiable
benefitsfromenteringintotheSeptemberGuaranty.
Apart from whether the September Guaranty may have increased the value of
LBHIs subsidiaries, the September Guaranty may have benefited LBHI by allowing
LBHItheabilitytosellitselftoBarclaysorotherwisegaintimetoexecutearescue.This
purported benefit is subject to an indirect benefit analysis. The burden is upon the
plaintiff to prove the value or lack of value of any indirect benefits.6537 A plaintiff
couldvaluethisindirectbenefitbyquantifyingtheoptionvalueofhavingadditional
timebeforethepetitiondatetoattempttoenterintoamorefavorabletransaction.

6537Metro Commcns, 945 F.2d at 650; but see Tousa, 2009 WL 3261963 at *7778 (holding if trustee meets

burdenthatdebtordidnotreceiveindirectbenefits,burdenshiftstodefendanttoproduceevidencethat
debtorreceivedanindirectbenefitthatwastangibleandconcrete).

1755

Quantifying this indirect benefit is difficult because it is unclear whether LBHI

(as opposed to its subsidiaries) benefited from the opportunity to devise another
solutiontoitsproblems.KDBrelayeditsdecisionnottocontinuetalkswithLehmanon
September 2, 2008.6538 In addition to KDB, Lehman pursued alternative transactions
withBankofAmerica,Barclays,andMetLife.6539OnlytheBarclaystransactionreached
thepointoffixingconsiderationforasale,butthisdealwasexpresslycontingentupon
approvalbytheFinancialServicesAuthorityand,thus,adefinitivesalesagreementhad
notbeenexecuted.6540Undertheproposedtransaction,Barclayswouldhavepurchased
theoperatingsubsidiariesofLBHIfor$3billionandguaranteedthedebtofLBHIand
its former subsidiaries.6541 LBHIs remaining assets would equal the assets for the
proposedSpinCoplus$3billionfromtheBarclayssale.6542Postsale,LBHIplannedto
seek $40 billion in new debt financing from a consortium of financial institutions.6543
Given the speculative nature of the proposed Barclays transaction,6544 a colorable

6538SeeSectionIII.A.3ofthisReportforadiscussionoftheKDBdeal.
6539SeeSectionIII.A.3ofthisReportforadiscussionofotherdealspursuedbyLehman.
6540ExaminersInterviewofShariD.Leventhal,Apr.30,2009,atp.4;ExaminersInterviewofThomasC.

Baxter,Jr.,May20,2009,atp.10;emailfromJohnVarley,Barclays,toFritsSeegers,Barclays(Sept.13,
2008)[BCIEX(S)00053344];ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atpp.910.
6541ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.8.
6542Id.
6543Id.
6544 Notably, Lowitt stated that even if JPMorgan had agreed to return some collateral to Lehman, the
larger issue for Lehman was that Lehman had lost enormous amounts of secured funding and the
confidence of the market, suggesting, albeit with the benefit of hindsight, that additional time may not
havebenefittedLBHI.ExaminersInterviewofIanT.Lowitt,Oct.28,2009,atpp.2223.

1756

argumentexiststhatLBHIreceivednoquantifiableindirectbenefitfromtheadditional
timeaffordedbytheSeptemberGuaranty.
Any value of time argument must also be discounted if the September
Guaranty acceleratedLehmansdemise.Evidence existsthattheSeptemberGuaranty
causedLBHIsliquidityproblemstobecomemoreacute.Byprovidingcashandmoney
marketfundstoJPMorgan(intheformofcollateralinconnectionwiththeSeptember
Guaranty),LBHIdraineditsrapidlydepletingliquiditypoolinthecriticaldayspriorto
thebankruptcyfiling.6545IfLBHIhaddeclinedtoexecutetheSeptemberGuaranty,the
additional liquidity may have extended LBHIs lifeline. This additional time might
haveprovidedanopportunityforthepartiestostructureanoutofcourtreorganization
or at least a more orderly liquidation, as opposed to the freefall bankruptcy that
occurred.6546 Thus, there is evidence to support a finding that LBHI did not receive
reasonablyequivalentvaluebyenteringintotheSeptemberGuaranty.
3.

InsolvencyasofSeptember10,2008

The Examiner has concluded that there is evidence to support a finding that
LBHIwasinsolventonSeptember10,thedatetheSeptemberGuarantywasexecuted.6547

6545Lehman,MinutesofMeetingofBoardofDirectors(Sept.14,2008)[LBEXAM003933].
6546Ofcourse,ifJPMorganhadpulleditscredit,LBHImighthavebeenforcedtofilebankruptcybefore

September15.
6547SeeSectionIII.B.3.bofthisReportforamoredetaileddiscussionofthesolvencyanalysisofLBHI.

1757

4.

UndercapitalizationasofSeptember10,2008

TheExamineralsohasconcludedthatthereisevidencetosupportafindingthat
LBHIwasundercapitalizedasofSeptember10,2008.6548Undercapitalizationisrelevant
onlytoclaimsmadetoavoidtheSeptemberGuarantyunderSection548(a).6549
b. DefensestoAvoidabilityoftheSeptember
Guaranty
1.

ApplicabilityoftheGoodFaithDefenseof
Section548(c)oftheBankruptcyCodeand
Section279oftheN.Y.DebtorCreditorLawto
theSeptemberGuaranty

TheExaminerhasconcludedthatJPMorganwillhavesubstantialcontraryfacts
toovercomeifitraisesthedefenseofgoodfaithunderSection548(c)orSection279of
the N.Y. Debtor Creditor Law. Under both Section 548(c) and New York law, a
transferee who acts in good faith may enforce an obligation to the extent that it gave
value to the debtor in exchange for the obligation.6550 The burden of proof for each
elementofaSection548(c)defenseisonJPMorgan.6551
Courts apply an objective test when assessing good faith.6552 JPMorgan would
notbefoundtohavetakentheobligationingoodfaithifthecircumstanceswouldplace
a reasonable person on inquiry of LBHIs fraudulent purpose, and a diligent inquiry

6548SeeSectionIII.B.dofthisReportforamoredetaileddiscussionoftheundercapitalizationanalysisof

LBHI.
6549Compare11U.S.C.548(a),withMcKinneysDebtorandCreditorLaw,274(2010).
655011U.S.C.548(c).
6551 See Nisselson v. Empyrean Inv. Fund, L.P. (In re MarketXT Holdings Corp.), 376 B.R. 390, 403 (Bankr.
S.D.N.Y.2007);McColleyv.Rosenberg(InreCandorDiamondCorp.),76B.R.342,351(Bankr.S.D.N.Y.1987).
6552InreBayouGroup,LLC,396B.R.810,844(Bankr.S.D.N.Y.2008)(citationsomitted).

1758

wouldhavediscoveredthefraudulent purpose.6553Goodfaithrequires eitherthat:(1)

JPMorganwasnotoninquirynotice,or(2)ifonnotice,JPMorganwasdiligentinits
investigation of LBHI.6554 Whether JPMorgan was on inquiry notice may also be
informedbyitsexperienceorsophistication.6555
Courtshavefoundthatatransfereewasputoninquirynoticeinavarietyof
contexts, including (1) fraudulent purpose of the transfer; (2) underlying fraud; (3)
unfavorable financial condition of the transferor; (4) insolvency of the transferor; (5)
improper nature of the transaction; and (6) voidability of the transfer.6556 The
enumerated examples, however, are not exhaustive and thus good faith must be
evaluatedonacasebycasebasis.6557
Some interviews with JPMorgan personnel indicate that JPMorgan did not
suspect that Lehmans bankruptcy was imminent.6558 JPMorgan stated that it did not
believe its collateral requests would cause a crisis within Lehman and JPMorgan
expressedconcernwithbecomingknownasthefirmthatcausedLehmansdemise.6559

6553Seeid.(citingJobinv.McKay(InreM&LBus.MachineCo.,Inc.),84F.3d1330,1338(10thCir.1996)).
6554Seeid.(quotingInreManhattanInv.FundLtd.,397B.R.1(S.D.N.Y.2007)).
6555Seeid.(citingJobin,84F.3dat1338).
6556Id.at84546(citationsomitted).
6557Id.at846(citationsomitted).

ExaminersInterviewofMarkG.Doctoroff,Apr.29,2009,atp.15;ExaminersInterviewofJamesL.
Dimon, Sept. 29, 2009, at p. 10 (the first time he thought Lehman may not survive was Saturday,
September 13); Examiners Interview of John J. Hogan, Sept. 17, 2009, at p. 8 (the first time he thought
LehmanmaynotsurvivewasSunday,September14).
6559ExaminersInterviewofDonnaDellosso,Feb.27,2009,atpp.2,5;ExaminersInterviewofJamesL.
Dimon,Sept.29,2009,atp.10;JaneBuyersRusso,JPMorgan,UnpublishedNotes(Sept.9,2008),atp.2
[JPMEXAMINER00006052]; see also email from Jane BuyersRusso, JPMorgan, to Kelly A. Mathieson,
6558

1759

On the other hand, some JPMorgan personnel stated that JPMorgan was concerned
aboutthestatusofLehmanandworriedbyacompany[Lehman]thatwashangingon
totheedge.6560JPMorganpersonnelstatedthattherumormillwasrampantconcerning
firms no longer doing business with Lehman and Lehmans stock was getting
killed.6561 In addition, JPMorgan executives had analyzed and expressed serious
concernsaboutLehmanssurvivalplans,6562includingtheviabilityofLehmansSpinCo
proposal.6563 JPMorgan similarly had expressed concerns about presentations that
Lehman prepared for the rating agencies;6564 in particular, JPMorgan was concerned
about the treatment of Lehmans survival strategies in the presentations.6565 In short,
evidence exists to support a finding that, given JPMorgans experience and
sophistication,6566 JPMorgan was on inquiry notice of Lehmans unfavorable financial
condition.6567

JPMorgan, et al. (Sept. 12, 2008) [JPM2004 0050097] (The goal was to protect jpm without pushing
[Lehman]overtheedge.).
6560InterviewofJamesL.Dimon,Sept.29,2009,atp.5.
6561ExaminersInterviewwithStevenD.Black,Sept.23,2009,atp.6
6562SeeSectionIII.A.5.bofthisReport.
6563Id.
6564 Email from Paolo R. Tonucci, Lehman, to Mark G. Doctoroff, JPMorgan, et al. (Sept. 4, 2008) [JPM
2004 0006302]. Lehman highlighted the sensitive nature of these documents multiple times. See id.
(There is a lot of confidential info . . . .); email from Ian T. Lowitt, Lehman, to Barry L. Zubrow,
JPMorgan(Sept.5,2008)[JPM20040006314](Thematerialswesentyouareobviouslyverysensitive...
);emailfromIanT.Lowitt,Lehman,toBarryL.Zubrow,JPMorgan(Sept.7,2008)[JPM20040006317].
JPMorganlimitedthecirculationofthematerials.SeeemailfromBarryL.Zubrow,JPMorgan,toIanT.
Lowitt,Lehman,etal.(Sept.8,2008)[JPM2004006317].
6565 Examiners Interview of Barry L. Zubrow, Sept. 16, 2009, at p. 7; see email from Barry L. Zubrow,
JPMorgan,toMarkG.Doctoroff,JPMorgan,etal.(Sept.5,2008)[JPM20040006286].
6566InreBayouGroup,LLC,396B.R.810,844(Bankr.S.D.N.Y.2008)(citingJobin,84F.3dat1338).
6567Id.at84546(citationsomitted).

1760

Once on inquiry notice, if JPMorgan fail[ed] to conduct a diligent

investigationitwilllackagoodfaithdefense.6568Toprovegoodfaith,JPMorgans
diligent investigation must ameliorate the issues that placed the transferee [or
obligee]oninquirynoticeinthefirstplace.6569ThereisevidencethatJPMorganmade
inquiriesofLehmanregardingitsfinancialcondition.JamesDimon,JPMorgansCEO,
statedthat,ineveryconversationhehadwithFuld,hereiteratedthatJPMorganwanted
tohelpandthatifanythingJPMorganwasdoingwashurtingLehman,Fuldshouldlet
Dimonknow.6570Inaddition,DonnaDellosso,ariskmanagerinJPMorgansinvestment
bank,wasreceivingdailyliquiditypoolupdatesfromLehman.6571
TheExaminerhasobservednoevidence,however,thatJPMorgansinvestigation
ameliorated the issues that put JPMorgan on inquiry notice in the first place. The
evidencesuggeststheopposite.6572AftermeetingwithLehmanonSeptember4,2008to
discussLehmansthirdquarterearningsandthestatusofitsSpinCoplans,6573JPMorgan
left concerned about the viability of its plans.6574 In addition, after reviewing a draft
copy of a presentation Lehman intended to give the rating agencies, executives at

6568Id.at859.
6569Id.(citingJobin,84F.3dat133556).
6570ExaminersInterviewofJamesL.Dimon,Sept.29,2009,atp.2.
6571

Examiners Interview of Donna Dellosso, Oct. 6, 2009, at p. 11; email from Edward A. Deleon,
JPMorgan, to Donna Dellosso, JPMorgan (Sept. 4, 2008) [JPM2004 0001065]; email from Mark G.
Doctoroff, JPMorgan, to Donna Dellosso, JPMorgan, et al. (Sept. 11, 2008) [JPM20040002262]. See also
SectionIII.A.5.bofthisReportforadiscussionofthedailyliquidityreporting.
6572SeeSectionIII.A.5.bofthisReportforadetaileddiscussionoftheattemptsofJPMorgantoinvestigate
LehmansfinancialconditionandJPMorgansincreasingconcerns.
6573ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atpp.1011.
6574Id.atp.11.

1761

JPMorgan found the presentation to be too vague and were concerned about the
strategies Lehman outlined.6575 Thus, there is evidence to support a finding that
JPMorgan lacks a goodfaith defense because JPMorgan was on inquiry notice and
subsequent investigation did not ameliorate the issues that put JPMorgan on inquiry
noticeinthefirstplace.
With respect to the question of value, this element of the goodfaith defense
raisesthesameinquiryasthereasonablyequivalentvalueanalysis.IfJPMorganwere
to prove that it acted in good faith, JPMorgan would retain its rights under the
Guaranty to the extent of the value it provided. As described in Section
III.B.3.g.5.a.ii.a.2 above, however, the Examiner has determined that there is sufficient
evidence to conclude that JPMorgan did not transfer a quantifiable benefit to LBHI in
connectionwiththeSeptemberGuaranty.
2.

ApplicabilityoftheSafeHarborProvisionsof
theBankruptcyCodetotheSeptember
Guaranty

The Examiner concludes that there is sufficient legal basis to support a

determination that the September Guarantyisnot protectedunderSections546(e), (f),
(g)or(j),whichprovidethatthetrusteemaynotavoidatransfermadetoaProtected
Party in connection with Protected Contracts, except in the case of actual fraud.6576 In

6575ExaminersInterviewofBarryL.Zubrow,Sept.16,2009,atp.7;seeemailfromMarkG.Doctoroff,

JPMorgan,toBarryL.Zubrow,JPMorgan,etal.(Sept.5,2008)[JPM20040006286].
6576See11U.S.C.546(e),(f),(g)and(j)(emphasisadded).

1762

contrast, Section 548 provides that [t]he trustee may avoid any transfer . . . of an
interestofthedebtorinproperty,oranyobligation...incurredbythedebtor.6577The
decisiontoincludeobligationswithinatrusteesavoidancepowersunderSection548
but to exclude that same language from Section 546 suggests that the safe harbors do
not protect the incurrenceof obligations fromavoidance.6578Whether thesafeharbors
protectthe September Guarantyturns onwhether adebtor makesatransferor incurs
anobligationwhenadebtorexecutesaguaranty.
Courts have uniformly determined that when a debtor incurs an obligation
underaguaranty,thisincurrenceofdebtisnotatransferundertheBankruptcyCodeor
New York state law, both of which define a transfer to include disposing or parting
with an interest in property.6579 These cases generally follow the rationale set forth in

657711U.S.C.548(a)(1)(emphasisadded).
6578 The Examiner has not located any reported decisions directly addressing this issue. However, this

readingofSection546findsstrongsupportinthecaselaw.SeeBFPv.ResolutionTrustCorp.,511U.S.531,
537 (1994) (interpreting differently the phrases fair market value in Section 522 and reasonably
equivalentvalueinSection548oftheBankruptcyCodebecauseitisgenerallypresumedthatCongress
actsintentionallyandpurposelywhenitincludesparticularlanguageinonesectionofastatutebutomits
it in another.) (quoting Chicago v. Envtl. Def. Fund, 511 U.S. 328 (1994)); In re Joelson, 427 F.3d 700, 705
(10th Cir. 2005) (Because the phrase respecting the debtors . . . financial condition is used in both
523(a)(2)(A) and 523(a)(2)(B) and both provisions were enacted as part of the same statute, this is a
classic case for application of the normal rule of statutory construction that identical words used in
differentpartsofthesameactareintendedtohavethesamemeaning.)(internalcitationsomitted);Inre
MerchantsGrain,Inc.,93F.3d1347,1356(7thCir.1996)(applyingsamemeaningtothephrasefixingof
liens in Sections 522 and 545 of the Bankruptcy Code because [t]here is a natural presumption that
identicalwordsusedindifferentpartsofthesameactareintendedtohavethesamemeaning.)(internal
citationsomitted);InreRevcoD.S.,Inc.,No.5881308,1990Bankr.LEXIS2966(Bankr.N.D.OhioDec.17,
1990)(comparingSection544,whichreferencesattackingasfraudulenteitherthetransferofpropertyor
the incurrence of an obligation, with Section 502(d), which limits its application to fraudulent transfers
andomitsanyreferencetoincurrenceofanobligation).
6579 11 U.S.C.101(54); N.Y.DEBT & CRED. LAW 270 (McKinney 2009); see, e.g., Coveyv. Commercial
NatlBankofPeoria,960F.2d657,661(7thCir.1992)(Althoughanoteorguaranteeisnotatransferfor

1763

theSupremeCourtsdecisioninBarnhillv.Johnson.6580Inthatcase,theCourtconsidered
whether,forpurposesofSection547,apreferentialtransferoccursonthedateacheckis
written or on the date the drawee bank honors the check. The Court first noted that
[w]hat constitutes a transfer and when it is complete is a matter of federal law.6581
Nevertheless,becausetheBankruptcyCodesdefinitionoftransferincludesreferences
toundefinedtermssuchaspropertyandaninterestinproperty,theCourthadto
looktostatelawtodeterminewhenatransferofpropertyoccurred.6582Afterreviewing
applicablestatelaw,theCourtconcludedthattheissuanceofacheckmerelycreatesa
promise to pay i.e.,an obligation for the maker and that the makers property did
not transfer until the drawee bank honored the check.6583 The Court rejected the
argumentthat issuingthecheck created aconditional transfer,determiningthatthe
payeehadnocontroloveranyofthemakerspropertyuntilthecheckwashonored:
Untilthemomentofhonorthedebtorretainsfullcontroloverdisposition
oftheaccount andthe accountremains subjectto avarietyofactionsby
third parties. To treat petitioners nebulous right to bring suit as a
conditional transfer of the property would accomplish a nearlimitless
expansion of the term conditional. In the absence of any right against

purposesof11U.S.C.101(54)...bothnoteandguaranteeareobligations);InreNirvanaRestaurantInc.,
337 B.R. 495, 508 (citing Covey and holding that guaranty could not be avoided under N.Y.D.C.L 274
becausethatstatutedidnotapplytofraudulentobligations);InreAsiaGlobalCrossing,Ltd.,333B.R.199,
204(Bankr.S.D.N.Y.2005)(aguarantyisanobligationratherthanatransferwithinthemeaningof
11U.S.C.101(54));seealsoRubinv.Mfrs.HanoverTrust,661F.2d979,99091(2dCir.1981)(grantingofa
guarantyisan obligation incurred); accordIn re Lawrence Paperboard Corp.,76 B.R. 866,872 (Bankr. D.
Mass.1987).
6580503U.S.393(1992).
6581Id.at39798(quotingMcKenziev.IrvingTrustCorp.,323U.S.365,36970(1945)).
6582Id.at398.
6583Id.at400.

1764

thebankortheaccount, wethinkthefairerdescriptionis that petitioner

had received no interest in debtors property, not that his interest was
conditional.6584
Relying upon Barnhill, the Bankruptcy Court in the Southern District of New
York concluded that when a debtor executes a guaranty, it incurs an obligation. The
courtreasoned:
Like the check in Barnhill, the Guaranty gave 360networks a chose in
actionagainstAsiaGlobal,conditionedonthedefaultbyGCBandwidth.
It did not grant 360networks any interest in or right to Asia Globals
property.Assuch,itwasanobligationratherthanatransferwithin
themeaningof101(54).SeeCoveyv.CommercialNatlBank,960F.2d657,
661 (7th Cir. 1992) (Although a note or guarantee is not a transfer for
purposes of 11 U.S.C. 101(54) . . . both note and guaranty are
obligations.); cf. Barnhill, 503 U.S. at 400 n. 8 (even if the delivery of a
checkgaverisetoacauseofactionagainstthedebtor,itwouldstillnotbe
atransferundertheBankruptcyCode).6585
Thus, a court may find that LBHIs incurrence of obligations under the September
Guarantyisnotprotectedbythesafeharbors.
A contrary argument may be constructed based upon recent Congressional
amendments to expand the protections of the safe harbors. Pursuant to the 2005
amendments to the Bankruptcy Code, the definition of Protected Contracts was

6584Id.at401.

AsiaGlobalCrossing,333B.R.at204.InInreAdler,ColemanClearingCorp.,263B.R.406(S.D.N.Y.2001),
theissueofwhetheraguarantywasoutsideofthereachofthesafeharborsbecauseitwastheincurrence
ofanobligationandanotatransferwasraised,butnotdecided.Id.at47273.Thetrusteearguedthat
because546(e)sheltersonlytransfersandbecausetheTrusteewasattemptingtoavoidobligations,
thoseobligationswerenotprotectedbythesafeharbor.Thecourtheldthatitdidnotneedtoreach
thisissuebecause,[r]egardlessofhowbroadlyornarrowlytheterm[transfer]isdefined,thisCourtis
persuaded that the transfers which [defendants] seek to enforce against Adler either did not constitute
qualifyingpaymentsordidnotcontemplateconsummationofabonafidesecuritiessettlementinthe
relevantsenseofthesewords.Id.at480.
6585

1765

expanded to include any security agreement or arrangement or other credit

enhancement related to any agreements or transactions referred to [ ], including any
guarantee or reimbursement obligation.6586 An argument may also be made based
upon the legislative history of the enactment of the safeharbor provisions and the
amendmentstheretowhichevidencethatCongresssoughttoreducethesystemicrisk
inthefinancialmarketplaceandpreventarippleeffectinwhichtheinsolvencyofone
financialfirmtriggersfailureselsewhereinthemarket.6587
The Examiner observes that no decisions have been reported that apply the
distinctionbetweentheavoidabilityofatransferandanobligationinacaseinvolving
the safe harbor provisions of the Bankruptcy Code. Consequently, this issue will
ultimately have to be resolved by the Court. If the September Guaranty is avoided,
LBHI would not be liable for any unsecured deficiency claims that JPMorgan might
assertbasedontheSeptemberGuaranty.

6586

See 11 U.S.C. 101(25) (forward contracts); 101(38)(A) (master netting agreements); 101(47)
(repurchase agreements); 101(53)(B) (swap agreements) 761(4) (commodity contracts); and 741(7)
(securitiescontracts).
6587SeeSectionIII.C.5.b.1foradiscussionoftheapplicationofthesafeharborprovisionsinlightofrecent
Congressional amendments. The issue addressed in that Section of the Report deals with an actual
transfer of securities as opposed to the creation of an obligation, which is the issue the Examiner is
addressing here. An argument based upon legislative history and the discernment of perceived
Congressional policy contravenes the instruction of various appellate court decisions requiring
applicationoftheplainmeaningofthestatuteintheabsenceofambiguity.SeeQSIHoldings,Inc.,vAlford
(InreQSIHoldings,Inc.),571F.3d545,549(6thCir.2009);ContemporaryIndus.Corp.v.Frost,564F.3d981,
98485(8thCir.2009);Lowenschussv.ResortsIntl,Inc.(InreResortsIntl,Inc.),181F.3d505,515(3rdCir.
1999);KaiserSteelCorp.v.CharlesSchwab&Co.,Inc.,952F.2d1230,1237(10thCir.1991).

1766

c.

AvoidabilityofTransfersofCollateralin
ConnectionwiththeSeptemberGuaranty

While avoidance of the September Guaranty would eliminate any general

unsecureddeficiencyclaimfiledbyJPMorganagainstLBHIforamountsowedtoitin
excessofitscollateral,itwouldnotautomaticallyresultinthereturnofthe$8.6billion
pledged to secure the September Guaranty or an unwinding of the postpetition
applicationof$1.95billion ofthis pledge. Themoredifficultissueiswhether (1) the
transfers made between September 9 and September 12 of additional collateral to
JPMorgan in connection with the September Agreements can be avoided either as
fraudulenttransfersorpreferencesorbaseduponacommonlawclaimbelongingtothe
LBHI estate under Section 541, or (2) the approximately $1.95 billion in setoffs that
JPMorgantookpostpetitionmaybeavoidedasimproperpostpetitiontransfers.
1.

LBHIsCollateralTransfersandPostPetition
Setoffs

Between September 9 and the bankruptcy filing on September 15, 2008, LBHI
transferred approximately $8.6 billion in cash collateral in connection with the
September Agreements.6588 Specifically, the following collateral transfers occurred
duringthisperiod:6589

6588SeeSectionIII.A.5.bofthisReportforamoredetaileddiscussionofthetransfersofcollateral.
6589Appendix18,LehmanCollateralatJPMorgansummarizescollateralpostedbyLehmanatJPMorgan

from June 2008 through September 2008 in response to JPMorgans margin requirementsand collateral
requests, which are discussed in detail at Section III.A.5.b of this Report. The chart neither lists every
collateral movement nor tracks every individual security, but summarizes significant collateral posts,
transfersandreturns.

1767

September9,2008

Cash

September9,2008

MoneyMarket
Funds

September10,2008

Cash

September10,2008

Corporate
bonds

September11,2008

Cash

September11,2008

Corporate
bonds

Cash

September12,2008

September12,2008

Corporate
bonds

September12,2008

Pine

Lehmanposted$1billioncashinresponseto
JPMorgansSeptember9collateralrequestfor
$5billion(ofwhichLehmanagreedtopost$3
billionimmediately).

Lehmanpostedapproximately$1.7billionin
moneymarketfundsinresponseto
JPMorgansSeptember9collateralrequest.

Lehmanposted$300millioncashinresponse
toJPMorgansSeptember9collateralrequest
for$5billion(ofwhichLehmanagreedtopost
$3billionimmediately).

LehmanprovidedJPMorgancorporatebonds
withavalueofapproximately$1.5billionto
valueandpossiblytosubstituteforsomeof
thecashcollateralLehmanpostedinresponse
toJPMorgansSeptember9collateralrequest.

Lehmanposted$600millioncashrelatedto
JPMorgansSeptember9collateralrequest.

JPMorganreturnedapproximately$500
millionofcorporatebondspostedbyLehman.

Lehmanposted$5billioncashinresponseto
JPMorgansSeptember11collateralrequest
for$5billioncash.

JPMorganreturnedtheremainingcorporate
bonds(approximately$1billion)toLehman.

JPMorganreleased$1billion(Lehmans
valuation)ofthePineCLOtoLehman.

1768

Of these transfers,thetwothat occurredonSeptember9were madebefore the

SeptemberAgreementswereexecuted.Althoughitmaybeclaimedthatthesetransfers
fall under the August Agreements, the evidence suggests that they were made in
connection with JPMorgans requests of LBHI to enter into the September
Agreements.6590
FollowingLBHIsbankruptcy,JPMorganapplied$10.6millionofthe$8.6billion
incashcollateralthatLBHIpledgedtorepayobligationsthatwerenotowedbyLBHI
priortotheexecutionoftheSeptemberGuarantyandapplied$1.94billionofthe$8.6
billion in cash collateral to repay obligations that LBHI had guaranteed prior to
September9onanunsecuredbasis.JPMorganisholdingthebalanceofthe$8.6billion
incollateral(approximately$6.9billion6591)andisassertingarightofoffsetinitsProofs
of Claim. The specific setoffs that JPMorgan has already taken to date, asserting that
theserepaymentswereallowedunderthesafeharborprovisions,arelistedasfollows:

JPMorganliquidated$10.1millionofLBHIcollateraltopayanLBIobligation
toJPMSIarisingfromsecuritieslendingactivity.6592

JPMorganliquidated$545,000ofLBHIcollateraltopayanLBIobligationto
JPMorganClearingarisingfromsecuritieslendingactivity.6593

6590SeeSectionIII.A.5.bofthisReport.
6591Thisamountincludessubsequentinterestearned.
6592SeeJPMorgan,Exposure,CollateralandSetoffSummary(Oct.27,2009),atp.5[LBEXJMPC000199].

This collateral liquidation repays an obligation that was not owed by LBHI before the execution of the
SeptemberGuaranty.
6593Seeid.ThiscollateralliquidationrepaysanobligationthatwasnotowedbyLBHIbeforetheexecution
oftheSeptemberGuaranty.

1769

JPMorgan liquidated $1.57 billion of collateral against a JPMCB derivative

claimonLBSF.6594

JPMorgan liquidated $80.3 million of collateral against a WMB derivative

claimonLBSF.6595

JPMorganliquidated$138.5millionofcollateralagainstaJPMCBderivative
claimonLBCC.6596

JPMorgan liquidated $3.4 million of collateral against a JPMM derivative

claimonLBIE.6597

JPMorgan liquidated $2.1 million of collateral against a JPMBD derivative

claimonLBIE.6598

JPMorgan liquidated $91.0 million of collateral against a JPMCB derivative

claimonLBFSA.6599

JPMorgan liquidated $10.2 million of collateral against a JPMM derivative

claimonLBFSA.6600

JPMorgan liquidated $3.9 million of collateral against a JPMCFI claim on

LBIEforrepotransactionexposure.6601

JPMorganliquidated$1.9millionofcollateralagainstaJPMMclaimonLBIE
forrepotransactionexposure.6602

6594 See id. at p. 3. This collateral liquidation repays an obligation that was guaranteed by LBHI on an

unsecuredbasisbeforetheexecutionoftheSeptemberAgreements.
6595Seeid.ThiscollateralliquidationrepaysanobligationthatwasguaranteedbyLBHIonanunsecured
basisbeforetheexecutionoftheSeptemberAgreements.
6596Seeid.ThiscollateralliquidationrepaysanobligationthatwasguaranteedbyLBHIonanunsecured
basisbeforetheexecutionoftheSeptemberAgreements.
6597Seeid.ThiscollateralliquidationrepaysanobligationthatwasguaranteedbyLBHIonanunsecured
basisbeforetheexecutionoftheSeptemberAgreements.
6598Seeid.ThiscollateralliquidationrepaysanobligationthatwasguaranteedbyLBHIonanunsecured
basisbeforetheexecutionoftheSeptemberAgreements.
6599Seeid.ThiscollateralliquidationrepaysanobligationthatwasguaranteedbyLBHIonanunsecured
basisbeforetheexecutionoftheSeptemberAgreements.
6600Seeid.ThiscollateralliquidationrepaysanobligationthatwasguaranteedbyLBHIonanunsecured
basisbeforetheexecutionoftheSeptemberAgreements.
6601Seeid.atp.5.ThiscollateralliquidationrepaysanobligationthatwasguaranteedbyLBHIunderthe
AugustGuaranty.

1770

JPMorgan liquidated $17.6 million of collateral against a JPMM derivative

claimonLBSF.6603

JPMorgan liquidated $18.9 million of collateral against a JPMM claim on

LBREM II BS Financing Mezz Holdings LLC for repo transaction
exposure.6604

In summary, JPMorgan has liquidated approximately $1.95 billion of the $8.6

billion in cash collateral; it is still holding approximately $6.9 billion of this collateral
anditisassertingarightofsetoffagainstthefollowingobligations:(1)approximately
$6.56billioninexposuresrelatedtoclearanceadvances;(2)approximately$75.6million
related to derivative contract claims; (3) approximately $228.8 million related to other
investment bank and treasury and security services claims;6605 and (4) $733.5 million
relatedtoassetmanagementexposure.6606
Absent application of the safe harbors, the Examiner concludes that there is a
colorable claim to avoid, at least in part, the collateral transfers LBHI made in
connection with the September Guaranty. If the September Guaranty is avoided as a
fraudulentobligation,itcannotserveastheunderlyingclaimsupportingthecollateral

6602Seeid.ThiscollateralliquidationrepaysanobligationthatwasguaranteedbyLBHIundertheAugust

Guaranty.
6603 See id. at p. 3. This collateral liquidation repays an obligation that was guaranteed by LBHI on an
unsecuredbasisbeforetheexecutionoftheSeptemberAgreements.
6604Seeid.atp.5.ThiscollateralliquidationrepaysanobligationthatwasguaranteedbyLBHIunderthe
AugustGuaranty.
6605SeeSectionIII.B.3.g.5.a.ii.c.4,ofthisReportforadescriptionoftheinvestmentbankandtreasuryand
securityservicesclaims.
6606SeeSectionIII.B.3.g.5.a.viofthisReportforadescriptionofassetmanagementexposureclaims.

1771

pledges.6607BecausetherewouldbenounderlyingdebtowedbyLBHItherewouldbe
no basis for JPMorgan to retain collateral posted by LBHI. Thus, to the extent that
JPMorgandeclinedtoreturnthecollateralvoluntarily,thetransfersofcashmadesolely
inrelianceupontheSeptemberGuarantywouldbesubjecttoclaimsforareturnofthe
collateralunderArticle9oftheUCCandNewYorkcommonlaw,6608fraudulenttransfer
law6609 and state law claims for unjust enrichment, money had and received and
conversion.6610Alternatively,assetforthinSectionIII.B.3.g.5.a.ii.b.2,absentapplication
of the safe harbors, there is a colorable claim to avoid certain of the transfers made
followingtheexecutionoftheSeptemberGuarantyaspreferences.
There are two important caveats to this analysis. First, with respect to any
collateralthatisfoundtobepostedinfavorofJPMorgantosecurederivativescontracts,
LBHIhadpreviouslyguaranteedtheseobligationsonanunsecuredbasisforcertainof
its subsidiaries and the September Agreements simply made LBHIs prior guaranty

6607SeeSilvermanv.PaulsLandmark,Inc.(InreNirvanaRestaurantInc.),337B.R.495,502(Bankr.S.D.N.Y.

2006)(iftheGuarantyisavoidedasafraudulentobligation,itcannotserveasfairconsiderationforthe
subsequent Transfers) (citing Dempster v. Overview Equities, Inc., 4 A.D.3d 495 (N.Y. App. Div. 2004)
(unenforceableobligationcannotconstitutefairconsideration)).
6608 For collateral where a secured partyexerts control (deposit accounts, electronic chattel paper,
investment property, letter of credit right, electronic document), Section 9208 of the New York UCC
requires the secured party to turn over the property if no further obligations are owed to the secured
party within 10 days after receiving an authenticated demand by the debtor. McKinneys Uniform
Commercial CodeLaw 9208 (2010). New York law further provides that when the underlying
obligationissatisfied,thedebtorisentitledtothepropertyback.KeshishianBros.v.Deverian,279A.D.324
(N.Y.App.Div.1952),orderamendedby280A.D.910(N.Y.App.Div.1952);Kirschv.ProvidentLoanSoc.of
N.Y., 71 N.Y.S.2d 241 (N.Y. App.. Term 1947). If the property is not returned the creditor is liable for
conversion. Rutherford Nat. Bank v. Manniello, 271 N.Y.S. 69 (N.Y. App. Div. 1934), affd, 195 N.E. 203
(N.Y.1935).
6609NirvanaRest.,337B.R.at502
6610SeeIII.B.3.g.5.a.vofthisReport.

1772

secured.6611Thus,eveniftheSeptemberGuarantyisavoided,thereremainsinplacea
contractthatcreatesliabilityforLBHIonaccountofthederivativescontracts.Because
transfersinfavorofguarantiesofderivativescontractsaresafeharbored,6612unlessthe
underlying unsecured derivatives guaranty can be avoided, this analysis does not
apply.AlthoughtheExaminerhasnotundertakentoanalyzewhetheranyclaimsexist
to avoid LBHIs guaranties of its subsidiaries obligations under various ISDA
agreements, he notes that these guaranties were all executed well outside of the time
period during which the Examiner has found evidence to support a finding of
insolvency or undercapitalization, and thus the Examiner does not believe that there
wouldbecolorableclaimstoavoidtheseguaranties.
Second,onJune 9, 2005,the ExecutiveCommittee ofLBHIs BoardofDirectors
approved a Unanimous Written Consent pursuant to which LBHI hereby fully
guarantees the payment of all liabilities, obligations and commitments of the

6611SeeISDAMasterAgreementbetweenJPMCBandLBCC(Nov.15,1993),atp.25[JPM20040000368]

(providingaguarantybyLBHI);ISDAMasterAgreementbetweenJPMMandLBIE(Aug.26,1997),atp.
14 [JPM2004 0086169] (providing a guarantyby LBHI);ISDA Master Agreement between JPMCB and
LBFSA(Nov.15,1993),atp.24[JPM2004000850](providingaguarantybyLBHI);Amendmenttothe
ISDA Master Agreement between JPMM and LBFSA (July 11, 2008), at p. 35 [JPM2004 0086103]
(providingguarantybyLBHI);ISDAMasterAgreementbetweenJPMCBandLBSF(Dec.20,1995),atp.
22 [JPM2004 0000345] (providing guaranty by LBHI); ISDA Master Agreement between JPMBD and
LBIE (Feb. 23, 1998), at p. 21 [JPM2004 0086072]; Guarantee of LBHI for ISDAMaster
Agreementbetween WMB and LBSF (May 28, 1998) [LBEXJPM 0000210]; Guarantee of LBHI for ISDA
MasterAgreementbetweenJPMMandLBSF(June7,2002)[LBEXJPM0000212].
661211U.S.C.546(e),(f),(g),and(j).

1773

subsidiaries set forth on Schedule A.6613 The Schedule A guaranteed subsidiaries

include LBJ, LBIE, LBCB, and Lehman Brothers Bankhaus AG.6614 Later Unanimous
Written Consents of LBHIs Board of Directors provide for a guaranty of Lehman
Brothers Treasury Co., LBCS, LBB, Lehman Brothers PTE, Ltd, and Lehman Brothers
Finance Asia Pte. Ltd.6615 In addition, in at least one instance, LBHI revoked the
guaranteedstatusofitssubsidiary,LehmanReLtd.6616TheExaminercannotconclude
with certainty whether or to what extent other LBHI guaranties of subsidiaries were
added or revoked. There is evidence to support a conclusion, however, that LBI was
not a guaranteed subsidiary of LBHI.6617 The Amended and Restated Code of
AuthoritiesforLBHI authorized LBHIuponresolutionoftheExecutiveCommittee of

6613

Unanimous Written Consent of the Executive Committee of the Board of Directors of Lehman
BrothersHoldingInc.(June9,2005)[LBEXAM003415].
6614Id.
6615UnanimousWrittenConsentoftheExecutiveCommitteeoftheBoardofDirectorsofLBHI(Feb.24,
2005)[LBEXWGM1102366](resolutiontomakeLehmanBrothersTreasuryCo.aguaranteedsubsidiary
of LBHI); Unanimous Written Consent of the Executive Committee of the Board of Directors of LBHI
(Nov. 7, 2005) [LBEXWGM 1104149] (resolution to make LBCS a guaranteed subsidiary of LBHI);
Unanimous Written Consent of the Executive Committee of the Board of Directors of LBHI (May 14,
2007) [LBEXWGM 965000] (resolution to make LBB a guaranteed subsidiary of LBHI); Unanimous
WrittenConsentoftheExecutiveCommitteeoftheBoardofDirectorsofLBHI(Apr.9,2008)[LBEXAM
003644] (resolution to make Lehman Brothers Finance Asia Pte. Ltd a guaranteed subsidiary of LBHI);
Lehman Brothers Holdings Inc. Minutes of the Board of Directors (Nov. 8, 2007)
[LBHI_SEC07940_026649](reflectingconsenttomakeLehmanBrothersPTELtd.aguaranteedsubsidiary
ofLBHI].
6616 Lehman Brothers Holdings Inc. Minutes of the Board of Directors (Nov. 8, 2007)
[LBHI_SEC07940_026649] (reflecting consent to revoke the guaranteed subsidiary status of Lehman Re
Ltd.).
6617 Alvarez & Marsal, Responses to Questions for Alvarez & Marsal/Weil, Gotshal & Manges (Dec. 7,
2009),atp.1(confirmingthatLBIwasnotaguaranteedsubsidiaryofLBHI).

1774

its Board of Directors to provide a full guaranty of all of the obligations of its
subsidiaries.6618
TheExaminerhaslocatednodecisioninvolvingtheenforceabilityofaguaranty
containedonlyinacorporateresolution.Thisresolution,however,maybeviewedasa
unilateralcontractforageneralguarantythatmaybeenforcedbyanyonetowhomit
is presented who acts upon it.6619 The guaranty resolution appears to satisfy the
basicgeneral guarantee requirements of knowledge,6620 acceptance (which canbe
implied)andconsiderationandthereforemaybeheldtocreateanenforceablegeneral
guarantyobligation.6621Totheextentthisguarantyisupheld,itwouldserveasapre
existing debt that would support the application of LBHIs collateral to the claim of
entities covered by the guaranty resolution. As set forth in Section III.B.3.g.5.a.ii.c.4,
some of the nonProtected obligations asserted in JPMorgans proof of claim are
obligations owed by subsidiaries covered by the guaranty resolution. As analyzed in
SectionIII.B.3.g.5.a.v,thisfactmaymakethetransfersofcollateraltosecureobligations

6618TheAmendedandRestatedCodeofAuthoritiesforLBHIAsAmendedThroughJuly1,2004[LBEX

AM043802].
6619FinanceAmericaPrivateBrands,Inc.v.HarveyE.Hall,Inc.,380A.2d1377,1379(Del.Super.Ct.1977).
6620 The LBHI 2006 10K (Feb. 13, 2007) and 2007 10K (Jan. 29, 2008) refer to the fact that LBHI
guarantee[s]alloftheobligationsofcertainsubsidiaries.
6621 See APL, Inc. v. Ohio Valley Aluminum, Inc., 839 S.W. 2d 571, 573 (Ky. Ct. App. 1992) (When the
circumstances surrounding the issuance of an absolute guaranty and the terms of the writing itself
evidence no indication that the guarantor anticipates notification of acceptance from the creditor, the
guarantorwillbeheldliableontheinstrumentfromthetimethecreditoractsinrelianceonit.).

1775

covered by the guaranty resolution avoidable as preferences and not as fraudulent

transfersorunderstatelaw.6622
2.

ApplicationoftheSafeHarborstothe$8.6
BillionCashCollateralTransfers

Whether the September Guaranty is protected by the safe harbors is, as noted
above,aquestionoffirstimpressionthatmustberesolvedbytheCourt.IftheCourt
determinesthataguarantyisanobligationnotprotectedbythesafeharborsandthus
avoidable, the transfers of collateral pursuant to the September Agreements
neverthelessmay still be protectedby the safeharbors.Thesafeharborprovisions of
Sections546(e),(f),(g),and(j)protecttransfersmadetoProtectedPartiesinconnection
with the Protected Contracts from avoidance.6623 Protected Contracts include any
security agreement or arrangement or other credit enhancement related to any
agreements or transactions referred to [ ], including any guarantee or reimbursement
obligation....6624ThusatransfermadepursuanttoaguarantyofaProtectedContract
isalsoitselfprotectedunderthesafeharbors.Thiswouldseemtoinsulatethetransfers
ofcollateraltoJPMorgantotheextentthatthetransfersweremadetosecureobligations
owed by LBHI or its affiliates on account of Protected Contracts. This results in the

6622GiventhemannerinwhichLBHIsliabilityundertheAugustGuarantyiscalculated,asexplainedin

SectionIII.B.3.g.5.a.iii,LBHIsliabilityundertheAugustGuarantymayhavebeenminimalorzeroasof
September15,2008.
6623See11U.S.C.546(e),(f),(g)and(j).
6624 See 11 U.S.C. 101(25) (forward contracts); 101(38)(A) (master netting agreements); 101(47)
(repurchase agreements); 101(53)(B) (swap agreements) 761(4) (commodity contracts); and 741(7)
(securitiescontracts).

1776

anomaly of the September Guaranty being subject to avoidance while the prepetition
transfers of collateral made pursuant to the September Guaranty not being subject to
avoidance.
Nonetheless, the Examiner concludes that there are three different colorable
bases to assert that the safeharbor provisions of the Bankruptcy Code do not apply.
First,thesafeharborprovisionsdonotcreaterightsforJPMorganthatdonototherwise
exist in the parties agreements. If the September Guaranty is avoided, there is no
underlyingdebtowedbyLBHItoJPMorgan(subjecttothecaveatsnotedabove)andno
basisforJPMorgantoapplythe$8.6billioninLBHIcollateraltorepaythedebtsowed
inthefirstinstancebyLBHIssubsidiaries.Putanotherway,thesafeharborprovisions
do not grant a financial participant rights to collateral it does not enjoy under its
agreements.Moreover,thesafeharborprovisionsdonotapplytoSection553exceptin
certain circumstances or to Section 549 of the Code.6625 Thus, if JPMorgan seeks
permissiontoapplythecollateraltoitsclaimsunderSection553,theBankruptcyCourt
is not constrained by the safeharbor provisions in denying the request (except in the
circumstances set forth in Sections 362(b)(6), (7), (17), (27) and 561). Because Section
553(a)(1)expresslyprovidesthatarightofsetoffisnotpreservediftheclaimofsuch

662511U.S.C.546(e),(f),(g),and(j).

1777

creditoragainstthedebtorisdisallowed,6626theCourtwouldlikelydenyarequestfor
leavetosetoffLBHIscashagainsttheobligationsowedbyotherLehmanentities.
Alternatively, if JPMorgan applies the LBHI collateral without first seeking
Bankruptcy Court permission, the Bankruptcy Court will be entitled to examine that
setoffunderSection549,againwithoutbeingconstrainedbythesafeharborprovisions
oftheCode,excepttotheextentthatthesetoffsarecoveredbySections362(b)(6),(7),
(17),(27)and561.Becausetheexceptionstotheautomaticstayonlyallowforcollateral
to be liquidated to pay claims in accordance with the parties agreements and do not
expand the rights of the financial participant, if the September Guaranty is avoided,
there would be no authority in the Code to authorize the setoff and it would be
recoverableunderSection549(a).
Second, the Enron bankruptcy produced several decisions involving the safe
harborsofSection546(e),includingdecisionsthatheldthattransfersmadebyEnronto
acquire its own shares at a time when it was allegedly already insolvent or rendered
insolvent by virtue of the transactions were not protected from avoidance by Section
546(e) because the transactions at issue were illegal and unenforceable, and therefore
void from inception, pursuant to an Oregon statute that prohibits distributions by an

662611U.S.C.553(a)(1).

1778

insolventcorporationonaccountofitsstock.6627Thus,theargumentherewouldbethat
transfersmadepursuanttoavoidguarantyarenotprotected.
Third, the transfers of collateral in connection with the September Guaranty
couldbeavoidedunderstatelawclaimsthatbelongtoLBHIpursuanttoSection541.
Although the safeharbor provisions explicitly prohibit a trustee from avoiding
transfers under Sections 544, 545, 547, 548(a)(1)(B) and 548(b), they apparently do not
prohibit a trustee from asserting causes of actions that become property of a debtors
estate under Section 541, such as state law claims arising under the UCC, for
conversion, unjust enrichment or money had and received, nor do they prohibit a
trusteefrombringingclaimsunderSections549or553(subjecttoSections362(b)(6),(7),
(17),(27)and561)tounwindimproperpostpetitionsetoffs.6628Therefore,becausethe
safeharborsomitSection541,thesafeharborsmaynotprotectagainstactionsbrought
pursuant to Section 541 to avoid the transfers made pursuant to the September
Agreements.6629

6627SeeEnronCorp.v.UBSAG(InreEnron),No.01B16034(AJG),2005WL3873897(Bankr.S.D.N.Y.Aug.

10, 2005); Enron Corp. v. Credit Suisse First Boston Intl (In re Enron Corp.), 328 B.R. 58 (Bankr. S.D.N.Y.
2005);Enronv.Bear,StearnsIntlLtd.(InreEnronCorp.),323B.R.857(Bankr.S.D.N.Y.2005).
6628 A general canon of statutory construction is that the enumeration of specific statutory sections
subject to a rule implies that the omitted sections are excluded from that rules application. DiCello v.
U.S.A.(InreRailwayReorganizationEstate,Inc.),133B.R.578,581(Bankr.D.Del.1991)(citationsomitted).
TheBankruptcyCodespecificallyprovidesthatthetermsincludesandincludingarenotlimiting.11
U.S.C. 102(3). Because the list of sections subject to the safe harbors is not set off by terms such as
includes or including, it may be assumed Congress meant the list to be exhaustive. DiCello, 133
B.R.at58182(interpretinglistofenumeratedSectionssubjectto546(a)).
6629 In other contexts, courts have read Section 546 narrowly and limited its application expressly as
written.SeeHartvigv.TriCityBaptistTempleofMilwaukee,Inc.(InreGomes),219B.R.286,296(Bankr.D.

1779

However,assetforthmorefullyinAppendix1,LegalIssues,SectionIV.F.,any
court addressing this issue will likely be faced with the argument that Section 546
preempts all state law claims, including those arising under Section 541,
notwithstanding the lack of an express reference to Section 541 within Section 548.6630
Thecaselawonpreemptionisunsettledandthetwoleadingdecisions,neitherofwhich
would be controlling in this case, are distinguishable in that in one of these cases the
statelawclaimsassertedwerenotstatelawclaimsbelongingtotheestateunderSection

Or. 1998) (bankruptcy court is in no position to recognize an exception to avoidance powers where
Congressdidnotcreateone.);seealsoInreNatlForgeCo.,343B.R.340,370(W.D.Pa.2006)(refusingto
read into Section 546(e) terms that are presently absent where to do so would result not [in] a
constructionof[the]statute,but,ineffect,anenlargementofitbythecourt,sothatwhatwasomitted,
presumablybyinadvertence,maybeincludedwithinitsscope.)(quotingLamiev.U.S.Trustee,540U.S.
526,538(2004);seealsoElPasoCityofTexasv.Am.W.Airlines,Inc.(InreAm.W.Airlines,Inc.),217F.3d
1161,116768(9thCir.2000)(objectionstoclaimspursuanttoSection502(d)werenotsubjecttoSection
546(a) limitations even though trustee was precluded from filing Section 547 actions by Section 546(a)
limitations);InreStoecker,143B.R.118,13138(Bankr.N.D.Ill.1992)(same),orderaffdinpart,revdinpart
onothergrounds,143B.R.879(N.D.Ill.1992),judgmentaffdinpart,vacatedinpartonothergrounds,5F.3d
1022(7thCir.1993);Schwartzv.Pierucci,60B.R.397,399(E.D.Penn.1986)(trusteesclaimspursuantto
UniformFiduciaryActwerenotbroughtpursuanttotrusteesavoidingpowersandthereforewerenot
subjecttoSection546(a)limitations);Smithv.MorrisRGreenhawOilandGas,Inc.(InreGreenhawEnergy,
Inc.), 359 B.R. 636, 64042 (Bankr. S.D. Tex. 2007) (although trustee was barred by Section 546(a)
limitationsperiodfromassertingwrongfulforeclosureunderSection544,trusteehadauthoritytopursue
such claim under Section541 which was not so time barred); Miller v. Spitz, M.D. (In re CS Assoc.),156
B.R.755(Bankr.E.D.Penn.1993)(holdingthattrusteesproceedingunderSection723wasnotsubjectto
Section546(a)limitationsandrejectingargumentthatSection723actionswerewithinthescopeofSection
544 actions); Mann v. Commonwealth Savings & Loan Assoc. (In re Ollada), 114 B.R. 654 (Bankr. E.D. Mo.
1990) (trustees action for turnover pursuant to Sections 542 and 543 was not subject to Section 546(a)
limitations); Britton v. Fessler & Bowman, Inc. (In re Britton), 66 B.R. 572, 575 (Bankr. E.D. Mich. 1986)
(debtors claims categorized by the court as an equitable action for restitution were not subject to
Section 546(a) limitations because the action was not brought by a trustee and because it did not arise
underSection544,545,547,558or553).
6630 See Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 988 (8th Cir. 2009) (state law claims for unjust
enrichmentandillegaland/orexcessiveshareholderdistributionspreemptedby546(e));OfficialComm.
ofUnsecuredCreditorsofHechingerInv.Co.v.FleetRetailFin.Group(InreHechingerInv.Co.),274B.R.71,96
(D.Del.2002)(unjustenrichmentclaimpreemptedby546(e)).

1780

541.6631Further,oneofthecasesreliesupontheconclusionthattheclaimatissuewas
effectively the same as an action to avoid a transfer under Sections 544 or 548, and
therefore,thecourtdeterminedthattheclaimcouldnotbebrought.6632Apartfromthe
factthatthepreemptiondecisionsarebothdistinguishableandnotcontrolling,avalid
argument can be made, as set forth in Appendix 1, Legal Issues, Section IV.F, that
preemptiondoesnotapplytoSection546becausebyitsowntermsSection546doesnot
applytoactionsbroughtunderSections541,548(a)(1)(A),549and553(subjecttocertain
exceptions), suggesting that Congress did not intend to fully cover all types of claims
against financial participants when it enacted the safeharbor provisions.6633 Thus, the
Examiner concludes that notwithstanding the existence of the preemption case law,
there is a colorable basis to conclude that state law claims belonging to LBHI under
Section541arenotbarred.
3.

ThereIsEvidencetoSupportPotentialState
LawClaimsAvailabletoLBHIPursuantto
Section541toAvoidtheTransfersIn
ConnectionwiththeSeptemberGuaranty

IftheSeptemberGuarantyisavoided,andtheCourtfindsthatstatelawclaims
thatbelongtoLBHIunderSection541arenotpreemptedbythesafeharborprovisions

6631ContemporaryIndus.,564F.3dat984(statelawclaimsassertedpursuanttosection544).
6632Hechinger,274B.R.at96.
6633SeeAppendix1,LegalIssues,atSectionIV.F.foradiscussionoftheissueofpreemptionofsuchstate

lawclaims.

1781

ofSection546,thenLBHIhasthreecolorablestatelawclaimstorecoverthetransfersof
collateral.
First, under Section 9208 of the UCC, a secured creditor is under a duty to
relinquishcontroloverdepositaccountsiftheunderlyingobligationissatisfied.6634The
Official Comments to Section 9208 provide that a secured party also is required to
relinquish possession of collateral when the underlying obligation is satisfied and the
failuretodosowouldconstituteconversion.6635
Conversionisanyunauthorizedexerciseofdominionorcontroloverproperty
byonewhoisnottheownerofthepropertythatinterfereswithandisindefianceofa
superior possessory right of another in the property.6636 To maintain a claim for
conversion,aplaintiffmustshow:(1)legalownershiporanimmediatesuperiorright
of possession to a specific identifiable thing and (2) that the defendant exercised an
unauthorizeddominionoverthethinginquestion,tothealterationofitsconditionorto
theexclusionoftheplaintiffsrights.6637Aconversionclaimmayonlysucceedifthe
party alleges a wrong that is distinct from any contractual obligations.6638 Rather, a

6634McKinneysUniformCommercialCodeLaw9208(2010).

6635Id.atcmt.4;RutherfordNat.Bankv.Manniello,240A.D.506,508,271N.Y.S.69,72(1934).
6636CommandCinemaCorp.v.VCALabs,Inc.,464F.Supp.2d191,199(S.D.N.Y.2006).
6637Id.
6638 Id. (quoting Phensalker v. Anderson Weinroth & Co., L.P., 175 F. Supp. 2d 635, 639 (S.D.N.Y. 2001),

vacatedonothergrounds,344F.3d184(2dCir.2003)(internalquotationsomitted)).

1782

plaintiff must show acts that were unlawful or wrongful as opposed to violations of
contractualrights.6639
Evidenceexiststosupportthisclaimbecause(1)LBHIhadlegalownershiporan
immediate superior right of possession to the $8.6 billion in cash transfers made to
JPMorgan in connection with the September Guaranty; and (2) if the September
GuarantyisavoidedandJPMorganisnotentitledtorecoverfromLBHI,JPMorganwill
have exercised unauthorized dominion over the funds, to the alteration of their
conditionandtotheexclusionofLBHIsrights.AlthoughJPMorganmightarguethat
LBHIauthorizedJPMorganspossessionandcontroloverthetransfers,LBHIcouldnot
have consented to an agreement that violates the law.6640 Therefore, if the September
Guaranty is found to be a fraudulent obligation, there is a colorable claim against
JPMorganforconversiontorecoverthe$8.6billionincollaterallessanamountequalto
any unpaid obligations covered under any other guaranties, such as the August
Guaranty,6641thederivativesguaranties6642ortheguarantyresolution.6643

6639Id.
6640

Smith v. Brown, 778 N.E.2d 490, 496 (Ct. App. Ind. 2002) (finding that the defendant exerted
unauthorizedcontrol,despiteconsenttoanagreement,becauseapartycannotconsenttoanagreement
thatviolatesstatelaw).
6641AssetforthinSectionIII.B.3.g.5.a.iii,therearelikelynoclaimscoveredbytheAugustGuaranty.
6642 The claims covered by the derivatives guaranties remaining after the application of subsidiaries
collateraltotalapproximately$1.94billion.SeeJPMorgan,Exposure,CollateralandSetoffSummary(Oct.
27,2009)[LBEXJPMC000199].
6643Theguarantyresolutionwouldappeartoapplytoa$95millionclaimassertedbyLBJandcontingent
claims asserted by Lehman Brothers Bankhaus AG and Woodlands Commercial Bank (f/k/a/ Lehman
Brothers Commercial Bank). Unanimous Written Consent of the Executive Committee of the Board of

1783

Second, LBHI may have a cause of action for unjust enrichment to remedy the
transfers made to JPMorgan in connection with the September Guaranty because: (1)
JPMorganwasenriched,(2)atLehmansexpenseand(3)itwouldbeagainstequityand
goodconsciencetopermitJPMorgantoretainwhatissoughttoberecovered.6644Here,
if the September Guaranty is avoided, LBHI may have a colorable claim for unjust
enrichmentbecauseJPMorganreceivedabenefitonacontractlaterfoundtobevoidor
unenforceable.6645Theremedyforunjustenrichmentisrestitution.6646Whereapartyhas
aclaimforunjustenrichment,thevalueoftheclaimwilldependontheconductofthe
parties,butwillnotbelessthanthevalueofthepropertyatthetimeitwastransferred
unlessthetransfereeiswithoutfault.6647
If LBHI were to prevail on a claim for unjust enrichment, LBHI would likely
recoveratleastthevalueoftheassetsatthetimeofthetransfer.Astheassetsmayhave

Directors of Lehman Brothers Holding Inc. (June 9, 2005) [LBEXAM 003415]. It also would cover the
LBIElineofcreditbutnoamountsareclaimedasdueunderthatlineofcredit.Id.
6644SeeAHASales,Inc.v.CreativeBathProds.,Inc.,867N.Y.S.2d169,180(N.Y.App.Div.2008)(citations
omitted).
6645 See U.S. E. Telecomm., Inc. v. US W. Comm. Servs., 38 F.3d 1289, 1299 (2d. Cir. 1994) (holding that a
subcontractor could recover against a general contractor under unjust enrichment theory where the
contractbetweenthepartieswasfoundtobeunenforceable);seealsoTaylor&Jennings,Inc.v.BellinoBros.
Constr.Co.Inc.,483N.Y.S.2d813(N.Y.App.Div.1984)(findingthatwhereasubcontractwasvoidedas
induced by fraud, recovery by the subcontractor against the contractor under the equitable doctrine of
quantummeruitwasproper);AluminumFare,Inc.v.Abdella,456N.Y.S.2d184(N.Y.App.1982)(whereno
valid agreement existed because written proposal was never signed and parties subsequently orally
altered proposal, contractor could still recover from owner on theory of quantum meruit for services
rendered).
6646StateofNewYorkv.SCAServs.Inc.,761F.Supp.14,15(S.D.N.Y.1991)(aplaintiffwhoestablishesa
primafaciecaseofunjustenrichmentisentitledtotheequitableremedyofrestitution.).
6647SeeVanleighCarpetCorp.v.GeneSchoorsIronForge,318N.Y.S.2d402(N.Y.Civ.Ct.1971);seealso22A
N.Y.Jur.2dContracts587(2009).

1784

declinedinvaluesincethetransfer,acourtwouldhavetodeterminetheirvalueasof
thetimeoftransfer.However,theamountofthatvalueavailabletoLBHIforrecovery
will depend on the Courts determination of LBHI and JPMorgans behavior. If the
court determines that JPMorgan was conscious that its demands that LBHI execute
additionalandexpandedguarantiesorthatitssubsequentdemandsforcollateralunder
thoseguarantieswere wrongful,thenLBHIwouldbeable to recoverthefullvalue of
the assets plus any of JPMorgans profits from them. If the court determines that
JPMorgans demands were not consciously wrongful, LBHI would be able to recover
thevalueofthepropertyuptotheamountofitsloss.IfthecourtdeterminesthatLBHI
isentitledtorestitutionfortheassetsbutthatJPMorganacquiredtheminnocentlyand
with no more fault than LBHI, LBHIs recovery would be limited to the benefit
JPMorganreceivedfromtheassetsorthereturnofthetransferredassets.
Finally, the Examiner has concluded that LBHI has a colorable claim against
JPMorgan for money had and received. Such cause may lie to remedy the transfers
made to JPMorgan in connection with the September Guaranty because (1) JPMorgan
received money belonging to the claimant, (2) JPMorgan benefited from receipt of the
money, and (3) underprinciplesofequityand good conscience,thedefendantshould
notbepermittedtokeepthemoney.6648Anactionformoneyhadandreceivedisbased
upon unjust enrichment and therefore the analysis is similar. JPMorgan will likely

6648Brewerv.StateofNewYork,672N.Y.S.2d650,656(N.Y.Ct.Cl.1998).

1785

argue that there was a contract, and therefore unjust enrichment or money had and
received cannot apply. If the September Guaranty is avoided, however, there is no
contract.6649AsinthecaseofFriar,thereisevidencetosupportafindingthatLBHIhad
norealisticalternativebuttoaccepttoJPMorgansdemands.6650Therefore,thetransfers
atissuemaybesubjecttoaclaimformoneyhadandreceived.
The remedy for a cause of action for money had and received is restitution.6651
Therefore,LBHIsrecoveryforclaimsformoneypaidandreceivedwillbegovernedby
theprinciplesofunjustenrichmentandrestitutionsetforthabove.6652

6649 Underlying contracts would exist with respect to the derivatives contracts and any obligations also

falling within the scope of the August Guaranty or the LBHI guaranty resolution. For this reason,
avoidingtheAugustGuarantymayalsobenecessary.
6650Friarv.VanguardHoldingCorp.,434N.Y.S.2d698,70102&n.2(N.Y.App.Div.1980)(holdingthatan
action for money had and received was adequately pled where the seller of home alleged he was
compelled to pay mortgage tax to lender or else sale would be aborted, and seller had no realistic
alternativetosurrendertolendersdemands).
6651Citipostal,Inc.v.UnistarLeasing,724N.Y.S.2d555,559(N.Y.App.Div.2001).
6652Whetherpreemptionappliesmaydependonwhetherthestatelawcausesofactionareinthenature
ofavoidanceactions.SeeInreFin.Mgmt.Servs.,Inc.,261B.R.150,156(Bankr.W.D.Pa.2001).Theremedy
foranunjustenrichmentormoneyhadandreceivedisrestitution.Apersonobtainsrestitutionwhenhe
isrestoredtothepositionheformerlyoccupiedeitherbythereturnofsomethingthatheformerlyhador
by the receipt of its equivalent in money. Restatement (First) of Restitution (2009), Chap. 1, Topic 1, 1.
Even if JPMorgan acted tortiously, the most LBHI would be able to recover through restitution is the
valueofthepropertyuptothefullamountofLBHIslossandtheprofitsJPMorganobtained.Therefore,
restitution is basically an avoidance of the benefit received by the wrongdoer, or a legal doctrine
designed to avoid unjust enrichment. In re Rezulin Prods. Liability Litig., 390 F. Supp. 2d 319, 340
(S.D.N.Y.2005).Becauserestitutioncanbeequatedtoanavoidanceaction,thecausesofactionofunjust
enrichment and money had and received could be deemed preempted by the safe harbors if a court
applies the doctrine. A state law cause of action for conversion, however, cannot be equated to an
avoidanceaction.Theremedyforconversionisadamageremedy.Thepropertyitselfisnotreturnedto
the party who was wronged; rather, the party receives damages in the amount of the value of the
propertyatthetimeofconversion.SeeBankBrusselsLambertv.CreditLyonnais(Suisse),192B.R.73,76n.3
(S.D.N.Y. 1996) (recovery on a conversion claim will be an amount equal to the full value of the
convertedproperty,ratherthanreturnofthespecificproperty).Therefore,astatelawcauseofaction
forconversioncannotbeequatedtoanavoidanceaction,andthusisarguablynotpreemptedbythesafe
harbors.

1786

In summary, if the safe harbors set forth in Section 546 do not protect the
transfers of collateral in connection with a voided guaranty, or if, in the alternative,
state law claims are not preempted, then there are colorable claims that transfers of
collateralmadeinconnectionwiththeSeptemberAgreementstotalingasmuchas$6.9
billion6653 (the $8.6 billion in transfers less the $1.95 billion in setoffs JPMorgan has
alreadytakenonaccountofobligationsthatarebothProtectedContractsand/orsubject
tothederivativesguaranties)wouldbeavoidableasfraudulenttransfersorpreferences.
4.

TotheExtenttheSeptemberGuaranty
ProvidedforaGuarantyofNonProtected
ContractObligations,ortotheExtent
JPMorganLiquidatedCollateralPursuantto
NonProtectedContractExposure,aColorable
BasisExistsThattheSafeHarborProvisions
AreNotApplicable

TheExaminerconcludesthatLBHIhasacolorablebasistoclaimthatevenifthe
safeharborsaregenerallyapplicable,notallofthecollateraltransfersmadepursuantto
theSeptemberAgreementsareprotected.ThesafeharborprovisionsofSections546(e),
(f), (g), and (j) protect transfers made to the Protected Parties in connection with the
Protected Contracts from avoidance.6654 Whether or not guaranties that secure both
ProtectedContractsandnonProtectedContractsfallwithinthesafeharborprovisions
dependsonacourtsinterpretationoftheinconnectionwithlanguage.

6653SeeAppendix23,Duff&Phelps,AnalysisofAPB,JournalEntry,CashDisbursementandJPMorgan

Collateral for a detailed listing of the amount, and timing, of the collateral transferred from LBHI to
JPMorganinconnectionwiththeSeptember9Guaranty.
6654See11U.S.C.546(e),(f),(g)and(j).

1787

The court in American Home Mortgage provides some guidance on this issue.6655
There, the debtors entered into a repurchase agreement that governed the rights and
obligations related to the sale and repurchase of mortgage loans or interests in
mortgageloansfromthedebtorstocounterpartyCalyon.Theagreementalsoprovided
for the servicing of mortgage loans subject to the repurchase agreement.6656 Applying
theplainmeaningofthestatute,thecourtheldthatthesaleandrepurchaseofmortgage
loans under the contract constituted a repurchase agreement under the criteria of
Section 101(47). Therefore, Section 559 applied and Calyon could enforce its rights
underthecontracttriggeredbyaconditionofthekindspecifiedinSection365(e)(1).6657
The court also held that the contract was a securities contract and that Calyonwas a
financialinstitutionandthereforeSection555wasalsoapplicable.6658Althoughitfound
portions of the contract subject to the safe harbors, the court held that the debtors
obligations relating to the servicing of mortgage loans under the contract were
severable.6659Becausetheservicingcontractwasneitherarepurchaseagreementnora
securitiescontract,itwasnotsubjecttoSections555or559,andthereforethecourtheld
thatthispartofthecontractwasnotsubjecttothesafeharbors,andCalyoncouldnot

6655CalyonN.Y.Branchv.AmericanHomeMortgageCorp.(InreAmericanHomeMortgage,Inc.),379B.R.503

(D.Del.2008).
6656Id.at509.
6657Id.at51718.
6658Id.at51819.
6659Id.at521.

1788

enforceitsrightsrelatingtotheservicingofthemortgageloanstriggeredbyacondition
ofthekindspecifiedinSection365(e)(1).6660
AplausiblereadingofAmericanHomeMortgagewouldbethatifacontractisnot
severable and involves transactions or agreements that do not qualify for safeharbor
protection, then the entire agreement falls outside of the safeharbor provisions.
American Home Mortgage, however, first determined the subject contract was a
repurchaseagreemententitledtosafeharborprotectionandthendeterminedwhether
it could sever the protected portions of the contract from the part of the contract that
wasnotsafeharbored.
Applying American Home Mortgages rationale to this case, a court may first
determinewhethertheSeptemberGuarantyoverallqualifiesforsafeharborprotection
andthendeterminewhetheranyportionsoftheSeptemberGuarantycouldbesevered
andexcludedfromsafeharborprotection.Alternatively,acourtmayinterpretSection
546s in connection with language more broadly, departing from American Home
Mortgage, and hold that severable portions of a contract are still in connection with
the Protected Contracts and entitled to protection. Still another possibility exists: a
court may determine that, to the extent the September Guaranty is entitled to safe
harborprotection,itisentitledtoprotectiononlytotheextentitguaranteesProtected

6660Id.at523.

1789

Contract obligations, or to the extent JPMorgan liquidated collateral pursuant to

ProtectedContractexposure.
In any event, there is evidence to support a finding that JPMorgan liquidated
collateralonlypursuanttoclearanceandsettlementobligations,derivativeobligations,
andrepurchasetransactionsallProtectedContracts.6661Thus,evenifacourtwereto
limitthescopeoftheinconnectionwithlanguage,itappearsthatJPMorganspost
petition collateral liquidations were all entitled to safeharbor protection absent a
conclusion that because September Guaranty is avoided, all of the collateral transfers
maybeavoidedaswell.
The Examiner has identified four categories of obligations incurred by LBHI
pursuant to the September Guaranty that are not subject to the protection of the safe
harborprovisionsoftheBankruptcyCode.
First, there is a $95.6 million loan to LBJ that was originally made on an
unsecuredbasis.6662InMarch2008,JPMorganrequestedthatLBHIpledge$60millionas
securityforthisloan.6663UndertheSeptemberAgreements,LBHIguaranteedthisdebt.
Asaresult,thisloan,whichwasoriginallypartiallyunsecured,becamefullysecuredon
accountoftheSeptemberAgreements.TheExaminerhasnotfoundanybasistoassert
thatthisloanwouldbeprotectedfromavoidancebyanyofthesafeharborexemptions.

6661JPMorgan,Exposure,CollateralandSetoffSummary(Oct.27,2009)[LBEXJPMC000199].
6662Id.
6663JPMorgan,LehmanBrothersExposureOverview(Sept.2008),atp.3[JPMEXAMINER00005966].

1790

There also is no evidence indicating that JPMorgan has liquidated LBHIs prior $60
million pledge, or applied any of the $8.6 billion in cash collateral to repay this loan.
Based upon American Home Mortgage, a colorable claim exists that the transfer of
collateraltotalingatleast$35.6milliontosecuretheLBJloanshouldbereturnedtothe
LBHIestate.6664
Second, there is a $2 billion line of credit that JPMorgan extended to LBIE that
was unsecured prior to the September Agreements, but became secured thereafter.6665
The Examiner has uncovered no evidence of any outstanding obligations on this $2
billion line of credit owed as of the Petition Date,6666 nor has JPMorgan asserted any
claims in its Proofs of Claim against this line. In addition, there is no evidence that
JPMorganappliedanyofthe$8.6billionofcollateraltorepayobligationsowingunder
this line between September 9 and 15. Thus, there are no collateral transfers made
pursuanttotheSeptemberAgreementsthatapplytothislineofcredit.
Third,JPMorganhasassertedasecuredclaimtotaling$295,885,149astocertain
fees and expenses.6667 There is no clear basis on which JPMorgan can assert that the
safeharborprovisionswouldapplytothesefeesandexpenses.Forexample,onesuch

6664Iftheguarantyresolutionisupheld,thenthetransferofadditionalcollateraltoJPMorgantosecure

the LBJ loanwould be a transfer made on account of an antecedent debt (the guaranty resolution) and
avoidableaspreferentialunder11U.S.C.547(b).
6665Id.atp.6[JPMEXAMINER00005971].
6666SeeEmailfromKellyMathieson,JPMorgan,toJeffHack,JPMorgan,etal.(Sept.15,2008)[JPM2004
0069403](thereis$0creditinusewithLBIE).
6667JPMorgan,Exposure,CollateralandSetoffSummary(Oct.27,2009),atp.1[LBEXJPMC000199].

1791

fee,anoperationaloverdraftfeeof$23,500,000inconnectionwithapaymenttoalaw
firm, doesnot appear to be connected to any Protected Contract pursuant to the safe
harborprovisionsoftheBankruptcyCode.6668Otherlistedexpenses,however,maybe
subject to safeharbor provisions. One is a claim of $54,041,439 for Repo
Agreement/Securities Lending Closeout Amounts.6669 This amount may arguably be
protected by the safeharbor provisions as being in connection with the Protected
Contractsofrepurchasecontractsand/orsecuritiescontracts.Thus,whilesomeofthese
fees and expenses may be subject to the safeharbor provisions, and therefore
unavoidable,itappearsthatothersmaynotbeprotectedandthereforecolorableclaims
existtoavoidthecollateraltransfersmadetosecurethesefeesandexpenses.
Finally, JPMorgan has asserted contingent claims relating to (1) LCPI
participationobligationsintheamountof$687.8million;(2)AuroraBankFSBlettersof
creditintheamountof$587.3million;(3)LehmanBrothersBankhausAGintheamount
of $209.3 million;6670 and (4) Woodlands Commercial Bank (f/k/a/ Lehman Brothers
CommercialBank)intheamountof$261.3million.6671TheExaminerhasnotattempted
to estimate the value of these claims. To the extent that the claims are estimated as

6668Id.
6669Id.
6670Id.Thisentityisasubsidiarycoveredbytheguarantyresolution.UnanimousWrittenConsentofthe

ExecutiveCommitteeoftheBoardofDirectorsofLehmanBrothersHoldingInc.(June9,2005)[LBEXAM
003415].
6671 Id. at p. 10. This entity is a subsidiary covered by the guaranty resolution. Unanimous Written
ConsentoftheExecutiveCommitteeoftheBoardofDirectorsofLehmanBrothersHoldingInc.(June9,
2005)[LBEXAM003415].

1792

having a positive value, the Examiner is not aware of facts to support a finding that
these claims are subject to Section 546s safeharbor provisions and any collateral
pledgedonaccountoftheseclaimsmaybesubjecttoavoidance.
TotheextentthatthecollateralremaininginJPMorganshandsisnotsufficient
to allow for the full return of the transfers made to secure nonProtected Contracts, a
colorable basis exists to find that JPMorgan should not be permitted to cherry pick
obligations in which to liquidate collateral to ensure safeharbor protection. American
Home Mortgage supports the conclusion that a court should assume that collateral
transfers to JPMorgan were first posted to secure nonProtected Contracts and avoid
those dollarsfirst for the benefitoftheestate.6672In othercontexts, courtsassume,for
example,thatapaymenttoacreditorwithapartiallysecuredclaimisfirstappliedto
the unsecured obligation to allow the trustee to avoid the transfer as a preference.6673
Whilethisanalogyisnotperfect,itsupportsafindingthat,based,uponAmericanHome
Mortgage,ofthe$6.9billionincashstillheldbyJPMorgan,JPMorganmustfirstreturn
cashequaltotheamountsowedonaccountofnonProtectedContractsbeforeapplying
anyofthefundstoreduceobligationsowedonaccountofProtectedContracts.

Seeid.

6672

6673Coveyv.CommlNatlBankofPeoria,960F.2d657,66263(7thCir.1992)(interestsofcreditorsdominate

in determining whether a creditor may apply payments to avoid liability under Section 548); see also
Drabkinv.A.I.CreditCorp.,800F.2d1153,1157(D.C.Cir.1986)(recognizingconclusivepresumptionthat
anundersecuredcreditorfirstappliesanytransferitreceivesfromthedebtortotheunsecuredportionof
thedebt);DeutscheBankSecurities,Inc.v.Kendall(InreConsilient,Inc.),No.C052430CW,0240383NK,
2006 WL 335415, *3(N.D. Cal. 2006) (same); Armstrong v. John Deere Co. (In re Gilbertson), 90 B.R. 1006,
1010(Bankr.N.D.1988)(same).

1793

(iii) AvoidabilityoftheAugustAgreementsandTransfers
inConnectionWiththeAugustAgreements
The August Agreements consisted of (1) the August Amendment to the
Clearance Agreement, which expanded the reach of the Clearance Agreement by
addingLBHI,LBIE,LOTCandLBJaspartiesandaddinglanguagethattheliabilityof
the Lehman entities under the Clearance Agreement was several, not joint;6674 (2) the
AugustGuaranty,underwhichLBHIguaranteedtheLehmanpartiesobligationsunder
the Clearance Agreement;6675 and (3) the August Security Agreement, which secured
LBHIs Guaranty, granting JPMorgan a security interest in a Cash Account, Securities
Accountandcertainrelatedaccounts.6676
a.

AvoidabilityoftheAugustGuarantyasa
ConstructiveFraudulentObligation
1.

LBHIIncurredanObligationWithinthe
ApplicableLookBackPeriodsWhenit
ExecutedtheAugustGuaranty

As described above, in Section III.B.3.g.5.a.ii.a.1, execution of a guaranty is not

itselftheincurrenceofanobligation;rather,theobligationisincurredwhentheloanis
madetotheprimaryobligor,therebycreatingacontingentliabilityfortheguarantor.6677
Here, the August Guaranty required LBHI to guarantee all obligations and liabilities
(includingwithoutlimitationtheObligationsasdefinedintheClearanceAgreement)

6674SeeAmendmenttoClearanceAgreement(Aug.26,2008),atp.1[JPM20040005856].
6675Guaranty(Aug.26,2008),atp.1[JPM20040005879].
6676SecurityAgreement(Aug.26,2008),atp.2[JPM20040005867].SeeSectionIII.A.5.bofthisReport

foracomprehensiveaccountoftheAugustAgreements..
6677SeeRubin,661F.2dat99091.

1794

of[theLehmanparties]to[JPMorgan]...pursuanttotheClearanceAgreement.6678As
of August 29, 2008, the Lehman parties (LBI, LCPI, LBIE, LOTC and LBJ) owed
obligationstoJPMorgan.Thus,uponexecutionoftheAugustGuarantyonAugust29,
2008,LBHIhadacontingentliabilitytorepayJPMorganifoneoftheLehmanpartiesto
theAugustAmendmenttotheClearanceAgreementcouldnotrepayJPMorgan.
2.

ThereIsEvidenceThatLBHIReceivedLess
ThanReasonablyEquivalentValueorDidNot
ReceiveFairConsiderationinExchangefor
GrantingJPMorgantheAugustGuaranty

The Examiner has concluded that there is evidence to support a finding that
LBHIdidnotreceivereasonablyequivalentvalueorfairconsiderationinexchangefor
incurringtheadditionalobligationsimposeduponitbytheAugustGuaranty.Priorto
August29,2008,LBHIhadnotguaranteedtheobligationsofLBItoJPMorganunderthe
Clearance Agreement.6679 Under the August Agreements, LBHI guaranteed all of the
obligations that the Lehman parties owed to JPMorgan under the Clearance
Agreement.6680LBHIsliabilitywascappedattheamountofcashandsecuritiesheldby
JPMorganintwopledgedaccounts.6681AsLBHIhadnotguaranteedtheseobligations
previously,itsgrossexposurewasadjustedeachdayandforeachsuchdayshallbe
equal to the dollar amount of cash and securities (based on the market value of such

6678Guaranty(Aug.26,2008),atp.1[JPM20040005879].
6679

Compare Amendment to Clearance Agreement (Aug. 26, 2008) [JPM2004 0005856] with Clearance
Agreement(June15,2000)[JPM20040031786].
6680Guaranty(Aug.26,2008)atp.12[JPM20040005879].
6681Id.

1795

securitiesasdeterminedbytheBankinitsreasonablediscretion)heldintwoaccounts
thatweresubjecttotheClearanceAgreementandtherelatedSecurityAgreement.
ForthesamereasonsassetforthinSectionIII.B.3.g.5.a.ii.a.2withrespecttothe
SeptemberGuaranty,thenetincreaseinexposuretoLBHIwastheoreticallyzerounder
the August Guaranty because of the potential overcollaterization of JPMorgan. This
preliminary conclusion is made taking into account the collateral pledged by the
subsidiaries, andassumes that the subsidiarieswouldnot payanythingonaccount of
general unsecured deficiency claims held by JPMorgan after application of the
collateral.6682 This preliminary conclusion is also subject to the caveats and further
analysisdiscussedinSectionIII.B.3.g.5.a.ii.a.2aboveregardingthenetexposureunder
theSeptemberAgreements.
After assessing LBHIs net exposure under the August Agreements, it is
necessarytodeterminewhatbenefitLBHIreceivedinexchange.Thisanalysismirrors
that set forth in SectionIII.B.3.g.5.a.ii.a.2, above with respect to the September
Guaranty. Because the Examiner has determined that there is evidence to support a
finding of insolvency for some of LBHIs subsidiaries, any benefit provided to those
subsidiarieswouldnothaveresultedinaquantifiableincreaseinthesubsidiarysvalue
to LBHI. Whether or not reasonably equivalent value was exchanged will depend on
whether the time between August 29, 2008 and September 15,2008 had, as of August

6682SeeSectionIII.A.5.bofthisReportforadiscussionoftheissueofovercollateralization

1796

29, 2008, any quantifiable value to LBHI. Moreover, as explained in Section

III.B.3.g.5.a.ii.a.2above,anybenefittoLBHIcouldbediscountedoreliminatedentirely
ifentryintotheAugustGuarantyinanywayacceleratedLehmansdemise.
3.

InsolvencyasofAugust29,2008

TheExaminerconcludesthatthereisinsufficientevidencetosupportafindingof
insolvencyonAugust29,thedateonwhichtheAugustGuarantywasexecuted.6683
4.

UndercapitalizationandInabilitytoPayDebts
asTheyComeDueasofAugust29,2008

TheExaminerconcludesthatthereissufficientevidencetosupportafindingof
undercapitalization of LBHI as of August 29, 2008, the date of the execution of the
AugustGuaranty.6684Undercapitalizationisrelevantonlytoclaimsmadetoavoidthe
AugustGuarantyunderSection548(a).6685
b. DefensestoAvoidabilityoftheAugustGuaranty
As discussed in Section III.B.3.g.5.a.ii.b, which addresses the defenses to
avoidability of the September Guaranty, the two primary defenses at issue are good
faith pursuant to Section 548(c) and the safeharbor provisions of Section 546 of the
Bankruptcy Code. The Examiner concludes that a colorable basis exists to avoid the
August Guaranty notwithstanding these defenses, although with respect to the good
faithdefense,becauseLBHIstroubledfinancialconditionwaslessapparentonAugust

6683SeeSectionIII.B.3.bofthisReportforamoredetaileddiscussionofthesolvencyanalysisofLBHI.
6684SeeSectionIII.B.3.dforamoredetaileddiscussionoftheundercapitalizationanalysisofLBHI.
6685Compare11U.S.C.548(a),withMcKinneysDebtorandCreditorLawsection274(2010)

1797

29thanitwasonSeptember10,JPMorgansclaimofgoodfaithisstronger.SeeSection
III.B.3.g.5.a.ii.b.1aboveforafulldiscussionofthisdefense.
AsdiscussedinSectionIII.B.3.g.5.a.ii.b.2,theExaminerhasconcludedthatthere
isacolorablebasistofindthattheAugustGuarantyisnotprotectedbythesafeharbor
provisions.
c.

AvoidabilityofTransfersofCollateralin
ConnectionWiththeAugustGuaranty

BecausetheAugustGuarantyislimitedtothevalueofthepledgedcollateraland
this cap changed to match the value of the pledged collateral held in two accounts,
avoidanceoftheAugustGuarantywouldnotbenefittheLBHIestatebyeliminatinga
potentialunsecuredclaim.6686Further,LBHIdidnotpledgeanyadditionalcollateralin
connection with the August Agreements.6687 However, because the September
Agreements did not replace the August Agreements, JPMorgan may claim that the
AugustSecurityAgreementandGuarantyalsoserveasabasistoretainthe$8.6billion
incollateraltransferredbetweenSeptember9andSeptember12,2008.

6686Guaranty(Aug.26,2008)atp.2[JPM20040005879].TheGuarantyprovidedthat:TheGuarantors

maximumliabilityunderthisGuarantyshalladjusteachdayandforeachsuchdayshallbeequaltothe
dollaramountofcashandsecurities(basedonthemarketvalueofsuchsecuritiesasdeterminedbythe
Bank in its reasonable discretion) (i) held on such day in the accounts of the guarantor subject to the
ClearanceAgreementandtheSecurityAgreementand(ii)thattheBankhasnotifiedtheGuarantortobe
deliveredtotheBankonsuchdayinsupportoftheGuaranty.Id.atp.2.
6687 See Appendix 18, Lehmans Collateral at JPMorgan. But see Section III.A.5.b. noting that LBHI
transferred cash collateral to JPMorgan on September 9, 2008 before the execution of the September
SecurityAgreement.

1798

TheAugustSecurityAgreementonlygrantedJPMorganalienuponaSecurities
Account,aCashAccountandcertainrelatedaccounts.6688Ofthe$8.6billionincollateral
transferred to JPMorgan from LBHI, cash totaling $6.9 billion was transferred to the
Cash Account in which JPMorgan would have had a lien pursuant to the August
SecurityAgreementandGuaranty.6689Followingthereceiptofthis$6.9billionincash,
the cash was moved to other accounts and as of the Petition Date, there was a zero
balanceintheCashAccount.6690Ifthe$6.9billionwasmovedfromtheCashAccountby
JPMorganandnotatLBHIsdirection,thenunderthedefinitionofAccountsfoundin
the August Security Agreement, JPMorgan may have lost its lien on the $6.9 billion.
Some evidence exists that JPMorgan controlled the movement of cash from the Cash
Account.6691 In addition, JPMorgan witnesses stated that the September 9 collateral
requestswerebasedprimarilyonitsinvestmentbankexposure,notinconnectionwith

6688 Security Agreement, (Aug. 26, 2009), at p.12 [JPM2004 00058567]. The Accounts against which

JPMorganhadalienundertheAugustSecurityAgreementaredefinedas:
(i) the securities account of [LBHI] at [JPMorgan] known as LCE or any subaccount or
replacement accounts thereto (the Securities Account), (ii) DDA# 066141605 (the Cash
Account)and(iii)anyotheraccountat[JPMorgan]towhich[LBHI]transfers(A)cashfromthe
Cash Account, (B) any interest, dividends, cash, instruments and other property from time to
timereceived,receivable(includingwithoutlimitationsalesproceeds)orotherwisedistributedin
respectoforinexchangeforanyorallofthecashorsecuritiesintheSecuritiesAccountorthe
Cash Account or (C) any cash or securities from the Securities Account or the Cash Account
during such time as [LBHI] or an Other Obligor has an outstanding obligation or liability to
[JPMorgan]undertheGuarantyortheClearanceAgreement.
Id.atp.1.
6689 See LBHI Account Statement (Sept. 30, 2008) JPMEXAMINER0000627072]; see also Security
Agreement(August26,2008)[JPM20040005867].
6690JPMorgan,AccountStatementforAcct.No.XXX605(Aug.30,2008Sept.30,2008),atpp.24[JPM
Examiner00006269].
6691MemorandumofTeleconferencebetweenHaroldNovikoff,Wachtell,Lipton,Rosen&Katz,etal.and
JeromeEpstein,Jenner&Block,etal.(Nov.19,2009)atp.4.

1799

the Clearance Agreement.6692 Because the stated basis for requesting a significant
portion of the $6.9 billion was not to secure obligations arising under the Clearance
Agreement and also because the definition of Accounts would appear to exclude
thesefundsoncetheyweremovedbyJPMorganoutoftheCashAccount,theAugust
Security Agreement would not appear to create a basis to retain these funds as they
were not in accounts covered by the August Security Agreement on LBHIs petition
date.Inaddition,thereisevidencethattheremaining$1.7billion,consistingofmoney
market funds, was transferred to accounts in which JPMorgan would not have a lien
pursuanttotheAugustSecurityAgreement.6693Thus,eveniftheSeptemberGuarantyis
avoided and the August Guaranty is not, there is a colorable basis to assert that the
AugustSecurityAgreementdoesnotcoverthe$8.6billionincashtransfers.Therealso
isacolorablebasistoclaimthatbaseduponthelanguagelimitingLBHIsliabilityunder
theAugustGuarantytothecollateralheldintheSecuritiesAccountandCashAccount
asadjustedonadailybasisthatthereisnoclaimarisingundertheAugustGuarantyto
collect from the $8.6 billion because this money was not held in the Cash Account or
SecuritiesAccountasofLBHIsSeptember15bankruptcyfiling.6694

6692SeeSectionIII.A.5.b.(1).(h)ofthisReport,whichdiscussesthebasisfortheSept.9collateralcall.
6693

See JPMorgan, Accounts Holding LBHC Collateral Pledged to JPM [JPM2004 0083539]; see also
SecurityAgreement(August26,2008)[JPM20040005867].
6694ThesameanalysisforavoidingtheSeptembercollateraltransfersappliestothosetransfersiftheyare
consideredashavingbeenmadeundertheAugustSecurityAgreement.SeeSectionIII.B.3.g.5.a.ii.c.

1800

(iv) AvoidabilityoftheAugustandtheSeptemberSecurity
AgreementsAndCollateralTransfersPursuantto
Section548(a)(1)(A)
Thereisevidencetosupportafindingthatsomeofthebadgesoffraudnecessary
toprovetherequisiteintenttostateaclaimunderSection548(a)(1)exist.Therefore,the
ExaminerconcludesthatthereisacolorableclaimtoavoidtheAugustandSeptember
Guaranties andthe$8.6 billionofcollateraltransfersmade pursuant to the September
Guaranty as actual fraudulent obligations and transfers.6695 The Examiner, however,
alsonotesthatwhenthesebadgesoffraudareviewedagainstthebackdropofevents
overtakingLBHIandinconnectionwithitsconductindealingwithitscreditorsduring
this timeperiod, it is likely that the trier of fact may also conclude that LBHI did not
havetherequisiteintenttohinder,delayordefrauditsothercreditorswhenitagreedto
grantJPMorganaguarantyundereithertheAugustorSeptemberGuarantiesorwhen
ittransferred$8.6billionofcashcollateraltoJPMorgan.
UnderSection548(a)(1)(A),anytransferofaninterest ofthedebtorinproperty
or the incurrence of an obligation that occurs within two years of the debtors
bankruptcyfilingissubjecttoavoidanceifthedebtormadethetransferwithanactual

6695Ifsuccessful,aclaimmadeunderSection548(a)(1)(A)isnotprotectedbythesafeharborprovisionsof

Section546(e),(f),(g)or(j).Thereisnocomparableexclusionforactualfraudulenttransferclaimsmade
under 11 U.S.C. 544 and state law and thus the Examiners Report focuses only upon a claim based
uponSection548(a)(1).

1801

intent to hinder, delay or defraud any entity to which the debtor was or became
indebted,onoraftersuchtransferwasmadeorsuchobligationwasincurred.6696
As set forth in connection with the Examiners analysis of the constructive
fraudulent transfer claims, LBHI incurred obligations and made transfers within the
applicablelookbackperiod.TheonlyissueiswhetherLBHIdidsowiththerequisite
intent.Courtsconsiderwhetheradebtorincurredanobligationormadeatransferwith
anactualintenttohinder,delayordefrauditscreditorsgenerallybylookingtowhether
certain badges of fraud are present.6697 The intent that matters here is the intent of
LBHI.6698Becauseintentisrarelysusceptibletodirectproof,thecourtshavedeveloped
whatareknownasthebadgesoffraudtoassesswhetheradebtorhastherequisite
intent.Thebadgesoffraudinclude,butarenotlimitedto:(1)thetransferofproperty
by a debtor during the pendency of a suit; (2) a transfer of property that renders the
debtor insolvent or greatly reduces its estate; (3) a series of contemporaneous
transactions that strip the debtor of all property available for execution; (4) secret or
hurried transactions not in the usual mode of doing business; (5) any transaction
conducted in a manner differing from customary methods; (6) a transaction whereby
thedebtorretainsbenefitsoverthetransferredproperty;(7)littleornoconsiderationin

669611U.S.C.548(a)(1)(A).
6697 See Appendix 1, Legal Issues, at Section IV.A.1, which discusses of the legal elements of an actual

fraudulenttransferclaimingreaterdetail.
6698SeeRubinBros.Footwear,Inc.v.Chem.Bank(InreRubinBros.Footwear,Inc.),119B.R.416,423(S.D.N.Y.
1990) (For purposes of 11 U.S.C. 548(a)(1), plaintiff mustshow fraudulent intent on the part ofthe
transferor,ratherthanonthepartofthetransferee.)(citationsomitted).

1802

returnforthetransfer;or(8)atransferofpropertybetweenfamilymembersorrelated
entities.6699Aplaintiffisnotrequiredtoproveallofthebadgesoffraud,butoncethe
plaintiffestablishesaconfluenceofseveralbadgesoffraud,thetrusteeisentitledtoa
presumption of fraudulent intent, shifting the burden to the obligee or transferee to
prove some legitimate supervening purpose for the transfers and incurrences of
obligationsatissue.6700
Theintentthatisrelevantisthatofthedebtor,nottherecipientofthefraudulent
transfer.6701 JPMorgans intent is irrelevant unless it can be shown that JPMorgan so
dominatedorcontrolledLBHIsoastomakeitsintent,LBHIsintent.6702Thedoctrineof
imputed intent is generally reserved for circumstances where: (1) the person or entity
exercising control over the disposition of the debtorsproperty stands in a position to
dosobyreasonofarelationshipofownership,executiveofficeorotherinsiderrole;(2)
the controlling person, standing in the position of either principal or agent on either
side of the transaction, may be presumed to act with actual or apparent authority to
effectuatethedispositionoftherelevantpropertyfromthedebtoronbehalfofandfor
the benefit of the transferee; (3) the controlling person is considered to stand in a

6699Salomonv.Kaiser(InreKaiser),722F.2d1574,158283(2dCir.1983)(identifyingbadgesoffraudunder

11U.S.C.S548)(citingInreMay,12B.R.618,627(N.D.Fla.1980));WallSt.Assocs.v.Brodsky,684N.Y.S.2d
244,248(N.Y.App.Div.1999)(identifyingbadgesoffraudunderN.Y.D.C.L.276).
6700Acequia,Inc.v.Clinton(InreAcequia,Inc.),34F.3d800,806(9thCir.1994);accordTavennerv.Smoot,257
F.3d401,408(4thCir.2001);Kellyv.Armstrong,141F.3d799,802(8thCir.1998).
6701RubinBros.Footwear,119B.R.at423.
6702InreRocoCorp.,701F.2d978,984(1stCir.1983);InreJamesRiverCoalCo.,360B.R.139,161(Bankr.
E.D.Va.Feb.8,2007)(collectingcases);Armstrongv.UnitedBankofBismark(InreBobsSeaRayBoats,Inc.),
144B.R.451,459(Bankr.D.N.D.1992).

1803

fiduciary capacity or hold a position of trust in the transferor entity; (4) imputation is
necessary in order to recognize and discourage the misuse of the corporate form by
means of transferring property between affiliated entities.6703 While JPMorgan may
have been in a superior bargaining position, cases indicate that such control is not
sufficienttoimputeintent.6704Thus,theredoesnotappeartobeevidencetosupporta
colorablebasisforitsapplicationinthiscase.Therefore,onlyLBHIsintentshouldbe
considered in assessing whether a colorable claim exists to avoid the August and
September Guaranties and the collateral transfers as actual fraudulent transfers and
obligationsexists.
AsforLBHIsintent,thefollowingbadgesoffraudarepresent:(1)LBHIdidnot
incurtheobligationormakethetransfersduringthependencyofonelawsuit,butitdid
soduringthependencyofamarketfreefallthatwasdirectlyimpactingLBHIsvalue.
This freefall was more pronounced at the time of the execution of the September
GuarantyandthetransfersofcollateralinconnectionwiththeSeptemberGuaranty.(2)
ThereisevidencetosupportafindingofinsolvencyofLBHIatthetimeoftheexecution
oftheSeptemberGuaranty.(3)There isevidenceto supportafinding that little or no
valuewasgiventoLBHIinexchangeforincurringtheguarantyobligationsormaking
thecollateraltransfers(thisanalysismirrorsthequestionofwhatvalueLBHIreceived

6703Jackson,263B.R.at44748.
6704AndrewVelezConstr.,Inc.v.Consol.EdisonCo.ofN.Y.(InreAndrewVelezConstr.,Inc.),373B.R.262,269

(Bankr.S.D.N.Y.2007).

1804

in exchange for guaranteeing its subsidiaries debts, see Section III.B.3.g.5.a.ii.a.2,

above). (4)The negotiations that resulted in the incurrence of the obligations and the
requests for collateral on September 9, 2008 were hurried transactions, executed
overnightonaveryrushedbasiswithoutkeyLehmanofficersreviewingtheSeptember
Agreements or understanding their scope before they were signed.6705 By way of
contrast, the August Guaranty was negotiated over a period of more than a week,
between August 18, 2008, when Doctoroff emailed a draft,6706 and August 29, 2008
whentheAugustAgreementswereexecuted.6707Thus,thisbadgeoffraudislikelynot
presentwithrespecttotheAugustGuaranty.(5)Thetransfersof$8.6billionofcash
collateral were significant to Lehmans overall liquidity and were done in a manner
designedtocreatethepublicimpressionthatthecashpledgedstillcountedaspartof
Lehmans liquidity pool.6708 Although it is an issue for the trier of fact to determine
whetherthesebadgesoffraudaresufficienttoshifttheburdentoJPMorgantojustify
the transfers and the incurrence of the obligation, a colorable basis exists to find that
they could shift the burden to JPMorgan. The analysis of the common law claims set

6705SeeSectionIII.A.5.b.foradiscussionofthehurriednatureofthetransactions.
6706 Email from Mark G. Doctoroff, JPMorgan, to Daniel J. Fleming, Lehman (Aug. 18, 2008) [LBEX

DOCID451527].
6707See,e.g.,id.;emailfromDanielJ.Fleming,Lehman,toMarkG.Doctoroff,JPMorgan(Aug.21,2008)
[LBEXDOCID310528];emailfromJeffreyAronson,JPMorgan,toPaulW.Hespel,GoodwinProcter,et
al.(Aug.25,2008)[JPM20040003466];emailfromNikkiG.Appel,toPaulW.Hespel,GoodwinProcter,
etal.(Aug.28,2008)[JPM20040004408].SeeSectionIII.A.5.bofthisReport,whichdiscussestheAugust
Agreementnegotiationsingreaterdetail.
6708EmailfromMarkG.Doctoroff,JPMorgan,toJaneBuyersRusso,JPMorgan,etal.(Sept.9,2008)[JPM
20040032520].

1805

forthinSectionIII.A.5.bincludesargumentsthatJPMorganmayemploytojustifythe
transfers.
TheExaminernotesthatthesebadgesoffraudmustbeviewedinthecontextof
what was happening in the market and in light of the fact that LBHI granted similar
guaranties and made similar collateral pledges in favor of other creditors of its
subsidiaries as LBHI and the other Lehman entities slipped into bankruptcy. A
reasonableinferencecouldbedrawnfromthisconductthatLBHIdidnotagreetoallof
these additional obligations or collateral pledges to hinder, delay or defraud its other
creditors, i.e., it was not making a transfer to one friendly creditor to avoid paying
others or to protect its assets for later use,but rather was attempting to quell creditor
concernsbygrantingparentguarantiesandpledgingcollateralwherenecessarybased
upon its perception that failing to do so might cause the credit flowing to Lehman to
dry up and its business to fail. Nonetheless, because the question of intent is fact
intensive, and there exists evidence to support some of the badges of fraud, the
Examiner concludes that a colorable claim exists, although that claim is subject to
substantialcontraryevidenceandinferencesdrawnfromtheevidence.
(v) AvoidabilityoftheTransfersofCollateralin
ConnectionwiththeSeptemberGuarantyPursuantto
Section547(b)oftheBankruptcyCode
The Examiner concludes that there is not sufficient evidence to support a
colorable claim to avoid the transfers of collateral from LBHI to JPMorgan on or after

1806

September 9 that secured obligations that LBHI had previously guaranteed on an

unsecured basis as avoidable preferences. Specifically, prior to the execution of the
September Guaranty, LBHI had guaranteed, on an unsecured basis, JPMorgan
derivativesclaimstotalingapproximately$3.08billionasofSeptember9.6709Thus,the
pledge of collateral under the September Agreements was: (1) a transfer to or for the
benefitofJPMorgan;(2)fororonaccountofanantecedentdebtowedbyLBHIbefore
suchtransferwasmade;(3)madewhileLBHIwasinsolvent;6710(4)madeonorwithin
90 days of the date of the filing of LBHIs bankruptcy petition; and (5) enabled
JPMorgantoreceivemorethanitwouldhavereceivedifthecasewereunderChapter7
ofthistitle,thetransfershadnotbeenmadeandJPMorganreceivedpaymentofsuch
debttotheextentprovidedbytheprovisionsofthistitle.6711Transfersgenerallymade
in connection with derivatives contracts, however, are Protected Contracts, and thus

6709SeeISDAMasterAgreementbetweenJPMCBandLBCC(Nov.15,1993),atp.25[JPM20040000368]

(providingaguarantybyLBHI);ISDAMasterAgreementbetweenJPMMandLBIE(Aug.26,1997),atp.
14 [JPM2004 0086169] (providing a guarantyby LBHI);ISDA Master Agreement between JPMCB and
LBFSA(Nov.15,1993),atp.24[JPM2004000850](providingaguarantybyLBHI);Amendmenttothe
ISDA Master Agreement between JPMM and LBFSA (July 11, 2008), at p. 35 [JPM2004 0086103]
(providingguarantybyLBHI);ISDAMasterAgreementbetweenJPMCBandLBSF(Dec.20,1995),atp.
22 [JPM2004 0000345] (providing guaranty by LBHI); ISDA Master Agreement between JPMBD and
LBIE (Feb. 23, 1998), at p. 21 [JPM2004 0086072]; Guarantee of LBHI for ISDAMaster
Agreementbetween WMB and LBSF (May 28, 1998) [LBEXJPM 0000210]; Guarantee of LBHI for ISDA
Master Agreement between JPMM and LBSF (June 7, 2002) [LBEXJPM 0000212]; see also JPMorgan,
Exposure,CollateralandSetoffSummary(Oct.27,2009)[LBEXJPMC000199].
6710TheExaminerhasconcludedthatthereisevidencetosupportafindingthatLBHIwasinsolventasof
September2,2009.ForthecompleteanalysisofLBHIssolvency,seeSectionIII.B.3.bofthisReport.For
purposesofaSection547(b)claiminsolvencyispresumed.11U.S.C.547(f).
6711See11U.S.C.547(b).SeeAppendix1,LegalIssues,atSectionIV.DofthisReport,whichdiscusses
Section547(b)ingreaterdetail.

1807

there is not a colorable claim to avoid the transfer of collateral to secure these
previouslyunsecuredobligationsofLBHI.6712
To the extent that LBHIs June 9, 2005 guaranty of certain subsidiaries debts
through its corporate resolution is enforceable by JPMorgan against LBHI, then that
portionofthetransferofthe$8.6billionthatsecuredobligationsowedtosubsidiaries
covered by the resolution guaranty would be: (1) a transfer to or for the benefit of
JPMorgan; (2) for or on account of an antecedent debt owed by LBHI before such
transferwasmade;(3)madewhileLBHIwasinsolvent;(4)madeonorwithin90days
of the date of the filing of LBHIs bankruptcy petition; and (5) enabled JPMorgan to
receivemorethanitwouldhavereceivedifthecasewereunderChapter7ofthistitle,
the transfers had not been made and JPMorgan received payment of such debt to the
extentprovidedbytheprovisionsofthistitle.BaseduponJPMorgansProofsofClaim,
thereappeartobeatleastthreeclaimsimplicatedbythisanalysis:(1)theLBJof$95.6
million;6713 (2) the Lehman Brothers Bankhaus AG contingent claim of $209.3 million;
and (3) the Woodlands Commercial Bank (f/k/a Lehman Brothers Commercial Bank)
contingentclaimintheamountof$261.3million.Inaddition,someofthe$391,490,210
infeesandexpensesmaybeimplicatedaswell;however,theJPMorganProofsofClaim

6712See11U.S.C.546(e).
6713Thetransfersubjecttoavoidancewouldbelimitedto$35millionasLBHIhadpostedapproximately

$60 million to secure this debt outside of the preference period and thus, LBHIs transfer of additional
collateral in September, 2008 only secured $35.6 million of this debt. See JPMorgan, Lehman Brothers
ExposureOverview(Sept.2008),atp.3[JPMEXAMINER00005966].

1808

arenotclearinallrespectsastowhichsubsidiaryowesthesefees.Becausethereisno
evidencetosuggestthatanyoftheseobligationsfallunderthesafeharbors,theyarenot
barredfromavoidanceandthereisevidencetosupportacolorablepreferenceclaim.
In addition, the Examiner concludes that there are colorable claims to avoid as
preferentialthecollateraltransfersmadeonaccountofNonProtectedContracts.Much
ofthe$8.6billionincashtransferstookplacefollowingtheexecutionoftheSeptember
Agreements, and thus, there is a colorable basis to claim that the postexecution
collateral transfers secured an antecedent debt owed by LBHI arising under the
September Guaranty. JPMorgans counsel has asserted that the cap on liability
containedintheSeptemberGuarantydefeatsapreferenceclaimbecauseanytransferof
collateral would not be on account of an antecedent debt. The September Guaranty,
however, provided that LBHIs maximum liability under this Guaranty shall be
THREE BILLION DOLLARS ($3,000,000,000) or such greater amount that [JPMorgan]
has requested from time to time as further security in support of this Guaranty.6714
Thus,LBHIsliabilityundertheSeptemberGuarantywasalwayscappedattheamount
ofadditionalcollateralthatJPMorganhadrequested.JPMorganscounselhasasserted
thatthislanguagemeansthereisnoantecedentdebtasthereisnoLBHIliabilityunder
theSeptemberGuarantyuntilsuchtimeasadditionalcollateralisactuallyposted.

6714Guaranty(Sept.9,2008),atp.2[JPM20040005813].

1809

On September 9, however, JPMorgan requested $5 billion of collateral in

connection with the agreements that it anticipated executing with LBHI.6715 The
languageoftheSeptemberGuarantydoesnottiethecappingofliabilitytocollateralin
thehandsofJPMorganbutonlytosuchgreateramountthat[JPMorgan]hasrequested
from time to time as further security in support of this Guaranty.6716 Thus, as of the
execution of the September Guaranty, LBHIs liability under the Guaranty was $5
billion. As of the execution of the September Guaranty, LBHI had posted only $3
billion. Thus, $2 billion of the cash collateral posted following the execution of the
September Guaranty was on account of an antecedent debt. Similarly, JPMorgan
requested an additional $5 billion of collateral on September 11, increasing LBHIs
liabilityundertheSeptemberGuarantyto$10billion.Theadditionalcollateralwasnot
pledgeduntilthenextday,makingthatpledgeonaccountofanantecedentdebt.
To the extent that the collateral transferred was on account of Protected
Contracts, JPMorgan would have a defense under the safeharbor provisions. As set
forth in Section III.B.3.g.5.a.ii.b, however, based upon American Home Mortgage, LBHI
hasacolorablebasisforassertingthatcollateraltransferredtosecurethenonProtected
Contracts discussed in Section III.B.3.g.5.a.ii.c.4 may be avoided as preferential
transfers.

6715SeeAppendix18,ofthisReport,whichdiscussesLehmanscollateralatJPMorganingreaterdetail.
6716Guaranty(Sept.9,2008),atp.2[JPM20040005813].

1810

With respect to those transfers of collateral not protected by the safeharbor

provisions outlined in Section III.B.3.g.5.a.ii.c.4, even if all of the elements set forth in
Section 547(b) are satisfied, liability will not lie if JPMorgan can establish a defense
underSection547(c).6717ThethreeapplicabledefensesarefoundinSection547(c)(1),(2),
and(4).6718
In order to succeed with a contemporaneous exchange defense under Section
547(c)(1), JPMorgan must show (1) that the transfers of collateral were for new value
giventoLBHI;(2)thatthetransferswereintendedtobeacontemporaneousexchange;
and (3) that the transfers were in fact substantially contemporaneous exchanges.6719
Although the transfers were made within days of the execution of the September
Guarantyandthus,JPMorganmaybeabletoshowthatthetransferswereintendedto
be and were in fact contemporaneous, there is no evidence that JPMorgan extended
new value in the form of money or moneys worth in . . . new credit to LBHI in
exchangeforthetransfers.ThereisnoevidencethatJPMorganlentadditionalamounts
to LBHI as a result of the September Guaranty. Instead, JPMorgan continued its
extensionofdiscretionarycredittoLBHIsaffiliates.Thissamediscretionaryextension

671711U.S.C.547(c).
6718Id.547(c)(1).
6719TheOfficial Comm.ofUnsecuredCreditorsof360networks(USA)Inc.v.U.S.RelocationServs.,Inc.(Inre

360networks(USA),Inc.),338B.R.194,204(Bankr.S.D.N.Y.2005)(citingInreMidAtlanticFund,Inc.,60
B.R.604,609(Bankr.S.D.N.Y.1986);InreMcLeanIndus.Inc.,132B.R.247,26364(Bankr.S.D.N.Y.1991),
revdonothergrounds,30F.3d385(2dCir.1994);OfficialComm.ofUnsecuredCreditorsof360networks(USA),
Inc.v.AAFMcQuay,Inc.(Inre360networks(USA),Inc.),327B.R.187,191(Bankr.S.D.N.Y.2005)).

1811

ofcreditexistedpriortotheexecutionoftheSeptemberGuarantyandthus,evenifthe
valueJPMorganprovidedtotheotherLehmanentitiescouldbeconsiderednewvalue
given to LBHI, it could be construed as nothing more than its forbearance from
withdrawingsuchcredit.Because[f]orbearancealonedoesnotconstitutenewvalue,
there is a colorable basis to conclude that there are claims to avoid the transfers as
preferentialnotwithstandingaSection547(c)(1)defense.6720
Forsimilarreasons,itisquestionablewhetherJPMorganhasadefensepursuant
toSection547(c)(4),whichprovidesadefensetotheextentofnewvaluetransferredto
orforthebenefitofthedebtorfollowingthetransferdeemedpreferential.6721Although
Section547(c)(4),unlikeSection547(c)(1),contemplatesthatthenewvaluemaybetoor
forthedebtorsbenefit,forbearancealsoisnotnewvaluewithinthemeaningofSection
547(c)(4).6722Thus,sincethereisnoevidencethatJPMorganincreaseditstotalexposure
toallLehmanentitiesfollowingtheexecutionoftheSeptemberAgreements,JPMorgan
likelydoesnothaveadefenseunderSection547(c)(4).
Finally, giventhequestionabletimingofthe transfers,the extraordinary nature
and size of the transfers and other unique facts surrounding JPMorgans request for
additional collateral as set forth in Section III.A.5.b, JPMorgan likely does not have a

6720Id.at205(citationsomitted).
672111U.S.C.547(c)(4).
6722InreABCNACO,Inc.,483F.3d470,47374(7thCir.2007).

1812

defensethatthetransfersofcollateralwereintheordinarycourseofbusinesspursuant
toSection547(c)(2).6723
(vi) AvoidabilityofObligationsofLBHItoFunds
ManagedbyJPMorgan
Relying upon the September Guaranty, JPMorgan, in its Proof of Claims, has
asserted claims arising from obligations of Lehman to various funds managed by
JPMorgan. JPMorgan asserts that these obligations are covered by the scope of the
September Agreements because such funds are affiliates of JPMorgan. The
September Agreements cover exposure to JPMorgan and its affiliates, subsidiaries,
successorsandassigns.6724
ThetermaffiliateisnotdefinedintheapplicableSeptemberAgreements.Per
their terms, the September Agreements are governed by the laws of the state of New
York.Further,theSecurityAgreementprovidesthatalltermsusedhereinwhichare
defined in the Uniform Commercial Code shall have the meanings therein stated.6725
TheGuarantiesbetweenthepartiescontainnosimilarprovision.Further,theUniform
CommercialCode(UCC),whichisreferencedintheSecurityAgreementstoprovide
meaningtoundefinedterms,doesnotprovideadefinitionofthetermaffiliate.

672311U.S.C.547(c)(2);seeAppendix1,LegalIssues,atSectionIV.D.
6724

See Amendment to Clearance Agreement (Sept. 9, 2008), at p. 1 [JPM2004 0005861]; Security

Agreement(Sept.9,2008),atp.1[JPM20040005873](emphasisadded).
6725SecurityAgreement(Sept.9,2008),atp.1[JPM20040005873].

1813

New York law, as the governing law of the September Agreements, provides
several definitions of the term affiliate.6726 However, there is no indication which
definition,ifany,representstheintentoftheparties.
Likewise,severalfederalstatutesdefinethetermaffiliate.6727Again,thereisno
indicationthatanysuchdefinitionshouldbeappliedtotheSeptemberAgreementsin
question.Withoutmore,thetermaffiliatehasnoplainmeaning.
NewYorkcaselawprovidesguidanceonhowtodealwithinstancesofcontract
ambiguity.Firstandforemost,[w]hetheracontractisambiguousor,onthecontrary,
clearandunequivocalinitsterms,isaquestionoflawtobedecidedbythecourtinthe
firstinstance.6728Furthermore,[t]heobjectiveinanyquestionoftheinterpretationofa
writtencontractistodeterminewhatistheintentionofthepartiesasderivedfromthe
languageemployed.6729
Without further inquiry, it cannot be said that LBHI intended its September
Agreements to extend to all obligations to the various funds managed by JPMorgan.
Similarly,itisnotevidentthatJPMorgansoughttoextendtheSeptemberAgreements

6726See,e.g.,N.Y.Bus.Corp.Law912(a)(1);N.Y.BankingLaw6l(1)(a);N.Y.BankingLaw606(6)(b)(i).
6727See,e.g.,BankHoldingCompanyActof1956,12U.S.C.1841(k);InvestmentCompanyActof1940,

15 U.S.C. 80a2;Securities ExchangeAct of1934,17 C.F.R. 240.13e3(a)(1); SecuritiesAct of 1933,17

C.F.R.230.405.
6728 Rice v. Miller, 864 N.Y.S.2d 255,258 (N.Y. Sup. Ct.2008) (citing In re Wallace v. 600 Partners Co., 658
N.E.2d715,717(N.Y.1995)).
6729Id.(citingHartfordAccident&IndemnityCo.v.Wesolowski,305N.E.2d907,90910(N.Y.1973));seealso
Suttonv.E. River Sav.Bank, 435 N.E.2d1075,1078(N.Y. 1982)(quoting BrownBros. Elec. Contrs. v. Bean
Constr.Corp.,361N.E.2d999,1001(N.Y.1977))([p]utanotherway,theaimisapracticalinterpretation
oftheexpressionsofthepartiestotheendthattherebearealizationof[their]reasonableexpectations).

1814

tosuchadegreeatthetimeofcontracting.Possibleargumentsbasedon(1)definition
of the term Accounts in the September Security Agreement or (2) JPMorgans
subsidiariesroleaspromoterofandadvisortothefundsareavailable,thoughneither
providesadefinitiveanswer.
The only specific mention of funds contained within any of the September
AgreementsisinthedefinitionofthetermAccountsasitdescribeswhatwouldserve
as security under the September Security Agreement.6730 The Security Agreement
provides that the term Accounts is to mean: all accounts of the Guarantor at
[JPMorgan](including butnot limitedto . .. anynomineeinany money marketfund
issued,managed,advisedorsubadvisedby[theBank]).6731
While this reference serves as a demonstration that money market funds were
contemplated by the parties at least in the sense that they would serve as security
undertheSeptemberSecurityAgreementitalsoraisestheargumentthatsuchaclause
would not be necessary where obligations to these funds, as affiliates to JPMorgan,
wouldbeprotectedundertheSeptemberAgreements.Giventhis,itisdifficulttoglean
theintentofthepartiesfromthisprovisionalone.
Based on the claims on file with the Court, subsidiaries of JPMorgan act as
investmentadvisorstothefundsinquestion.Inthiscapacity,JPMorganssubsidiaries

6730SecurityAgreement(Sept.9,2008),atp.1[JPM20040005873].
6731Id.

1815

have the power in certain instances to take actions such as directing investment
decisions of the funds, monitoring performance and compliance of the funds, and
negotiatingtermsofagreementstobeenteredintoonbehalfofthefunds.
Further,forcertainfunds,itappearsaFormDNoticeofSaleofSecuritiesfiling
isonfilewiththeSecuritiesandExchangeCommission.Insomeinstances,aJPMorgan
subsidiary is listed as a Promoter within these filings. Under the Investment
Company Act of 1940, a Promoter is defined as a person who, acting alone or in
concertwithotherpersons,isinitiatingordirecting,orhaswithinoneyearinitiatedor
directed, the organization of such company.6732 While some degree of control is
evidenced by this relationship, that degree of control does not resolve whether this
would qualify as an affiliate within the intended meaning of the parties in the
applicableAgreements.
Giventhelackofaplainmeaningofthetermaffiliateandtheambiguitywhich
results, extrinsic evidence of the reasonable intent of the contract parties would be
necessary to determine whether various funds managed by subsidiaries of JPMorgan
shouldbeconsideredaffiliates.
To summarize, the intent of the parties cannot be determined within the four
corners of the applicable agreements. No provision contained in the September
Agreements provides clarification as to whether a fund managed by a subsidiary of

673215U.S.C.80a2(a)(30).

1816

JPMorgan qualifies as an affiliate. As noted above, the UCC, which the September
Agreements reference in order to define terms used but not defined, also lacks a
definitionofaffiliate.Theissueofwhethervariousfundsmanagedbysubsidiariesof
JPMorganareaffiliatesofJPMorganpresentsmaterialissuesoffactandlawthatcannot
beresolvedwithoutfurtherevidenceregardingthereasonableintentofthepartiesand
thepreciserelationshipofJPMorgantothemoneymarketfundsinquestion.
Basedontheaboveanalysis,thereisacolorableclaimthattheseobligationsare
unsecured due to the ambiguity of the September Agreements. On behalf of
JPMorgans various funds which it alleges are affiliates, JPMorgan claims $746
million for which roughly $12.5 million has been paid through collateral held. That
leaves a net amount of $734 million.6733 Thus, assuming the scope of the September
Guaranty does not cover the various funds alleged to be affiliates, then these
obligations will become unsecured, and the $12.5 million that has been paid will be
subjecttoavoidance.
(b) CitiAvoidanceAnalysis
(i) Background
Citi was Lehmans designated settlement member on the Continuous Linked
Settlement(CLS)system.6734Inaddition,Citiprovidedotherfinancialservicessuchas

JPMorgan,Exposure,CollateralandSetoffSummary(Oct.27,2009),atp.1[LBEXJPMC000199].

6733

6734MotionofDebtorsforOrder,PursuanttoSection105oftheBankruptcyCode,ConfirmingStatusof

CitibankClearingAdvances,Ex.A,DocketNo.109,InreLehmanBros.HoldingsInc.,No.0813555(Bankr.
S.D.N.Y. Sept. 18, 2008). The LBICitibank CLS relationship was established by a CLS Settlement

1817

the establishment and maintenance of cash deposit and custodial accounts, the
provision of credit facilities, trade clearing and settlement services, agency and trust
services,foreignexchangerelatedservices,andsecuritieslending.6735TheCLSsystem
is a trading platform, operated by a consortium of banks, for the clearance and
settlement of foreign exchange trades.6736 After the markets negative reaction to
Lehmans second quarter earnings announcement and Lehmans personnel changes,
CitisoughttoreduceitsintradayriskexposuretoLehman.6737Consequently,onJune
12,2008,Citiobtaineda$2billioncashdepositfromLBHI,tobedepositedwithCitiin
anovernightcallaccount.6738OnJune12,2008,LBHIwasapartytoaGuarantydated
June 7, 2004 (the 2004 Guaranty) under which LBHI agreed to unconditionally
guarantee[]thepunctualpaymentwhendue,whetheruponmaturity,byaccelerationor
otherwise,ofallobligations(noworhereafterexisting)ofeachBorrowertoCitigroup,
Inc.6739 Citigroup, Inc. is defined to include each of its subsidiaries or affiliates,

Services Agreement for CLS UserMembers dated December 19, 2003. Id. at p. 1. This CLS clearance
agreement was amended and restated in a Citibank CLS Settlement Services Amended and Restated
Agreement for CLS User Members dated October 28, 2004. Id. References to the CLS Clearance
AgreementrefertotheAgreementasamendedandrestated.
6735MotionofDebtorsforOrder,PursuanttoSection105oftheBankruptcyCode,ConfirmingStatusof
Citibank Clearing Advances, at p. 2, Docket No. 109, In re Lehman Bros. Holdings, Inc., No. 0813555
(Bankr.S.D.N.Y.Sept.18,2008).
6736SeeCLS,AboutCLS,http://www.clsgroup.com/About/Pages/default.aspx(lastvisitedDec.23,2009).
6737 Email from Brian R. Leach, Citigroup, to Vikram S. Pandit, Citigroup, et al. (June 12, 2008) [CITI
LBHIEXAM 00114115] (stating that Citi initially asked for $3 billion segregated but Lehman sent $2
billioninacallaccount).
6738EmailfromDanielJ.Fleming,Lehman,toIanT.Lowitt,Lehman(June12,2008)[LBEXAM008608].
6739Guaranty(Jan.7,2004)[LBEXDOCID1090071],attachedtoemailfromMichaelMauerstein,Citi,to
EmilCornejo,Lehman(Sept.9,2008)[LBEXDOCID1079084].

1818

includingCiti.6740TheBorrowersaredefinedtoincludeonlyLehmanBrothersHoldings
PLC, LB Securities Asia Ltd., LBSF, LBJ, LBIE, LBCC Asia Ltd., and Lehman Brothers
BankhausAG.6741LBIwasnotaBorrowerunderthe2004Guaranty.
Fortwomonths,beginninginJuly2008,thepartiesnegotiatedwithoutsuccess
aformalpledgeagreementwiththeunderstandingthatLBHIwouldpledgesecurities
to collateralize Citis clearing and settlement credit lines in lieu of the cash deposit.6742
Thosepledgeagreementnegotiationsceasedwhen,instead,betweenSeptember9and
12,LBHIandCitiamendedthe2004Guarantytoexpanditsscopebyaddingtenmore
LBHIsubsidiariestoit,includingLBI(theAmendedGuaranty).6743LBIamendedits
DirectCustodialServicesAgreement(DCSA,togetherwiththeAmendedGuaranty,
theSeptemberAgreements),6744whichprovidedCitiwithabroadandexplicitrightof

6740Id.
6741Id.
6742 See Email from Thomas Fontana, Citigroup, to Christopher M. Foskett, Citigroup (Sept. 10, 2008)

[CITILBHIEXAM 00075863] (discussing how Citi spent two months negotiating the collateral
arrangement and should have had it completed long ago instead of the fire drill of getting the
GuarantyAmendmentonSeptember9).
6743SeeAmendment1ToGuaranty(Sept.9,2008)[LBEXDOCID090568](executedversionsignedbyIan
Lowitt and adding LBCC on September 11, 2008) attached to Rosa Garcia, Lehman to Emil Cornejo,
Lehmanetal.(Sept.12,2008)[LBEXDOCID065565].InadditiontoLBI,theAmendedGuarantyadded
LB Australia Securities Pty Ltd., LB Taiwan, LB Securities Private Ltd., Neuberger Berman, LBCS, LB
FinanceJapan,LBGCS,LBSecuritiesTaiwanandLBCC.
6744TheDCSAisalternativelytitledtheDirectCustodyAgreement(DCA)inthedocumentsignedon
March26,1992,andreferredtoastheDCSAintheSeptember12,2008amendment.However,theDCA
and DCSA are the same document, amended by the Deed addendum on September 12, 2008. For
consistency, the Examiner refers to the 1992 version as the DCSA, or original DCSA, and the 2008
version as the DCSA Amendment. See Direct Custodial Services Agreement Deed (Sept. 12, 2008)
[CITILBHIEXAM 00005903] (referring to the DCSA entered into by LBI, then known as Shearson
Lehman Brothers Inc., and Citibank on March 26, 1992), and Direct Custody Agreement for Citibank,

1819

setoffandgrantedCitiafirstfixedsecurityinterestinLehmanscashandsecuritiesin
itsCitiaccounts,exceptforcashandsecuritiesinLehmanscustomeraccounts.6745The
Amended Guaranty also provided Citi with crossaffiliate setoff rights.6746 Citi
continued thereafter to provide clearing and trade settlement services for Lehman,
albeitunderreducedclearinglimits,untilLBHIfiledforbankruptcyonSeptember15.
Early on September 15 or late on September 14,6747 Citi transferred $500 million
fromLBHIsaccountatCititoLBIsaccountatCititofundLehmansCLSobligations
after Fleming made the request on the afternoon of September 14.6748 See Section
III.A.5.cforacompletediscussionofLehmansdealingswithCiti.

N.A.,SubsidiariesandAffiliatesandShearsonLehmanBrothersInc.(Mar.26,1992)[CITILBHIEXAM
00031437].
6745DirectCustodialServicesAgreementDeed(Sept.12,2008),atp.2[CITILBHIEXAM00005903].
6746Guaranty(Jan.7,2004)[LBEXDOCID1090071],attachedtoMichaelMauerstein,Citi,toEmilCornejo,
Lehman(Sept.9,2008)[LBEXDOCID1079084].
6747LehmanBrothers,Inc.AccountReport(Oct.1,2008),atp.1033[CITILBI00024142];emailfromJulius
Silbiger,Citigroup,toThomasObermaier,Citigroup,etal.(Sept.14,2008)[CITILBHIEXAM00104189]
(statingthatthe$500millionhadmovedby9:42p.m.thatevening);emailfromRogerBarnes,Citigroup,
to Naresh N. Kumar, Citigroup, et al. (Sept. 14, 2008) [CITILBHIEXAM 00104189] (explaining that
Citichecking opened at 9 p.m. that evening so the transfer could be made then); email from Thomas
Fontana, Citigroup, to Christopher M. Foskett, Citigroup, et al. (Sept. 14, 2008) [CITILBHIEXAM
00101129](approvingthetransfer);LehmanBrothersInc.AccountReport(Oct.1,2008),atp.1033[CITI
LBI 00024142 (Confidential For Settlement Purposes Only)] (account statement confirming that the
transaction transferred $500 million from Lehman Brothers Holdings Main Open Account 40615202 to
LehmanBrothersInc.account30544658forvalueonSeptember15,2008).
6748 Email from Daniel J. Fleming, Lehman, to Paolo R. Tonucci, Lehman, et al. (Sept. 14, 2008) [LBEX
DOCID457630].

1820

(ii) Avoidabilityofthe$2BillionDeposit
Becausethetransferofthe$2billiondepositfromLBHItoCitioccurredonJune
12,2008,itisoutsideoftheninetydaypreferenceperiod.6749Inadditionbecauseitwas
madeonaccountofanantecedentobligationarisingunderthe2004Guaranty,itwould
notbeafraudulenttransfer,asvalueisreceivedbyadebtorifpropertyistransferredto
secure an antecedent obligation.6750 Thus, the Examiner concludes that the evidence
doesnotsupporttheexistenceofacolorableclaimtoavoidthetransferofthe$2billion
depositfromLBHItoCitiasapreferenceorasafraudulenttransfer.
(iii) AvoidabilityoftheAmendedGuaranty
The Examiner concludes that a colorable claim exists to avoid the Amended
Guaranty as constructively fraudulent, although the benefit to the estate from this
avoidance action may not be significant. The legal analysis of this claim and some
aspectsofthefactualanalysisunderlyingthisconclusionmirrorthosecontainedinthe
Examiners discussion of the potential claim to avoid the JPMorgan September
Guaranty as a fraudulent obligation and thus, to streamline this discussion, the
Examinerincorporatesthatanalysiswhereappropriate.

6749SeeAppendix1,LegalIssues,atSectionIV.D.foradiscussionofpreferencelawpursuanttoSection

547oftheBankruptcyCode.
675011U.S.C.548(d)(2)(A).

1821

LBHI executed the Amended Guaranty on September 9, 2008 and added an

additionalpartyonSeptember11,2008.6751Atthattime,obligationswereowedtoCiti
andthus,LBHIincurredobligationsonthosedates,6752whichfallwithintheapplicable
lookbackperiodsunderSections548and544andNewYorklaw.6753Inaddition,there
is evidence to support a finding that LBHI had unreasonably small capital and was
insolventonSeptember9,2008.6754
AswiththeJPMorgananalysis,thelikelykeyfactualdisputeinconnectionwith
thisclaimwillbewhetherLBHIreceivedreasonablyequivalentvaluefortheAmended
Guaranty.LBHIssubsidiariesclearedtradesthroughCiti.Thus,LBHIwoulddirectly
benefitfromtheAmendedGuarantyonlyif,byprovidingthiscreditsupport,thevalue
of LBHIs interests in its subsidiaries increased by at least an amount reasonably
approximatetotheadditionalobligationsthatLBHIincurred.
Aswiththe JPMorgananalysis, thestartingpoint iswhatdidLBHIgiveup by
agreeing to guarantee the debts of the additional subsidiaries. The ex post increased
exposure to LBHI that resulted from LBHI entering into the Amended Guaranty was
approximately $337 million, largely consisting of (1) claims against LBCC for $13.7

6751SeeAmendment1ToGuaranty(Sept.9,2008)[LBEXDOCID090568](executedversionsignedbyIan

LowittandaddingLBCConSeptember11,2008)attachedtoemailfromRosaGarcia,Lehman,toEmil
Cornejo,Lehman,etal.(Sept.12,2008)[LBEXDOCID065565]..
6752SeeRubin,661F.2dat99091.
6753 11 U.S.C. 548(a); McKinneys Civil Practice Law and Rules 213 (2010); Island Holding LLC v.
OBrien,775N.Y.S.2d72,74(App.Div.2004).
6754 See Section III.B.3.b of this Report for the solvency analysis of LBHI. See Section III.B.3.d of this
ReportfortheunreasonablysmallcapitalanalysisofLBHI.

1822

million,ofwhichamajorityrelatedtoderivativeterminationpayments;and(2)claims
againstLBIfor$336million,ofwhich$260millionispursuanttoaCLSagreement.6755
As with the JPMorgan analysis, this theoretical increase in exposure of $337
million must be measured against any direct or indirect benefits LBHI received as a
result of providing this credit support. As detailed in the JPMorgan analysis there is
evidence to support a finding that certain LBHI subsidiaries were insolvent. The
Examiner did not make a finding as to the solvency of LBI inasmuch as this issue is
likely being examined by the SIPA Trustee. The Examiners conclusions, therefore,
assume without independent investigation that LBI was insolvent on September 911,
2008.TheExaminerhasnot,however,foundevidencetosupportafindingthatLBCC
was insolvent, but the increase in liabilities related to LBCC were a relatively small
component of the increase in liability.6756 In light of the insolvency of the LBHI
subsidiaries,theExaminerconcludesthatthereisacolorablebasistofindthatLBHIdid
notreceivequantifiabledirectbenefitsasaresultofsigningtheAmendedGuaranty.
TheanalysisastowhetherLBHIreceivedanyindirectbenefitsmirrorsthatofthe
JPMorgan analysis.6757 As with that analysis, the Examiner concludes that there is

6755 Duff & Phelps Memorandum Regarding Review of Citibank Claims on Lehman Entities (Jan. 22,

2010).
6756LBCCisanentitycoveredbytheresolutionguarantyandthus,ifitisvalid,thenLBHIwasalready
liableforitsobligationstoCitiandtheAmendedGuarantydidnotcreatethisadditionalexposure.
6757 See III.B.3.g.5.a.ii.a.2. for an analysis of the buying of time benefit as it relates to the agreements
enteredintowithJPMorgan.

1823

evidence to support a conclusion that the indirect benefit of additional time was not
reasonablyequivalenttotheadditionalliabilitiesLBHIincurred.
With respect to the issues of both direct and indirect benefit to LBHI from the
execution of the Amended Guaranty, Citi can be expected to present evidence to the
contrary, including the fact that the Debtors filed the Motion of Debtors For Order
Pursuant To Section 105 Of The Bankruptcy Code, Confirming Status Of Citibank
Clearing Advances, seeking authority to continue clearing for certain Lehman entities
andconfirmingthatanyclaimsarisingfromsuchclearingactivitieswouldbeallowed
asclaimsundertheAmendedGuaranty.6758Theseissueswillhavetoberesolvedbya
trieroffact.
Because LBHI incurred an obligation when it entered into the Amended
Guaranty,asdiscussedinSectionIII.B.3.g.5.a.ii.b.2,itdidnotengageinasafeharbored
transaction, and the Amended Guaranty may be avoided. Thus, the Examiner has
determinedthat,iftheCourtadoptsanarrowapplicationofthesafeharborsdescribed
above,6759thenthereisabasisforacolorableclaimtoavoidtheGuarantyAgreement.If
theGuarantyAgreementisavoided,the2004Guarantygoverns.6760Assuch,ifavoided,

6758MotionofDebtorsForOrderPursuantToSection105OfTheBankruptcyCode,ConfirmingStatusOf

Citibank Clearing Advances, Docket No. 109, In re Lehman Bros. Holding, Inc. No. 0813555 (Bankr.
S.D.N.Y.Sept.18,2008).TheMotion,however,statesthat[t]hisMotiondoesnotseekanorderofthis
CourtvalidatingtheGuaranty.Id.at15.
6759SeeIII.B.3.g.5.a.ii.b.2.forthedescriptionofthelegalquestionregardingthescopeofthesafeharbor
amendments.
6760Guaranty(Jan.7,2004)[LBEXDOCID1090071],attachedtoemailfromMichaelMauerstein,Citi,to
EmilCornejo,Lehman(Sept.9,2008)[LBEXDOCID1079084].

1824

LBHI would no longer be obligated to cover the obligations of the ten Lehman
subsidiaries added by the Amended Guaranty and any excess collateral would be
returnedtotheLBHIestate.
CitihasassertedthefollowingclaimsagainstLBHIonaccountofobligationsof
LBHI subsidiaries that were added to the list of borrowers pursuant to the Amended
Guaranty:

LBCSoverdraftofaccountno.xxx769intheamountof$85,296.6761

Amount owed by LBI under CLS Agreement in the amount of

$260,326,894.6762

AmountowedbyLBIundersecuritieslendingtransactionsintheamountof
$1,199,775.6763

CustodyfeesowedbyLBIunderDirectCustodyAgreementintheamount
of$82,345.6764

PrepetitioninterestchargedowedbyLBIforthelatesettlementofsecurities
lendingandrepurchasetransactionsintheamountof$207,624.6765

LBIoverdraftsintheamountof$12,199,628.6766

AccountservicefeesowedbyLBIintheamountof$42,627.6767

Amounts owed by LBI for misdirected wire claims in the amount of

$12,795,775.6768

6761SummaryofCitiProofsofClaimAgainstLehmanFiledBeforeSeptember22,2009BarDate,atp.2

[LBEXCITI000001].
6762Id.atp.4.
6763Id.
6764Id.
6765Id.
6766Id.
6767Id.

1825

LBIcheckmistakenlycreditedtoJPMorganintheamountof$35,389.6769

AggregatenetamountowedbyLehmanCLSparties(LBI,LBSF,LBCCand
LBIE)underCLSagreement,aftertakingintoconsideration$1billionsetoff
intheamountof$47,424,651.6770

Amount owed by Neuberger Berman under December 6, 2004 securities

lendingagreementintheamountof$13,044.6771

FacevalueofLBInotedue2026intheamountof$8,132,177.6772

Amount owed by LBI pursuant to FX transaction in the amount of

$1,156,390.6773

AmountowedbyLBIforaccountservicefeesintheamountof$111,278.6774

AmountowedbyLBIunderFXtransactionsintheamountof$2,676,721.6775

Amount owed by LBI under Custody Agreements in the amount of

$57,278.6776

In total, Citi claims an additional $346.5 million against LBHI based upon
obligationsowedbysubsidiariesthatwereaddedundertheAmendedGuaranty.Ifthe
AmendedGuarantyisavoided,the$2billiondepositwouldnotbesubjecttosetoffon
accountoftheseclaims,norwouldCitihaveanunsecuredclaimagainsttheLBHIestate
on account of these amounts. But because the total claims of Citi against LBHI are

6768Id.
6769Id.
6770Id.atp.5.ThisclaimisrelevanttothisanalysisonlytotheextentofLBIandLBCCsportionofthe

claim.
6771Id.atp.8.
6772Id.
6773Id.atp.10.
6774Id.
6775Id.atp.11.
6776Id.atp.11.

1826

approximately $2.8 billion,6777 assuming the validity of these claims, avoidance of the
AmendedGuarantywillnotresultinareturnofanypartofthesefundsandmayserve
only to avoid a general unsecured claim against the LBHI estate of up to $346.5
million.6778
Because the DCSA was between LBI and Citi, the Examiner defers to the SIPA
TrusteetodeterminewhetheranyclaimsariseasaresultoftheDCSA.
(iv) Avoidabilityofthe$500MillionTransferFroman
LBHIAccounttoanLBIAccount
Eitherlate onSeptember14oronSeptember15,2008,afterthefilingofLBHIs
bankruptcy petition,Cititransferred$500 millionfrom LBHIsaccountatCitito LBIs
accountatCiti6779tofundLehmansCLSobligations.6780Anaccountstatementdatesthe
transfer as of September 15;6781 however, contemporaneous emails evidence that the

6777Thisamountexcludescontingentclaims.Assuch,the$2.8billiontotalinclaimsagainstLBHImaybe

subjecttoincreaseonaccountofsuchclaims.
6778IftheLBHIresolutionguarantyisvalid,thenclaimsattributabletoLBIE,LBJ,LBCSandLBCCwould
be excluded from this analysis, See Unanimous Written Consent of the Executive Committee of the
Board of Directors of Lehman Brothers Holding Inc. (June 9, 2005) [LBEXAM 003415]; Unanimous
Written Consent of the Executive Committee of the Board of Directors of LBHI (Nov. 7, 2005) [LBEX
WGM1104149](resolutiontomakeLBCSaguaranteedsubsidiaryofLBHI);
6779LehmanBrothersInc.AccountReport(Oct.1,2008),atp.1033[CITILBI00024142](accountstatement
confirming that the transaction transferred $500 million from Lehman Brothers Holdings Main Open
Account40615202toLehmanBrothersInc.account30544658).
6780 Email from Daniel J. Fleming, Lehman, to Paolo R. Tonucci, Lehman, et al. (Sept. 14, 2008) [LBEX
DOCID457630].
6781LehmanBrothersInc.AccountReport(Oct.1,2008),atp.1033[CITILBI00024142](accountstatement
confirming that the transaction transferred $500 million from Lehman Brothers Holdings Main Open
Account40615202toLehmanBrothersInc.account30544658).

1827

transfer actually occurred on the evening of September 14.6782 Because transfers

executed after 9 p.m. on Sunday night are batched with the Monday trades, Citis
counseladvisedtheExaminerthattheaccountstatementdatedSeptember15reflected
that transfer.6783 Whether the transfer is found to have occurred on September 14, the
daybeforeLBHIfileditspetition,oronSeptember15,followingthefiling,determines
whether the transfer may be avoided. If it occurred on September 14, the transfer
wouldfallunderthesafeharbors.6784IfthetransferoccurredafterthefilingofLBHIs
bankruptcy, it is a postpetition transfer avoidable pursuant to Section 549.6785 This
transfer was not authorizedunder eithertheBankruptcyCodeorbytheCourt,6786 nor
doesitappeartohaveadefenseprovidedbySection549.6787Moreover,thesafeharbor
provisionsofSection546donotprotecttransfersavoidablebySection549.6788

6782EmailfromJuliusSilbiger,Citigroup,toThomasObermaier,Citigroup,etal.(Sept.14,2008)[CITI

LBHIEXAM00104189](statingthatthe$500millionhadmovedby9:42p.m.thatevening);emailfrom
Roger Barnes, Citigroup, to Naresh N. Kumar, Citigroup, et al. (Sept. 14, 2008) [CITILBHIEXAM
00104189] (explaining that Citichecking opened at 9 p.m. that evening so the transfer could be made
then);emailfromThomasFontana,Citigroup,toChristopherM.Foskett,Citigroup,etal.(Sept.14,2008)
[CITILBHIEXAM00101129](approvingthetransfer).
6783EmailfromClaudiaHammerman,PaulWeiss,toAngelaAllen,Jenner&Block,etal.(Jan.26,2010).
678411U.S.C.546(e).
6785SeeAppendix1,LegalIssues,atSectionIV.G.foramoredetaileddiscussionofSection549.
6786See11U.S.C.549.
6787Seeid.
678811U.S.C.546(e),(f),(g),(j).

1828

(c) FRBNYAvoidanceAnalysis
TheExaminerhasfoundnoevidencethatanytransfersmadetotheFRBNYwere
madebyororiginatedfromanyLehmanChapter11entity.Instead,theExaminerhas
foundthatallcollateralLehmantransferredtotheFRBNYoriginatedfromLBI.
To determine whether FRBNY, with LBI as a conduit, may have received
collateral from the Lehman Chapter 11 entities, the Examiner analyzed the trading
activity of 177 different CUSIPs in which FRBNY had trading activity with Lehman
during the period of August 1, 2008 to September 19, 2008. Of the 177 CUSIPs with
direct trading activity between LBI and the FRBNY, a sample of 30 were analyzed to
determine if any Lehman Chapter 11 entity was the source of these CUSIPs from LBI
(i.e.,didLBIenterintoanyfinancingtrades,suchasreverserepotrades,6789wherebyLBI
loanedcashinreturnforasecurity)duringthetimeperiodofJune1,2008toSeptember
19,2008.
TheExaminerdeterminedthatLBIengagedinreversereposwithLBF,LBIE,and
LBSFduringthetimeperiodestablishedabove.While21oftheCUSIPswereincluded
inreversereposbetweenLBIandtheLehmanChapter11entities,theFRBNYdidnot
engage in any corresponding reverse repo activity with LBI for these same securities

6789Areverserepurchaseagreement(reverserepo)isarepofromthestandpointofthebuyer/lender.In

a reverse repo, Party A (the buyer/lender) purchases a security from Party B (the seller/borrower) in
exchangeforcashforapredeterminedperiodoftime,afterwhichPartyAreturnsthesecuritytoPartyB
atapredeterminedprice(cashplusinterest).ReversereposareawayforPartyAtolendfundsandhold
thetradedsecurityascollateral.Inarepurchaseagreement(repo)PartyAtransfersasecuritytoParty
Binexchangeforcashforapredeterminedperiodoftime,afterwhichPartyBreturnsittoPartyAata
predeterminedprice(cashplusinterest).

1829

(i.e.,theFRBNYdidnotreverseinthecorrespondingsecuritiesfromLBI).Therefore,it
does not appear that FRBNY provided financing to LBI using collateral sourced from
LehmanChapter11entities.
Tofurtherthisanalysis,theExaminerreviewedthetradingactivityforallnon
treasury related CUSIPs traded between FRBNY and LBI during the relevant time
period of interest.6790 After examining the trade data for these CUSIPs, the Examiner
determinedthattherewerenoinstanceswhereLBIenteredintoanyreverserepotrades
for these CUSIPs with any nonLBI Lehman Chapter 11 entity as counterparty.
Thereby,coupledwiththesampleanalysis,theevidenceshowsthattheFRBNYdidnot
providefinancingtoLBIusingcollateralfromanyLehmanChapter11entity.
Because the Examiner has identified no instances of a transaction between LBI
and the FRBNY where LBI provided collateral to the FRBNY that originated from a
Chapter 11 Lehman entity, the Examiner defers to the SIPA Trustee with regard to
potentiallyavoidabletransactionsbetweenFRBNYandLBI.
(d) HSBCAvoidanceAnalysis
(i) Background
HSBC was a clearing bank, source of intraday credit for settling trades, and
counterpartytoLBHIandrelatedentitiesintransactionsinvolvingavarietyoftreasury

6790 Approximately 50 of the 177 CUSIPs involved nontreasury which were deemed to have a higher

likelihoodofbeingrepoedbyLBItotheFRBNY.

1830

products.6791 On January 4, 2008, LBHI guaranteed all of LBIEs payments, liabilities,

andobligationstoHSBC.6792Approximatelyonemonthpriortothepetitiondate,HSBC
informed Lehman that HSBC would be completely, albeit gradually, exiting their
relationship.6793
During the last week of August and the first week of September, HSBC
demandedtheequivalentof$945million6794andreceivedfromvariousLehmanentities
(described below) approximately GBP 435 million and approximately HKD 1.4 billion
(for a total of the equivalent of approximately $947 million to $992 million6795) cash
collateralinordertocontinueprovidingclearingandsettlementservicestoLehman.6796
HSBC also demanded that Lehman execute the U.K. and Hong Kong Cash Deeds to
securethecollateral(collectively,includingthedeposits,theCashDeedTransactions

6791ExaminersInterviewofGuyBridge,Sept.29,2009,atp.3.
6792 See Annex A to Proof of Claim of HSBC Private Bank (Suisse) SA, at p. 2, Claim No. 15603, In re

LehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Sept.17,2009).
6793 Nicholas J. Taylor, HSBC, Briefing Note Project Milan (Aug. 18, 2008), at pp. 12 [HBUS 90];
Examiners Interview of Nicholas J. Taylor, Oct. 15, 2009, at p. 6; Examiners Interview of Guy Bridge,
Sept.29,2009,atp.4.
6794 This amount and some of the other monetary amounts discussed in this Section are of foreign
currency.TotheextentthereareconversionstoUSD,allsuchconversionsareapproximate.
6795 The evidence is not conclusive as to the amount of such collateral. For an explanation of this
discrepancy,seeSectionIII.A.5.dofthisReport.
6796 Email from Guy Bridge, HSBC, to Carlo Pellerani, Lehman, et al. (Aug. 27, 2008) [HBUS 3]
(demanding combined deposits of $945 million in London and Hong Kong); email from Guy Bridge,
HSBC,toNicholasJ.Taylor,HSBC,etal.(Aug.28,2008)[HBUS9250](reportinginitialreceiptofGBP435
million);emailfromCarloPellerani,Lehman,toIanT.Lowitt,Lehman,etal.(Aug.28,2008)[LBEXAM
008853] (reporting return of GBP 435 million to Lehman); email from Martina C. W. Kung, HSBC, to
PatriciaGomes,HSBC,etal.(Sept.1,2008)[HBUS397](reportingpendingdepositofHKD1.4billion);e
mail from Guy Bridge, HSBC, to Nicholas J. Taylor, HSBC, et al. (Sept. 1, 2008) [HBUS 401] (reporting
receiptofGBP435million).

1831

and separately, including the deposits, the U.K. Cash Deed Transactions and the
HongKongCashDeedTransactions,respectively).6797
(ii) TheU.K.CashDeedTransactions
TheGBP435milliondepositwasmadeonSeptember1,2008.6798TheExaminers
financial advisors have identified a GBP 435 million (the equivalent of approximately
$800million)transferonSeptember1,2008fromLBHIsLondonbranch,LBHI(U.K.),to
LBIE,afterwhichLBIEandLBHI(U.K.)transferredGBP435millionbackandfortheach
day.6799 Meanwhile, as described in more detail in Section III.A.5.d of this Report,
LehmansuccessfullynegotiatedwithHSBCtonarrowtheproposedrightofsetoffand
expanditsownaccesstothecashsecuredbythecashdeeds.6800OnSeptember9,2008,
both LBHI(U.K.) and LBIE executed a cash deed with HSBC plc (together, the U.K.
CashDeeds)6801tosecurewhateverportionsofthe$435GBPdepositHSBCdetermined
were necessary to cover certain exposures to Lehman as specified by the deeds.6802
HSBCreturnedEUR200million(the equivalentofapproximately$282million)ofthe

6797

Email from Guy Bridge, HSBC, to Carlo Pellerani, Lehman, et al. (Aug. 27, 2008) [HBUS 3];
ExaminersInterviewofGuyBridge,Sept.29,2009,atpp.56;ExaminersInterviewofNicholasJ.Taylor,
Oct.15,2009,atpp.67(discussingplantorequirecollateral).
6798 Email from Guy Bridge, HSBC, to Nicholas J. Taylor, HSBC, et al. (Sept. 1, 2008) [HBUS 401]
(reportingreceiptofGBP435million).
6799Duff&Phelps,TimelineofHSBCCashTransfers(Nov.13,2009),atp.1.
6800 Examiners Interview of Guy Bridge, Sept. 29, 2009, at p. 6; see email from Guy Bridge, HSBC, to
NicholasJ.Taylor,HSBC,etal.(Sept.3,2008)[HBUS570](discussingLehmansrefusaltosigntheCash
Deedswithoutchangestotheterms).
6801 Cash Deed between HSBC and LBIE (Sept. 9, 2008) [HBUS 1180]; Cash Deed between HSBC and
LBHI(U.K.)(Sept.9,2008)[HBUS1190].
6802 Email from Guy Bridge, HSBC, to Nicholas J. Taylor, HSBC, et al. (Sept. 9, 2008) [HBUS 1179];
ExaminersInterviewofGuyBridge,Sept.29,2009,atp.6.

1832

deposit to a Lehman entity on September 11,6803 but the Examiners financial advisers
have been unable to identify which Lehman entity received the funds because of the
multiplicity of EUR 200 million transfers on that same day.6804 Given the September 9,
2009StipulationbetweenHSBCandtheDebtors,describedbelow,theExaminerdidnot
continuetopursueadditionalavenuestodeterminewhichLehmanentityreceivedthe
EUR200million.
(iii) TheHongKongCashDepositTransactions
On September 1, HSBC personnel reported a pending deposit from Lehman of
approximatelyHKD1.4billion,ortheequivalentofapproximately$180million6805and
Lehman executed the Hong Kong Cash Deed on September 12.6806 The Examiners
financialadvisorshaveidentifiedpotentiallyrelatedtransfers:anintercompanytransfer
of HKD 1,432,547,668.60 (approximately $183,400,000) on August 29, 2008 ordered by
LBIE, and a transfer of HKD 1,515,153,863.02 (approximately $194,131,922) out of the
Lehman Brothers Asia Holdings (LBAH) Money Market Placement general ledger
cashaccount(accountno.XXXXXXX600)onSeptember1,2008.6807Accordingtocounsel

6803 Examiners Interview of Guy Bridge, Sept. 29, 2009, at p. 7. According to Lehmans Daily Funding

CallUpdateemailforSeptember11:TrsyhavereducedcashdepositwithHSBCtoGBP200mtorelease
liquidityinthefirm.EmailfromMariaBarrio,Lehman,toNeilUllman,Lehman,etal.(Sept.11,2008)
[LBEXDOCID 1898196]. The Examiners financial advisors analysis of Lehmans transactions during
this period shows that this report was erroneous, and that Lehman received EUR 200 million on
September11.Duff&Phelps,PreliminaryFindingsre:HSBCDeposits(Dec.2,2009),atp.1.
6804Duff&Phelps,PreliminaryFindingsre:HSBCDeposits(Dec.2,2009),atp.1.
6805EmailfromMartinaC.W.Kung,HSBC,toPatriciaGomes,HSBC,etal.(Sept.1,2008)[HBUS397].
6806EmailfromPatriciaGomes,HSBC,toAgnesY.L.Lau,HSBC,etal.(Sept.12,2008)[HBUS1760].
6807Duff&Phelps,PreliminaryFindingsre:HSBCDeposits(Dec.2,2009),atp.2.

1833

for HSBC, however, the relevant LBAH deposit account held HKD 1.15 billion until
September16,2008.6808
On September 12, 2008, LBAH executed a cash deed with HSBC Ltd. to secure
these funds (the Hong Kong Cash Deed); however, because Lehman executed the
HongKongCashDeedtoolateinthedayforHSBCLtdtotransferthecashcollateralto
asecuredaccountcoveredbythedeed,andbecauseofaSeptember15publicholidayin
Hong Kong, HSBC Ltd. was unable to transfer the funds into such an account until
September16.6809
All but approximately $3.7 million of the Hong Kong funds were subsequently
returned to an account designated by the provisional liquidators of Lehmans Asia
Pacificsubsidiary.6810
(iv) September9,2009Stipulation
On September 9, 2009, HSBC and LBHI entered into a stipulation (the
Stipulation) regarding funds held by HSBC pursuant to deposits by LBHI in
connectionwiththeU.K.CashDeedbetweenLBHI(U.K.)andHSBCplc.6811HSBCand
Lehman agreed that HSBC was permitted to setoff (1) an overdraft in the amount of

6808MemorandumfromKenColeman,HSBCcounsel,toExaminer,re:TransfersinConnectionWiththe

HongKongCashDeed(Oct.23,2009),atp.1.
6809EmailfromPatriciaGomes,HSBC,toAgnesY.L.Lau,HSBC,etal.(Sept.12,2008)[HBUS1760].
6810MemorandumfromKenColeman,HSBCcounsel,toExaminer,re:TransfersinConnectionWiththe
HongKongCashDeed(Oct.23,2009),atp.1.
6811 Stipulation, Agreement and Order, Pursuant to Sections 362 and 553 of the Bankruptcy Code,
ModifyingtheAutomaticStayfortheLimitedPurposeofPermittingHSBCBankplctoEffectSetoffand
Resolution of Certain Banking Arrangements Between Lehman Brothers Holdings Inc. andHSBC Bank
plc,atp.2,DocketNo.5089,InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Sept.9,2009).

1834

GBP99,992,714.37(theequivalentofapproximately$164million)plusaccruedinterest
in the amount of GBP 69,347.60 (the equivalent of approximately $144,070); and (2) a
misdirectedpaymentin theapproximateamountof GBP 605,000.00 (theequivalentof
approximately $999,516)6812 (for a total setoff of approximately GBP 100,667,061.97, or
approximately$164.6million).6813Inaddition,HSBCagreedtotransferEUR70million
(approximately$101million)toanaccountdesignatedbyLBHI.6814Asforanyandall
other and further claims, HSBC and Lehman agreed to work in a commercially
reasonable manner to address issues surrounding HSBCs additional alleged setoff
rightsagainstLBHI.6815
ForacompletediscussionofLehmansdealingswithHBSC,seeSectionIII.A.5.d
ofthisReport.
(v) AvoidabilityoftheJanuary4,2008Guaranty
TheExaminercannotconcludethattheJanuary4,2008Guarantyisavoidableas
a constructively fraudulent incurrence of an obligation, because there is insufficient
evidence to support a finding that LBHI had unreasonably small capital or was
insolventonthisdate.6816

6812Id.
6813TheamountofsetoffwassubjecttoHSBCsfinalaccounting.Seeid.
6814Id.
6815Id.
6816SeeSectionIII.B.3.b.forthesolvencyanalysisofLBHI;seeSectionIII.B.3.d.fortheunreasonablysmall

capitalanalysisofLBHI.

1835

(vi) AvoidabilityoftheHongKongCashDeed
Transactions
It is unnecessary to analyze the avoidability of the Hong Kong Cash Deed
Transactions because (1) the funds have been returned to LBAH, except for
approximately $3.7 million, exempted with the approval of the LBAH provisional
liquidators,6817 and (2) the Examiner and his financial advisers have not been able to
identify a U.S. Debtor as the source of the funds for the Hong Kong Cash Deeds
Transactions.TheHongKong CashDeedTransactionsareincludedinthediscussion
belowonlyinsofarastheyrelatetotheU.K.CashDeedTransactions.
(vii)

AvoidabilityoftheU.K.CashDeed

BecauseoftheStipulation enteredintobetweenHSBC andLBHI,theExaminer

hasdetermineditisunnecessarytoanalyzetheavoidabilityoftheU.K.CashDeed,asit
appearsthatthepartieshaveresolvedanyoutstandingissuespursuanttotheU.K.Cash
Deed.
According to the Stipulation, the balance of accounts in the name of LBHI
(CollateralAccounts)wasEUR343,446,459.96(approximately$495million)asofApril
28,2009.PursuanttotheStipulation,HSBCwaspermittedtooffsetapproximatelyGBP
100,667,061.97(approximately$164.6million).6818

6817MemorandumfromKenColeman,HSBCcounsel,toExaminer,re:TransfersinConnectionWiththe

HongKongCashDeed(Oct.23,2009),atp.1.
6818TheamountofsetoffwassubjecttoHSBCsfinalaccounting.SeeStipulation,AgreementandOrder,
PursuanttoSections362and553oftheBankruptcyCode,ModifyingtheAutomaticStayfortheLimited
PurposeofPermittingHSBCBankplctoEffectSetoffandResolutionofCertainBankingArrangements

1836

(viii) AvoidabilityoftheTransferoftheRemaining
Collateral
Under the terms of the Stipulation, HSBC and LBHI have agreed to work
togethertoresolveissuesregardingtheremainingclaimsofHSBC.Forthisreason,and
thefactthatthetransfersofanycollateralremainingpursuanttotheStipulationappear
tobeprotectedtransactionsunderthesafeharborprovisions,theExaminerdetermined
thatitwasunnecessarytoformanopinionastowhethertherearecolorableclaimsin
connectionwiththecollateralthatremainspursuanttotheStipulation.6819
(e) StandardBankAvoidanceAnalysis
Standard Bank was Lehmans clearing and settlement bank for trades in South
Africa.6820 Standard, like other clearing banks, demanded and received a collateral
depositshortlybeforeLehmansbankruptcy.6821OnSeptember5,2008,StandardBank
informed Lehman that Lehman must pledge $200 million in collateral, and that
StandardBankwouldfailLehmanstradesthatwerenottimelyfundedorsupportedby
adequate collateral.6822 The next day, Standard Bank set a deadline of September 9 to

BetweenLehmanBrothersHoldingsInc.andHSBCBankplc,atp.2,DocketNo.5089,InreLehmanBros.
Holdings,Inc.,No.0813555(Bankr.S.D.N.Y.Sept.9,2009).
681911U.S.C.546(e).
6820 Email from Jonathan Seeranj, Lehman, to Stirling Fielding, Lehman, et al. (Sept. 4, 2008) [LBEX
DOCID455717].
6821 Email from Joseph Igoe, Lehman, to Steve Durrant, Lehman, et al. (Sept. 9, 2008) [LBEXDOCID
455717].
6822EmailfromSteveDurrant,Lehman,toShaunLawrence,Lehman,etal.(Sept.8,2008)[LBEXDOCID
1058390](emailchaindiscussinghowtorespondtoStandardBank).

1837

receive the funds or it would cease settling Lehmans trades.6823 On September 9, a

Lehman entity placed a $200 million deposit with Standard in response to Standards
demand.6824 On September 11, LBIE executed and delivered a pledge agreement to
coverthedeposit.6825ThepledgeagreementallowedStandardBanktosetoffdebtsLBIE
orLBIowedStandardinconnectionwithclearingandsettlementintheSouthAfrican
market.6826OnSeptember16,StandardBanksetoff$10,422,859.72fromLBIEsaccount
to cover advances for trades settling on September 15 and 16.6827 For a complete
discussionofLehmansdealingswithStandardBank,seeSectionIII.A.5.g.
To date, neither the Examiner nor the Examiners financial advisors have been
able to identify a transfer from a Lehman Chapter 11 Debtor as the source of the
September9depositof$200million.Inorder to determinewhether thesource of the
transfer of the equivalent of $200 million to Standard Bank6828 was a U.S. Lehman
Debtor, the Examiners financial advisors executed a search of the GCCM data set for
possibletransfersfromLehmantoStandardBank,ortoanintermediarythatultimately
transferred funds to Standard Bank. The Examiners financial advisors found that,
baseduponareviewoftransfersthatappearedrelevantbecauseof(1)thedatesofthe

6823 Email from Joseph Igoe, Lehman, to Steve Durrant, Lehman, et al. (Sept. 9, 2008) [LBEXDOCID

455717].
6824Id.
6825EmailfromStirlingFielding,Lehman,toMariaBarrio,Lehman,etal.(Sept.11,2008)[LBEXDOCID
1777132].
6826LetterfromKennyFihla,StandardBank,toHuwRees,Lehman,re:NoticeofEnforcementofPledge
andCession(Sept.16,2008),atp.1[LBEXDOCID1090737].
6827Id.
6828ThetransfermayhavebeeninUSDoritmayhavebeeninSouthAfricanRand(ZAR).

1838

transfers and (2) the absolute amounts of the transfer (in both USD and ZAR), no
transfers were identified in the GCCM data set that appear to match the transfer in
question.Baseduponthisreview,theevidencesuggeststhatanonChapter11Lehman
Entitywasthesourceofthefunds.
Accordingly,becausetheredidnotappeartobeevidencetosupportaconclusion
that the transfer involvedpropertyofa LehmanChapter11Debtor,the Examiner did
notanalyzetheavoidabilityofsuchtransfer.
(f) BNYMAvoidanceAnalysis
The Bank of New York Mellon (BNYM) provided, among other services,
accountsupporttoLehmanforLehmansEuropeancommercialpapertradingprogram
and account and financing support for mediumterm note issuances and
redemptions.6829 As a result, BNYM believed that it bore intraday credit risk from
Lehman,andinAugustof2008,BNYMbeganrequestingthatLehmanplacecollateral
withBNYM.6830
LBHI, through LBHI (U.K), eventually placed $170 million in collateral with
BNYM through a series of transfers made between September 10 and 12, 2008 (the

6829 Email from Graham Kettle, Lehman, to Joseph Igoe, Lehman, et al. (Aug. 21, 2008) [LBEXDOCID

1066642](explainingsourcesofBNYMsintradayexposuretoLehman).
6830Id.

1839

BNYM Deposit).6831 The BNYM Deposit was secured with a collateral deposit
agreementthatLBHIexecutedonSeptember11,2008.6832
OnDecember3,2009,theCourtapprovedastipulationamongLBHI,LBSF,and
BNYM that provided that BNYM would return the BNYM Deposit to LBHI, plus
interest of $1,756,492.41 and minus bank fees of $306,641.36.6833 Due to this court
approvedstipulationprovidingforafullreturnofLBHIscollateral,theExaminerhas
determinedthatanyavoidanceanalysisisrenderedunnecessary.Foramoredetailed
discussionofLehmansdealingswithBNYM,seeSectionIII.A.5.f.
(g) BofAAvoidanceAnalysis
At the time of this writing, Lehman and BofA are before the Court in an
adversary proceeding. The pending dispute stems from BofAs November 10, 2008,

6831 Email from Graham Kettle, Lehman, to Scott Alvey, Lehman, et al. (Sept. 10, 2008) [LBEXDOCID

1065130](orderingthetransferof$125millionfromLBHItoanaccountheldforthebenefitofBNYM);e
mailfromStevenJ.Engel,Lehman,toGrahamKettle,Lehman,etal.(Sept.10,2008)[LBEXDOCID65930]
(providing transaction details); email from Craig L. Jones, Lehman, to Stirling Fielding, Lehman, et al.
(Sept. 10, 2008) [LBEXDOCID 065919] (confirming outgoing payment); email from Graham Kettle,
Lehman, to Steven J. Engel, Lehman, et al. (Sept. 11, 2008) [LBEXDOCID 065879] (reporting BNYM
orderingthereturnof$75milliontoLehman);emailfromGrahamKettle,Lehman,toDanielJ.Fleming,
Lehman,etal.(Sept.12,2008)[LBEXDOCID65923](reportingdepositof$120millionwithBNYM).
6832 Collateral Deposit Agreement between Lehman Brothers Holdings, Inc. and the Bank of New York
Mellon,LondonBranch(Sept.11,2008)[LBEXDOCID1031225](finalversionforexecution).
6833 Stipulation and Agreed Order Between Lehman Brothers Holdings, Inc., Lehman Brothers Special
Financing, Inc. and Bank of New York Mellon Regarding (1) Turnover of Collateral Deposit and (2)
ReturnofMisdirectedWires,atpp.12,DocketNo.6040,InreLehmanBros.Holdings,Inc.,CaseNo.08
13555 (Bankr. S.D.N.Y. Dec. 3, 2009). The stipulation also provided for the return of $71,305890.63 in
misdirectedtransfersthatBNYMerroneouslywiredtoanLBSFaccountatJPMorganonApril16and20,
2009.Id.atp.2.

1840

setoffofapproximately$509millionfromvariousLBHIaccounts.6834Specifically,BofA
setoff the funds against debts it claims Lehman Brothers Special Financing incurred
throughderivativeandswapagreementswithBofA.6835Lehmanclaimsthatthissetoff
was improper.6836 Out of deference to the Court and to avoid interfering with active
litigation, the Examiner has limited his direct investigation of this claim and does not
reach conclusions about the relative merits of the parties arguments. For a complete
discussionofLehmansdealingswithBofA,seeSectionIII.A.5.e.
(h) CMEAvoidanceAnalysis
(i) Summary
This Section describes the circumstances surrounding the transfers by the CME
Group (the CME) of more than $2.0 billion in LBI collateral (margin) and clearing
deposits, including margin pertaining to futures and options contracts cleared by LBI
forthebenefitofLBHIaffiliates,attheCMEinconnectionwiththeCMEsdecisionto
sell and transfer LBIs proprietary positions, including positions maintained for the
benefitofLBHIaffiliates,tothreeentities,Barclays,GoldmanSachsandDRWTrading.
This Section also addresses whether any colorable common law or bankruptcy claims
arisefromthetransfers.

6834

Joint Stipulation of Undisputed Facts, at 44, Docket No. 74, Bank of Am., N.A. v. Lehman Bros.
Holdings,Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Dec.7,2009).
6835Id.at45.
6836Id.at46.

1841

TheExaminerconcludesthatanargumentcanbemadethatthetransfersatissue
were fraudulent transfers avoidable pursuant to Section 548 of the Bankruptcy Code
andSections273through275oftheNewYorkDebtorandCreditorlaw6837because(1)
the transfers were made during the applicable lookback period; and (2) Lehman
receivedlessthanreasonablyequivalentvalueorfairconsiderationforthetransfers(a
loss to Lehman exceeding $1.2 billion over the closeofbusiness liabilities associated
withthepositionsandanetlossofcloseto$100millionovertheSPANRisk(margin)
requirements). Whether LBI had unreasonably small capital or was insolvent at the
timeofthetransferisanissueunresolvedbythisReportandtheExaminerdeferstothe
findingsoftheSIPATrustee.6838Inanyevent,theExaminerconcludesthattheevidence
doesnotsupporttheexistenceofcolorableclaimsbecause(i)theCMEanditsofficers
likely would be immune because the CME acted within its statutory role as a self
regulator of its exchanges, (ii) the Commodity Exchange Act (CEA)6839 likely would
preemptmostsuitsagainstboththeCMEorthetransferees,and(iii)thetransferslikely
wereprotectedfromavoidancebythesafeharborprovisionsoftheBankruptcyCode.

6837SeeAppendix1,LegalIssues,atSectionsIV.A.,IV.Cforadiscussionofapplicablefraudulenttransfer

law.
6838 An argument could be made that it is the solvency or unreasonably small capital of LBHI and its
affiliates(ratherthanLBI)thatisrelevantbecauseLBIclearedforthebenefitofLBHIanditsaffiliates.See
Section III.B.3.d for the analysis of unreasonably small capital of LBHI and its affiliates. See Section
III.B.3.bforthesolvencyanalysisofLBHI.SeeSectionIII.B.3.cforthesolvencyanalysisoftheaffiliatesof
LBHI.
68397U.S.C.1etseq.

1842

(ii) Background
TheCMEGroupiscomprisedoffourdesignatedcontractmarkets:theChicago
BoardofTrade(CBOT),theChicagoMercantileExchange,theNewYorkMercantile
ExchangeandCOMEX(f/k/aCommodityExchange,Inc.).TheCMEsClearingHouse
Division confirms, clears and settles all derivatives contracts traded at the CME
exchanges,actsasthecentralcounterpartyandprovidesaperformanceguarantyforall
futuresandoptionscontractsclearedthroughtheseexchanges.6840
LBIwasalongstandingclearingmemberofallfouroftheCMEexchanges.At
thetime ofLBHIs bankruptcy, LBI maintained substantialproprietary orhouse
positions in energy, interest rate, and equities (i.e., S&P 500, etc.) futures and options
traded on CME exchanges, along with smaller positions in metals, agriculture, and
foreignexchange.Atthetime,LBIscombinedmarginrequirementsattheCMEtotaled
roughly$2billionforLBIsproprietarypositionsandanadditional$2billionforLBIs
publiccustomerpositions.6841
LBIs proprietary positions included the domestic exchangetraded commodity
futures and options positions of most LBI affiliates,such as LBCS and LBSF. Because
theywerenotCMEclearingmembers,affiliatessuchasLBCSenteredintoandcleared
domestic exchangetraded commodities futures and options contracts through LBI,

6840ExaminersInterviewofTimothyDoar,Oct.16,2009,atp.2.
6841Id.

1843

which was a registered futures commission merchant and clearing member of most
majorexchanges.6842
LBI historically maintained very little excess margin at the CME and instead
manageditscashaggressivelysothatonlyafewmilliondollarsinexcessmarginfunds
would remain on deposit at the CME.6843 The CME began more actively monitoring
LBIsfinancialcondition(andthefinancialconditionofallotherinvestmentbanksthat
wereclearingmembersoftheCME)followingthecollapseofBearStearns.Duringthis
period,theCMEwasinregularcontactwithLehmanpersonnelandLehmanpersonnel
metwiththeCMEonatleastoneoccasiontoprovideassurancesaboutLBHIandLBIs
liquidity.6844 The CME also regularly consulted with the CFTC (primarily through
Ananda Radhakrishnan and Robert Wasserman, director and associate director,
respectively,oftheCFTCsDivisionofClearingandIntermediaryOversight),theSEC
(primarily through Mike Macchiaroli) and the Federal Reserve Bank concerning the
financialconditionofLBIandotherinvestmentbanksonitswatchlist.6845
Sometime on Friday, September 12, 2008, the federal regulators made CME
aware that they expected Lehman either would be sold or in bankruptcy by Monday,
September15.TheCMEunderstoodthatintheeventLehmanfiledbankruptcy,itwas

6842ExaminersInterviewofSatuParikh,Aug.26,2009,atpp.910.
6843Id.
6844ExaminersInterviewofTimothyDoar,Oct.16,2009,atp.3.
6845Id.

1844

expected to follow the Refco model,6846 which involved an immediate holding

company bankruptcy filing but no immediate bankruptcy filing for regulated
subsidiaries.6847
On Saturday, September 13, 2008, the CME began preparations for a possible
liquidation or transfer of LBI positions. Tim Doar, Managing Director of Risk
Management in the CME Clearing House Division, stated in interviews with the
Examiner that the CME believed it would not be prudent to conduct an open market
liquidationofLBIspositionsbecauseofthesizeandcomplexityofthepositions,aswell
asthecreditandexecutionriskthatwouldbeassociatedwithsuchalargeopenmarket
liquidation.6848 LBI was a major clearing member of the CME; the aggregate margin
requirements for all CME clearing members was approximately $95 billion, of which
roughly$4billionwasattributabletoLBIalone.6849Asaresult,onSaturday,September
13, 2008, Kim Taylor, President of the CME Clearing House Division, contacted Jeff
Jennings, Lehmans Global Head of Futures, for permission to disclose LBIs house
positionstopotentialbuyersandseekbidsfromfirmsthatwouldassumeresponsibility
for the positions. 6850 On Sunday, September 14, 2008, Tom Russo (Lehmans general

6846Id.
6847

In the Refco case, its regulated futures commission merchant subsidiary, Refco, LLC, did not
commence bankruptcy proceedings until it was ready to be sold and transfer all customer positions to
ManFinancial,Inc.,n/k/aMFGlobal.
6848ExaminersInterviewofTimothyDoar,Oct.16,2009,atp.3.
6849Id.atp.2.
6850Id.atp.3.

1845

counsel) contacted Taylor and consented to the CMEs disclosure of LBIs house
positionstopotentialbuyers.6851
The CME selected a handful of firms from which to solicit contingent bids on
LBIs house positions, including the positions of LBI affiliates such as LBCSthat were
cleared through LBI. The firms selected by the CME to participate in the bidding
process were Barclays, Goldman Sachs, Morgan Stanley, JPMorgan, Citadel L.P. and
DRW Trading. 6852 The CME selected these six firms based on their capital, market
concentrationconsiderationsandriskmanagementexpertise.6853
TheCMEdeliveredtheportfolioinformationregardingLBIshousepositionsto
potential bidders on Sunday and, by Monday morning, had received bids on LBIs
proprietary positions from five of the six firms. Some of the bids were for the entire
portfolio;otherswereforsegmentsoftheportfolio,dividedeitherbyCMEexchangeor
by product type.6854 However, all of the bids involved substantial losses to LBI in the
formofthetransferofthemajority(andinseveralcasesall)oftheCMEmarginposted
inconnectionwiththepositions.6855TheCMEdeliveredsummariesofthebidresultsto

6851Id.
6852Id.
6853Id.
6854EmailfromDaleMichaels,CMEGroup,toClearingHouseSeniorMgmt.,CMEGroup,etal.,(Sept.

15,2008)[CME4767].
6855EmailfromKimTaylor,CMEGroup,toKaushikAmin,Lehman,etal.(Sept.15,2008)[CME4750].

1846

KaushikAmin,LehmansGlobalHeadofLiquidMarkets,duringthedayonMonday,
September15,2008Lehmanspetitiondate.6856
OnMondaymorning,September15,2008,themembersoftheCMEEmergency
FinancialGroupCraigDonohue(CMEChiefExecutiveOfficer),PhupinderGill(CME
President),TerrenceDuffy(ChairmanoftheBoard),JimOliffandHowardSiegel(Co
ChairmenoftheClearingHouseRiskCommittee)andTaylormetanddecidedto(i)
placeLBIonliquidationonlystatusforitsproprietarypositions,and(ii)givetheCME
Clearing House Division authority to sell or transfer LBIs house positions in bulk.6857
The CME liquidation only instructions were communicated to Jennings, who Doar

6856Id.

SeeRule975,EmergencyFinancialConditions,
http://www.cmegroup.com/rulebook/CBOT/I/9/75.html.
CMERule975(EmergencyFinancialConditions)provides,initsentirety:
If the President of the Exchange or the President of the Clearing House determines that the
financialoroperationalconditionofaclearingmemberoroneofitsaffiliatesissuchthattoallow
thatclearingmembertocontinueitsoperationwouldjeopardizetheintegrityoftheExchange,or
negatively impacts the financial markets by introducing an unacceptable level of uncertainty,
volatilityorrisk,whetherornottheclearingmembercontinuestomeettherequiredminimum
financial requirements, he may empanel the Chief Executive Officer, the President of the
Exchange,ChairmanoftheBoard,theChairmanoftheClearingHouseRiskCommitteeandthe
President of the Clearing House. (Emergency Financial Committee) Such panel shall be duly
authorizedand,uponaunanimousvoteofthepanel,beempoweredtoorder(a)animmediate
positionlimitation,(b)animmediatesuspensionoftheclearingmember,(c)thatallopentrades
ofsaidclearingmemberbeforliquidationonly,(d)theliquidationortransferofalloraportion
of the open positions of the clearing member, (e) additional performance bond to be deposited
withtheClearingHouseand/or(f)anyotheractionnecessarytoprotectthefinancialintegrityof
the Clearing House. The clearing member affected by action taken shall be notified and may
requestahearingbeforetheBoardasprovidedinRule412.Intheeventofsuspension,theChief
ExecutiveOfficershall,promptlyafterasuspension,setthematterforhearingbeforetheBoard
for final determination. To the extent that the panel orders that all open trades of a clearing
memberbeforliquidationonly,orthepanelorderstheliquidationortransferofalloftheopen
positionsofaclearingmember,Rule913.B.shallapplyandtheclearingmembershallbetreated
asawithdrawingclearingmember.
Id.
6857

1847

believes passed the instruction along to Amin and Parikh, along with instructions to
attempttosellLBIshousepositionsinbulk.6858TheCMEdidnotgiveLBIadeadline
to sell or liquidate its positions at the CME.6859 Rather than liquidating its positions,
however,LBImodestlyaddedtoitspositionsoverthenexttwodays.6860Thiscontinued
tradingactivitywasattributedtoconfusionandchaosatLBI.6861
The CME did not give liquidation only instructions to LBI because it was in
defaultwithrespecttoanyCMEmarginrequirements,butratherforgeneralfinancial
insecurity reasons related to LBHIs bankruptcy filing.6862 Doar stated that with the
bankruptcy of LBHI and LBIE, even a significant increase in Lehmans cash and
liquidity positions wouldnot haveenabledLBIto survive asaCMEclearingmember
forlong.6863Rather,theCMEvieweditasonlyamatteroftimebeforeLBIwhichwas
ineligible for Chapter 11 relief would need to commence a SIPC or Chapter 7
liquidation proceeding.6864 The CME also was concerned that JPMorgan might cease
acting as LBIs settlement bank with the CME Clearing Division. Although it was
technically possible to conduct transactions with the CME without a settlement bank,

6858ExaminersInterviewofTimothyDoar,Oct.16,2009,atp.4.
6859Id.
6860Id.
6861Id.
6862Id.
6863Id.
6864Id.

1848

no CME clearing member had ever done so.6865 Doar stated that it would have
presentedanunprecedentedsituationandadditionalrisktotheCMEandnotedthaton
Wednesday,September17,BofAceasedactingasLBIssettlementbankwithrespectto
the other dominant domestic derivatives clearing organization, the Options Clearing
Corporation(OCC).6866
TheCMEwasinregularcontactonMonday,September15throughWednesday,
September 17, with Jennings, Amin and Parikh concerning the liquidation of LBIs
housepositions.6867OnWednesday,ParikhinformedtheCMEthatLBCShadarranged
for Goldman Sachs to purchase LBCSs natural gas positions, which it traded at the
NYMEXthroughLBI,inbulk.6868LBI,however,didnotfindabuyerforanyofitsother
housepositions.
Goldmanagreedtoassumethenaturalgaspositionsasofthecloseofbusiness
on Tuesday, September 16, in consideration for the transfer to Goldman of
$622,104,458.98fromLBIsmarginandcollateraldepositsattheCME.6869TheNYMEX
naturalgaspositionsasofthecloseofbusinessonTuesdayincludedoptionswithanet
option value of negative $482,102,458.98 for which Goldman Sachs would assume

6865Id.
6866Id.
6867Id.
6868Id.

EmailfromTimothyDoar,CMEGroup,toMichelleGold,Lehmanetal.(Sept.18,2008)[CME7959];
Spreadsheet[CME8753];emailfromMichaelDawley,Goldman,toT.Doar,CMEGroup,etal.(Sept.18,
2008)[CME8754].
6869

1849

liability; consequently, the amount to be transferred to Goldman Sachs exceeded the

Tuesday closeofbusiness position liabilities by $140 million.6870 The aggregate Span
Risk6871 or margin requirements associated with these positions, $129,270,361 was
lessthanthisamount.6872
SometimeonWednesday,September17,theCMElearnedthattheproposedsale
to Barclays would not include the assumption of risk associated with LBI proprietary
positions, only LBI public customer positions. The CME also learned on Wednesday
that LBIwas likelyto file for bankruptcyonFriday,andthat the Australianexchange
was preparingto suspendLehmans trading. 6873Consequently, that eveningthe CME
Emergency Financial Group met and determined to resolicit bids in LBIs house
portfolio from five of the six firms from which it had solicited bids on Sunday,
September 14, 2008, and to transfer the positions in bulk to the winning bidders the
followingmorning(thesixthfirm,MorganStanley,hadnotsubmittedanacceptablebid
on September 14, and therefore the CME did not include Morgan Stanley in the

CME 7959; CME 8753; CME 8754. The positions did not actually transfer to Goldman Sachs until
Thursday morning. In the interim, on Wednesday LBI funded a futures variation of $82,654,310 with
respecttothenaturalgasportfolio,sotheamountofLBImarginultimatelytransferredtoGoldmanSachs
bytheCMEwasreducedbythisamount.
6871 SPAN is a CMEdeveloped system which evaluates overall portfolio risk by calculating the worst
possible loss that a portfolio of derivative and physical instruments might reasonably incur over a
specifiedtimeperiod(typicallyonetradingday.)Thisisdonebycomputingthegainsandlossesthatthe
portfoliowouldincurunderdifferentmarketconditions.SPANistheindustrystandardforportfoliorisk
assessment, and is the official performance bond (margin) mechanism of 50 registered exchanges,
clearing organizations, service bureaus and regulatory agencies throughout the world. See SPAN,
www.cmegroup.com/clearing/riskmanagement/spanoverview.html.
6872Spreadsheet[CME8753].
6873ExaminersInterviewofTimothyDoar,Oct.16,2009.
6870

1850

Wednesday bidding). 6874 The CME communicated its intended course of action to
Jennings and Herbert Bart McDade. Doar stated that McDade argued against the
CMEs bulk liquidation but did not provide an alternative course of action other than
thestatusquo.6875
Overnight, the CME transmitted LBIs house position information to the five
firmsandinstructedthemtosubmitbidsonthefollowingbasketsofLBIpositions:(i)
NYMEX/Clearport/COMEX (energy) derivatives; (ii) FX derivatives; (iii) interest rate
derivatives; (iv) equity derivatives; and (v) agricultural and alternative investment
derivatives. On Thursday morning, September 18, 2008, the CME evaluated the bids
that it had received overnight and transferred LBIs house positions (including LBHI
affiliatepositionsclearedthroughLBI)tothreefirms,asfollows:
a.

EnergyDerivatives

ThehighestbidfortheNYMEX/Clearport/COMEX(energy)derivativesportfolio
wasdeliveredbyBarclays.Barclaysassumedtheenergypositionsclearedthroughthe
CME,asofcloseofbusinessonWednesday,inconsiderationforthetransfertoBarclays
of $707,413,215 from LBIs margin and collateral deposits at the CME. The energy
positions included options with a negative net option value of $372,413,215, so the
amount transferred to Barclays exceeded the Wednesday closeofbusiness position

CME7959;CME8753;CME8754.
ExaminersInterviewofTimothyDoar,Oct.16,2009.

6874
6875

1851

liabilitiesassociatedwiththepositionsby$335million.6876TheaggregateSpanRiskor
marginrequirementsassociatedwiththesepositions,$260,947,206,waslessthanthis
amount.6877
b. FXDerivatives
ThehighestbidfortheFXderivativesportfoliowasdeliveredbyDRWTrading.
DRW Trading assumed the FX positions cleared through the CME, as of close of
businessonWednesday,inconsiderationforthetransfertoDRWTradingof$2,289,375
from LBIs margin and collateral deposits at the CME. The FX positions included
options with a net option value of $3,710,625, so the amount transferred to DRW
Trading exceeded the Wednesday closeofbusiness position liabilities associated with
the positions by $6 million.6878 The aggregate Span Risk or margin requirements
associatedwiththesepositions,$11,482,836,wasgreaterthanthisamount.6879
c.

InterestRateDerivatives

ThehighestbidfortheinterestratederivativesportfoliowasdeliveredbyDRW
Trading.DRWTradingassumedtheinterestratepositionsclearedthroughtheCME,as
ofcloseofbusinessonWednesday,inconsiderationforthetransfertoDRWTradingof
$333,489,665 from LBIs margin and collateral deposits at the CME. The interest rate

6876 Email from Timothy Doar, CME Group, to Michael Nielsen, Lehman, et al. (Sept. 18, 2008) [CME

8217];Spreadsheet[CME8753].
6877Spreadsheet[CME8753].
6878 Email from Timothy Doar, CME Group, to Michael Nielsen, Lehman, et al. (Sept. 18, 2008) [CME
8217];Spreadsheet[CME8753].
6879Spreadsheet[CME8753].

1852

positions included options with a negative net option value of $93,489,665 for which
DRWTradingassumedliability,sotheamounttransferredtoDRWTradingexceeded
the Wednesday closeofbusiness position liabilities associated with the positions by
$240million. 6880TheaggregateSpanRiskormarginrequirementsassociatedwith
thesepositions,$129,949,964,waslessthanthisamount.6881
d. EquityDerivatives
The highest bid for the equity derivatives portfolio was delivered by Goldman
Sachs. Goldman Sachs assumed the equity positions cleared through the CME, as of
closeofbusinessonWednesday,inconsiderationforthetransfertoGoldmanSachsof
$445,132,487 from LBIs margin and collateral deposits at the CME. The equity
positions included options with a net option value of $4,867,513 so the amount
transferred to Goldman Sachs exceeded the Wednesday closeofbusiness position
liabilitiesassociatedwiththepositionsby$450million.6882TheaggregateSpanRiskor
margin requirements associated with these positions, $737,443,448, was greater than
thisamount.6883

6880 Email from Timothy Doar, CME Group, to Michael Nielsen, Lehman, et al. (Sept. 18, 2008) [CME

8217];Spreadsheet[CME8753].
6881Spreadsheet[CME8753].
6882 Email from Timothy Doar, CME Group, to Michael Nielsen, Lehman, et al. (Sept. 18, 2008) [CME
8217];Spreadsheet[CME8753].
6883Spreadsheet[CME8753].

1853

e.

AgriculturalDerivatives

ThehighestbidfortheagriculturalderivativesportfoliowasdeliveredbyDRW
Trading.DRWTradingassumedtheagriculturalpositionsclearedthroughtheCME,as
ofcloseofbusinessonWednesday,inconsiderationforthetransfertoDRWTradingof
$52,452,362 from LBIs margin and collateral deposits at the CME. The agricultural
positions included options with a net option value of $4,547,638, so the amount
transferred to DRW Trading exceeded the Wednesday closeofbusiness position
liabilitiesassociatedwiththepositionsby$57million.6884TheaggregateSpanRiskor
margin requirements associated with these positions, $55,230,535, was less than this
amount.6885
Thesethreefirmsacceptedallgoingforward riskassociated withthe positions.
There were no bids for the smaller metals and agricultural positions, so those were
liquidatedbytheCMEintheopenmarketonFriday.6886
The bulk sale process (including the Goldman Sachs sale arranged by LBCS)
resulted in a substantial loss to LBI exceeding $1.2 billion over the closeofbusiness
liabilitiesassociatedwiththepositions,andanetlossofcloseto$100millionoverthe
SPANRisk(margin)requirements.Thisprocessrepresentedthefirstandonlytimethe

6884 Email from Timothy Doar, CME Group, to Michael Nielsen, Lehman, et al. (Sept. 18, 2008) [CME

8217];Spreadsheet[CME8753].
6885Spreadsheet[CME8753].
6886 Email from Timothy Doar, CME Group, to Michael Nielsen, Lehman, et al. (Sept. 18, 2008) [CME
8217];Spreadsheet[CME8753].

1854

CMEhadconductedaforcedtransfer/liquidationofaclearingmemberspositions.The
CME currently holds roughly $150 million of former LBI margin collateral remaining
fromthetransferandliquidationprocess.
Thus, LBI may have a colorable claim against CME, or any of the firms that
boughtLBIspositionsatasteepdiscountduringtheliquidationorderedbytheCME,
forthelossesthatLBIsustainedasaresultoftheforcedsaleofhousepositionsheldfor
thebenefitofLBIanditsaffiliates.
(iii) DefensestoAvoidabilityofClaims
a.

ApplicabilityofCEAPreemption

TheSupremacyClauseoftheUnitedStatesConstitutionauthorizesCongressto
displace state law in any area that Congress has the power to regulate. In general, a
federal statute preempts state law in one of three instances: (1) when Congress
expressly states its intent to preempt or displace relevant state law (express
preemption);6887 (2) when a federal regulatory scheme is so pervasive as to make
reasonabletheinferencethatCongressleftnoroomfortheStatestosupplementit6888
withinanentirefieldofregulation(fieldpreemption);or(3)whenitisimpossibleto
complywithbothfederalandstatelaw,orwherestatelawstandsasanobstacletothe

6887Fid.Fed.Sav.&LoanAssnv.DelaCuesta,458U.S.141,15253(1982).
6888Id.at153(quotingRicev.SantaFeElevatorCorp.,331U.S.218,230(1947)).

1855

accomplishment and execution of the full purposes and objectives of Congress

(conflictpreemption).6889
Thetermpreemptiongenerallyreferstowhetherafederalstatuteorregulation
supersedes any state law to the contrary. Some of the potential claims against CME,
however, are federal claims (e.g., fraudulent transfer claims under Section 548 of the
Bankruptcy Code). Because preemption law deals with federaltrumpingstatelaw
situations, it maynot applyto whether the CEAprecludesnonCEAfederal causesof
action.However,theCEAcouldstillforecloseotherfederalclaimsifacourtconcludes
theCEAimplicitlyrepealedthoseclaimsorthatCongressintendedtheCEAtobethe
exclusive remedy for claims arising out of futures markets. Whatever the technical
resolution of that question, courts analyzing whether the CEA forecloses nonCEA
claims (state or federal) use similar standards for both federal and state claims.6890
Indeed, the primary case upon which this section relies held that the CEA effectively
preempts the Sherman Act.6891 Therefore, the CEA provides the sole mechanism for
regulating commodities, and any state or federal statute or claim that frustrates
CongressregulatoryschemeislikelyprecludedbytheCEA.

6889Am.Agric.Movement,Inc.v.Bd.ofTradeoftheCityofChi.,977F.2d1147,1155(7thCir.1992),abrogated

on other grounds by Freightliner Corp. v. Myrick, 514 U.S. 280, 28889 (1995), as recognized by Time Warner
Cablev.Doyle,66F.3d867,875n.7(7thCir.1995).
6890See,e.g.,W&WFarms,Inc.v.CharteredSys.Corp.ofNewYork,Ltd.,542F.Supp.56,60(N.D.Ind.1982)
(ItlogicallyfollowsthattheActpreemptsprivateactionsbasedonfederalorstatestatutoryschemes...
(emphasisadded)).
6891SeeAm.Agric.Movement,977F.2dat1158.

1856

Through the CEA, Congress establishe[d] an ambitious scheme for the

regulationofcommoditiestrading.6892TheCEAisenforcedbytheCommodityFutures
Trading Commission (the CFTC), which shall have exclusive jurisdiction . . . with
respect to accounts, agreements . . . and transactions involving contracts of sale of a
commodity for future delivery . . . .6893 Though that provision would appear to
expresslypreemptanystatelaworclaimthatmerelyinvolv[ed]contractsofasaleofa
commodityforfuturedelivery,6894theCEAhasasavingsclausethatprotectsatleast
somenonCEAclaims:Nothinginthissectionshallsupersedeorlimitthejurisdiction
conferred on courts of the United States or any State.6895 Thus, Congress did not
expressly preempt state law through the CEA.6896 Further, the savings clausetells us
that Congress did not intend to preempt the field of futures trading.6897 That leaves
only conflict preemption as the means through which the CEA could preempt claims
againsttheCME.
There are two variants of conflict preemption. First, a state law is preempted
whereitwouldbeimpossibletocomplywithboththestateandfederallaw.Whether
theCEApreemptsstatelawbecauseitisimpossibletocomplywithboththestateand

6892Kerrv.FirstCommodityCorp.ofBoston,735F.2d281,288(8thCir.1984).
68937U.S.C.2(a)(1)(A).
6894 Id. Standing alone, this would appear to grant exclusive authority to the Commission over cases

involvingfuturescontracts,andtocompletelypreemptstatelawasaresult.Am.Agric.Movement,977
F.2dat1155.
68957U.S.C.2(a)(1)(A).
6896Am.Agric.Movement,977F.2dat1154.
6897Id.at1155.

1857

federal law depends on the particular state law at issue. Most of the common law or
statutory claims that could conceivably be brought against the CME (such as a
fraudulenttransferclaim)wouldnotinvolveanunavoidableconflictwiththeCEA.
Second,conflictpreemptionexistswherestatelawstandsasanobstacletothe
accomplishmentandexecutionofthefullpurposesandobjectivesofCongress.6898At
least one federal appellate court has held that a state law claim, whether based on a
statuteorcommonlaw,canbepreemptedifitfrustratesthepurposesandobjectivesof
Congress in passing the CEA.6899 In American Agricultural Movement, Inc. v. Board of
Trade of the City of Chicago, the Seventh Circuit held, in relevant part, that the CEA
preempted a suit against the CBOT that was premised on the CBOTs adoption of an
emergency resolution, pursuant to its selfregulatory powers, ordering the liquidation
ofexcessivelyhighshortorlongpositionstoensurethestabilityofthesoybeanmarket.
The order caused the long positions in the futures market to fall in value, with a
proportionate decline in the cash market. Soybean farmers sued the CBOT, claiming
thattheCBOTactedinbadfaithinadoptingtheemergencyresolutionbecausesomeof
the members of the committee that approved the resolution had clients that would
benefitfromthedropinprice.6900

6898Id.(quotingHinesv.Davidowitz,312U.S.52,67(1941).
6899Id.
6900Id.at115051.

1858

TheSeventhCircuitheldthattheCEApreemptedthefarmersclaims.Thecourt
concluded that the combined effect of the savings clause (whichkept alive some state
lawclaims)andtheclausegrantingexclusivejurisdictiontotheCFTCoverclaimswith
respect to accounts, agreements . . ., and transactions involving contracts of sale of a
commodityforfuturedelivery,tradedorexecutedonacontractmarket....ledtoa
conclusion that: [g]iving full effect to both clauses compels the conclusion that
Congressintendedtopreemptsome,butnotall,statelawsthatbearuponthevarious
aspectsofcommodityfuturestrading.6901
Thecourtnoted,however,thatthestatutorytextdidnotresolvewhichparticular
claimstheCEApreempted.Thus,thecourtdeclared,wemusttakeourguidancefrom
the goals and policies underlying the statute.6902 Examining the history of the 1974
amendments to the CEA, the court found that the purpose of the CEA was to ensure
uniform,nationalrulesfortheoperationofcommoditiesmarkets:
Thecircumstancessurroundingpassageofthe1974Actshedagreatdeal
of light upon the preemptive scope of the CEA. It appears that a
confluence of events in the early 1970sincluding a drastic surge in
commodities trading, rapidly rising food costs, and a highly publicized
andcostlyfuturestradingscandalledCongresstomodernizeandfortify
the CEA and fill some fairly significant regulatory gaps. The Acts
proponentswereconcernedthatthestates,inlightofthesecircumstances,
might step in to regulate the futures markets themselves. This, they
feared, might have subjected the national futures trading apparatus to
conflicting regulatory demands. The solution, the House Committee on
Agriculture believed, was to put all exchanges and all persons in the

6901Id.at1155.
6902Id.

1859

industryunderthesamesetofrulesandregulationsfortheprotectionof
all concerned. The Senate Committee on Agriculture and Forestry
apparently concurred, as indicated by its deletion of a CEA provision
whichappearedtopreservethestatesauthorityoverfuturestrading.6903
Thus, the Seventh Circuit held that [w]hen application of state law would
directly affect trading on or the operation of a futures market, it would stand as an
obstacle to the accomplishment and execution of the full purposes and objectives of
Congress, and hence is preempted.6904 The emergency resolution adopted by CBOT
wasanexerciseofitsselfregulatorypowerundertheCEA,whichisattheverycoreof
the comprehensive regulatory scheme Congress enacted over the futures market.
Accordingly, the [farmers] state law claims against the CBOT for implementing the
emergencyResolutionarepreemptedbytheCEAbecausetheyareintimatelytiedtothe
operationofacontractmarket.6905
The Seventh Circuits decision, however, did not broadly sweep aside all state
law claims that arose in the context of the futures markets. Rather, [w]hen . . . the
application of state law would affect only the relationship between brokers and
investorsorotherindividualsinvolvedinthemarket,preemptionisnotmandated.6906
Thus,theSeventhCircuitwasconcernedwithensuringthatselfregulatingcommodity
exchanges were subject only to the uniform commands of the CEA, rather than the

6903Id.at115556(citationsandquotationsomitted).
6904Id.at115657(citationsandquotationsomitted).
6905Id.at1157.
6906Id.

1860

patchworkofrulesthatwouldresultfrombroadapplicationfromstatecommonlawor
statutoryclaimsagainstthoseexchanges.Becauseclaimsamongpartiesthatarenotthe
exchangeitself(e.g.,brokersandinvestors)donotimplicatetheexchangesoperationof
itsmarket,thoseclaimsarenotpreempted.
Neither the Second Circuit nor the Supreme Court has expressly adopted the
holding or reasoning of the Seventh Circuit. In an analogous context, however, the
SecondCircuithasheldthatfederallawgrantsselfregulatoryorganizationsimmunity
from suit when acting in their regulatory function.6907 Citing American Agricultural
Movement with approval, the Second Circuit concluded immunity for officials was
necessary to carry out Congresss regulatory goals under the CEA.6908 Further, lower
courts(eventhoseoutsidetheSeventhCircuit)havefollowedtheholding ofAmerican
Agricultural Movement.6909 Thus, there is strong reason to conclude that American
AgriculturalMovementisacorrectstatementofthelawofpreemptionundertheCEA.
Applying theSeventhCircuits reasoning toany claimsagainst theCME forits
liquidation ofLBIsproprietary positions,theExaminerconcludes thatthe CEA likely
preempts any claims against CME. As in American Agricultural Movement, any claim
against the CME would attack a formal resolution made by an exchange as the

6907Barbarav.N.Y.StockExch.,Inc.,99F.3d49,59(2dCir.1996).
6908Id.
6909 See DGM Invs, Inc. v. N.Y. Futures Exch., Inc., No. 01 CV 11602 (RWS), 2002 WL 31356362, at *45

(S.D.N.Y.Oct.17,2002);W.CapitalDesign,LLCv.N.Y.MercantileExch.,180F.Supp.2d438,443(S.D.N.Y.
2001).

1861

regulatorofitsmarket.TheCMEdirectedtheliquidationofLBIspositionspursuantto
anorderfromitsEmergencyFinancialCommitteetoprotecttheintegrityandstability
of CME contract markets. Any challenge to that decision in court would attack a
decision of the CME that is intimately tied to the operation of a contract market.6910
UnderAmericanAgriculturalMovement,thatclaimwouldbepreempted.
ThereisnocaselawdirectlyaddressingwhethertheCEAalsopreemptsclaims
againstthefirmsthatparticipatedintheliquidationsaleorderedbytheCME,butthose
claimslikelyarealsopreempted.Afterall,theclaimswouldbepredicatedonthevery
sameactasclaimsdirectlyagainsttheCME:CMEsliquidationorder.Acourtwould
likelyholdthataclaimagainstathirdpartyforparticipatinginatransactionordered
byanexchangeincarryingouttheexchangesregulatoryfunctionwouldbeintimately
tied to the operation of a contract market, and thus preempted. After all, it would
frustrate the ability of an exchange to regulate its market if thirdparties could not
participate in an auction or other emergency process without fear of liability. Thus,
claims against the firms that participated in the CMEordered liquidation sale would
likelybepreemptedtothesameextentthatclaimsagainstCMEarepreempted.
b. ApplicabilityofSelfRegulatoryOrganization
Immunity
Even if the CEA did not preempt any claims against the CME or firms
participating in the liquidation sale, the immunity provided to selfregulatory

6910Am.Agric.Movement,977F.2dat1157.

1862

organizationsliketheCME,anditsofficers,wouldlikelyforecloseanysuitagainstthe
CME.
TheCMEisaselfregulatoryorganization,orSRO.CongressgivesSROsthe
authority to regulate, police, and discipline those who participate in their markets,
subject to the supervision of federal agencies. Thus, SROs (e.g., the NYSE, NASDAQ,
and CME, among others) establish rules for their exchanges, license those who can
participate in them, investigate violations of rules and laws, and discipline members
through internal adjudications. All of those activities are subject to the oversight and
regulationoffederaladministrativeagenciesliketheSECandCFTC.
SROs, as well as their officers personally in most situations, are absolutely
immune from suit for acts taken within the scope of their regulatory or adjudicative
functions. That immunity is premised on the notion that, when acting in such a
capacity, an SRO is exercising quasigovernmental power, and should enjoy the same
immunity from suit that a governmental organization would have. As the Second
CircuitstatedinBarbarav.NewYorkStockExchange:Althoughthe[NewYorkStock]
Exchange is a private, rather than a government entity, immunity doctrines protect
privateactorswhentheyperformimportantgovernmentalfunctions.6911

Barbarav.N.Y.StockExch.,Inc.,99F.3d49,58(2dCir.1996).TheBarbaracourtexpanded:
We think that absolute immunity is particularly appropriate in the unique context of the self
regulationofthenationalsecuritiesexchanges.UndertheExchangeAct,theExchangeperformsa
variety of regulatory functions that would, in other circumstances, be performed by a
governmentagency.Yetgovernmentagencies,includingtheSEC,wouldbeentitledtosovereign
immunity from all suits for money damages. As a private corporation, the Exchange does not

6911

1863

As with the preemption analysis discussed above, courts have predicated SRO
immunityonthefactthatallowingsuitsagainstSROsandtheirofficerswouldfrustrate
thepurposeofCongressinauthorizingSROstoexercisebroaddiscretioninregulating
exchanges:
Furthermore, allowing suits against the Exchange arising out of the
Exchangesdisciplinaryfunctionswouldclearlystandasanobstacletothe
accomplishment and execution of the full purposes and objectives of
Congress, namely, to encourage forceful selfregulation of the securities
industry. Other courts have relied upon this rationale in holding that
state law claims against selfregulatory organizations are preempted by
the Exchange Act. Although we do not rely on the doctrine of federal
preemption in this case, we think that the reasoning of these cases
supports our conclusion that the Exchange is immune from damages
claimswithrespecttoitsconductofdisciplinaryproceedings.6912
EarlySROimmunitycasessuggestedthatabsoluteimmunitymightonlyattach
to the prosecutorial or adjudicative functions of the SRO, while qualified immunity
wouldapplytootherregulatoryfunctionsoftheSRO.InAustinMun.Secs.,Inc.v.Natl
AssnofSec.Dealers,Inc.(Austin),theFifthCircuitbecamethefirstcourttorecognize
SROimmunity.6913ThecourtbaseditsholdingonanSROsquasigovernmentalnature,
and the cases thatgrant governmentofficials someformof immunityfortheir official
acts.6914Onlycertaingovernmentalfunctionsareprotectedbyabsoluteimmunity;most

shareintheSECssovereignimmunity,butitsspecialstatusandconnectiontotheSECinfluences
our decision to recognize an absolute immunity from suits for money damages with respect to
theExchangesconductofdisciplinaryproceedings.
Id.at59(citationsomitted).
6912Id.(quotationsandcitationsomitted).
6913757F.2d676,686(5thCir.1985).
6914Id.at68688.

1864

are subject only to qualified immunity, which provides more limited protection. The
FifthCircuit,therefore, engagedinanextensive analysisofwhichtype ofimmunitya
SRO should enjoy. The claims in Austin involved the investigation, charge, and
prosecution of claims by NASD against one of its members.6915 The Austin court held
that the NASD was entitled to absolute immunity from the claims because
governmental actors generally are entitled to absolute immunity for judicial or
prosecutorial functions.6916 But Austin suggested that SROs would not be completely
protectedfromclaimsarisingfromalltheirofficialfunctions,asAustindeniedabsolute
immunitytoNASDstaffforclaimsarisingfromtheirinvestigation(notprosecution)of
the wrongdoing at issue.6917 The Court left open the possibility that the NASD staff
wouldbeentitledtoqualifiedimmunityfortheirinvestigatoryacts.6918
TheSecondCircuit,however,hasrejectedtheclaimthataSROisentitledtoless
than absolute immunity for its nonprosecutorial and adjudicative functions. In
DAlessiov.NewYorkStockExchange,theSecondCircuitheldthattheNYSEwasentitled
toabsoluteimmunityforclaimsthatitimproperlyinterpretedtheSecuritiesExchange
Act, improperly failed to alert the plaintiff he was violating the Act, and improperly
cooperatedandassistedtheU.S.AttorneysOfficeinitsinvestigationoftheplaintiff.6919

6915Id.at68182.
6916Id.at689.
6917Id.at693.
6918Id.
6919258F.3d93,106(2dCir.2001),affg125F.Supp.2d656(S.D.N.Y.2000).

1865

TheplaintiffarguedtheNYSEdidnothaveabsolutelyimmunitybecausetheclaimsdid
not flow from the NYSEs prosecutorial or adjudicative authority, which the plaintiff
arguedweretheonlyclaimsforwhichBarbaraheldSROshadabsoluteimmunity.
The court rejected that argument.6920 [A]lthough the immunity inquiry in
Barbara was confined to the NYSEs conduct in connection with disciplinary
proceedings, Barbara stood for the broader proposition that a SRO, such as the NYSE,
maybeentitledtoimmunityfromsuitforconductfallingwithinthescopeoftheSROs
regulatory and general oversight functions.6921 The court held that the NYSEs
interpretation of the Act, and its decision to charge the plaintiff with misconduct and
referhiscasetotheU.S.Attorneysofficewerequasipublicadjudicatoryandquasi
prosecutorial acts, and thus fell even under the plaintiffs proposed limitation of
absolute immunity.6922 The court then extended absolute immunity outside the
adjudicatory or prosecutorial context to include the NYSEs alleged failure to monitor
the plaintiffs compliance with the Act, because those acts related to the proper
functioning of the regulatory system.6923 Thus, DAlessio stands for the broad
propositionthatanSROhasabsoluteimmunityforallofitsofficialactionswithinthe
scopeofitsdelegatedauthority:[W]eholdthattheNYSE,whenactinginitscapacity
asaSRO,isentitledtoimmunityfromsuitwhenitengagesinconductconsistentwith

6920Id.at10405.
6921Id.at105.
6922Id.at106.
6923Austin,757F.2dat687(quotedinDAlessio,258F.3dat106).

1866

the quasigovernmental powers delegated to it pursuant to the Exchange Act and the
regulationsandrulespromulgatedthereunder.6924
Where claims go to the heart of a SROs regulatory function, courts have not
hesitated to immunize SROs and their officers from liability. Thus, the Ninth Circuit
threwoutasuitarisingfromtheNASDAQsdecisiontodelisttheplaintiffsstockon
thefirstdayofitspublicoffering.6925Thecourtheldthattherearefewfunctionsmore
quintessentially regulatory than suspension of trading, so the delisting decision was
immunefromattack.6926
ImmunityappliestodecisionsofanSROundertheCEA.InMandelbaumv.New
York Mercantile Exchange, Mandelbaum sued NYMEX for what Mandelbaum alleged
was NYMEXs improper use of its investigative and adjudicative authority to harass
himandrequirehimtohavetosellhisseatontheexchange.6927Thedistrictcourtheld
that Mandelbaums claims were foreclosed by NYMEXs absolute immunity as an
SRO.6928
AnSRO,however,isnotabsolutelyimmunefromallsuits.IftheSROisacting
initsprivate,ratherthanregulatory,manner,itisnotimmunefromsuit.InWeissmanv.

DAlessio,258F.3dat106;seealsoDLCapitalGroup,LLCv.NasdaqStockMkt,Inc.,409F.3d93,9798(2d
Cir.2005)(holdingNasdaqabsolutelyimmunefromsuitchallengingmannerinwhichNasdaqpublicly
announcedsuspensionorcancellationoftrades);MFSSec.Corp.v.N.Y.StockExch.,Inc.,277F.3d613,617
(2dCir.2002)(holdingNYSEimmunefromcontractclaimbysecuritiesfirmthathadbeenstrippedofits
NYSEmembership).
6925SpartaSurgicalCorp.v.NatlAssnofSec.Dealers,Inc.,159F.3d1209,121314(9thCir.1998).
6926Id.at1214.
6927894F.Supp.676,677(S.D.N.Y.1995).
6928Id.at67980.
6924

1867

Natl Assoc. of Securities Dealers, an owner of WorldCom stock (Weissman) sued

NASDAQ for its advertising touting WorldCom stock, which plummeted when
WorldComimploded.6929NASDAQclaimeditwasimmunefromsuit,buttheEleventh
Circuit (sitting en banc) disagreed. The Court held that because immunity is
appropriateonlywhenanSROisperformingregulatory,adjudicatory,orprosecutorial
functionsthatwouldotherwisebeperformedbyagovernmentagency,itfollowsthat
absoluteimmunitymustbecoterminouswithanSROsperformanceofagovernmental
function.6930 Thus, the question was whether the NASD was acting in its private or
governmentalcapacitywithrespecttotheadvertisementsatissue.TheCourtheldthat
theadvertisementswereofaprivatenature:Theseadvertisementsbytheirtoneand
contentwereintheserviceofNASDAQsownbusiness,notthegovernments,andsuch
distinctlynongovernmentalconductisnotprotectedbyabsoluteimmunity.6931
Applyingthesestandardshere,CMElikelyhasabsoluteimmunityfromanysuit
byLBIarisingfromCMEsdecisiontoliquidateLBIsproprietarypositions.CMEwas
actinginitsregulatory,notprivate,capacitywhenitorderedtheliquidation.Thepoint
of the forced sale was to wind down LBIs positions (which were large relative to the

6929500F.3d1293,1294(11thCir.2007).
6930Id.at1297.

Id.at1299.FourdissentingjudgesheldthatwhileNASDAQwasnotentitledtoimmunityformostof
the advertisements, it was immune from liability for its advertisement in the Wall Street Journal. That
advertisement communicated to investors that companies listed on NASDAQ must satisfy rigorous
financialstandards.BecausetheestablishmentofthosestandardswasadutydelegatedtoNASDAQby
the SEC, NASDAQ is entitled to absolute immunity for its communication of those standards to
investors.Id.at1300(Pryor,J.,concurringinpartanddissentinginpart).
6931

1868

size of the CME market) without substantially disrupting the market. The CEA
expressly grants the CME the authority to promulgate rules for the emergency
liquidation of open positions in its market, which rules the CME implemented when
orderingtheliquidationofLBIspositions.6932WhethertheCMEsdecisionwasawise
oneisirrelevant;itisthenatureoftheSROsacts,notthewisdomorlegalityofthose
acts,thatdetermineswhethertheSROisimmunefromsuit.6933Thus,becausetheCME
wasactingpursuanttoitsobligationsundertheCEA,itislikelyimmunefromsuit.
SROimmunityprobablydoesnotprecludeasuit,however,againstthefirmsthat
participated in the liquidation sale. There is scant case law on the liability of third
parties arising from their participation in an SROordered transaction for which the
SRO would enjoy absolute immunity. The firms could claim that the structure and
purpose of the CEA suggest that third parties would be immune from suit as well.
CMEsliquidationorderwasexpresslycontemplatedbytheCEA.6934Thebuyersinany
liquidation proceeding would almost always be private actors, not SROs. If those
private actors could be sued for participation in a liquidation for which the SRO is
immune,thentheSROsauthoritytoorderliquidationwouldbeseverelyimpeded:it
would be difficult to find buyers if those buyers fear their participation in the

6932See7U.S.C.7(d)(6)(A).
6933

See Barbara, 99 F.3d at 58; DAlessio, 258 F.3d at 10405; see also Mandelbaum, 894 F. Supp. at 682
(immunityanalysisfocusessolelyonthefunctionperformedbytheofficial,andnotonthecorrectness
orevenconstitutionalityofhisorheractions).
6934See7U.S.C.7(d)(6)(A).

1869

liquidationwouldsubjectthemtoliability.However,thereisnocaselawsupportfor
this argument,and it conflicts with thenotionthatCEAimmunityispremisedon the
nature of the actor and its acts a quasigovernmental actor exercising governmental
power. The participating firms, after all, were acting in their private interest when
participatinginthesale.Thus,CEAimmunitylikelydoesnotapplytoclaimsagainst
theprivatefirms,buttheExaminercanoffernodefinitiveconclusionastothatissue.
c.

ApplicabilityoftheSafeHarborProvisionsofthe
BankruptcyCode

The Bankruptcy Codes safeharbor provisions provided in Section 546 are

described in detail in Appendix 1, Legal Issues, Section IV.E, and thus will not be
described in detail here. In summary, Section 546(e) protects from avoidance margin
payments,settlementpayments,andtransferstocertainprotectedpartiesinconnection
with securities contracts, commodity contracts, or forward contracts.6935 Further, the
FinancialNettingImprovementsActof2006(FNIA)substantiallybroadenedSection
546(e)toprotectnotonlysettlementormarginpayments,butalsotransfersmadeby,to,
or for the benefit of Protected Parties in connection with securities, commodity, or
forward contracts. Recently, the courts of appeals have read the statute literally, and

6935See11U.S.C.546(e).

1870

thushavebroadlyheldthatanytransferinconnectionwithasecuritiesorcommodity
contractisprotectedbySection546(e).6936
The Examiner concludes that there is evidence to support a finding that the
transfers at issue were in connection with the sale of commodity contracts, as defined
bySection761(4)andthuslikelyprotectedfromavoidancepursuanttoSection546(e).
Thus, because the transfers are likely protected from avoidance by the safeharbor
provisions, the Examiner has found the evidence does not support the existence of a
colorableclaimfortheiravoidance.
h) AvoidanceAnalysisofLBHIAffiliatePaymentstoInsider
Employees(FourthBullet)
(1) Summary
In connection with bullet four of the Examiner Order, which asks whether any
LBHI Affiliate has colorable claims against LBHI or any other entities for potentially
voidable transfers, the Examiner identified and investigated potential constructively
fraudulenttransfersmadebyLBHIAffiliatestoinsideremployees.6937
The Examiner analyzed these transfers as potential constructively fraudulent
transfersunderSection548oftheBankruptcyCode,ratherthanaspotentialpreferences

6936 See Brandt v. B.A. Capital Co. (In re Plassein Intl Corp.), No.082616, 2009 WL4912137, at *4 (3d Cir.

Dec.22,2009)(safeharborsnotintendedtoexcludeprivatelyheldsecuritiestransactions);Contemporary
Indus., 564 F.3d at 986 (safe harbors are not limited to public securities transactions, nor is there a
requirementthatthefinancialintermediaryinvolvedhaveabeneficialinterest);QSIHoldings,571F.3d
at550(same)KaiserSteelCorp.v.CharlesSchwab&Co.,Inc.,952F.2d1230,1240(10thCir.1991)(KaiserII)
(rejecting notion that safeharbor protected payments only to extent recipient was a participant in the
clearanceandsettlementsystem).
6937ExaminerOrderatp.3,fourthbullet.

1871

under Section 547 of the Bankruptcy Code, because there was insufficient evidence to
establishafindingthattherespectiveLBHIAffiliateswereinsolventatthetimeofthe
transfers. In addition, the Examiner did not investigate transfers made by LBHI to
insideremployeessincethatwasnotwithinthescopeoftheExaminerOrder.Finally,
the Examiner did not investigate transfers that constituted annual discretionary
performance bonuses paid to insider employees on January 31, 2008 for the 2007
performance year6938 because such transfers fell outside the pertinent statutory
requirementsforbothpreferencesandfraudulentconveyances.
The transfers identified and investigated by the Examiner included severance
paymentsLBHIAffiliatespaidtoinsideremployeespursuanttoseparationagreements,
aswellasbonusbuyoutsandbonusesguaranteedathiringtoinsideremployeesmade
pursuant to employmentcontracts.TheExaminerconcludes thatanargument canbe
made that certain transfers made by LOTC may be constructively fraudulent and
avoidable pursuant to Section 548(a)(1)(B)(ii)(IV) of the Bankruptcy Code because the
transfers were made (1) for less than reasonably equivalent value, (2) to or for the
benefit of an insider, (3) under an employment contract and (4) not in the ordinary
courseofbusiness.
Although the Examiner was not asked to investigate or make conclusions with
respect to LBHIs transfers to insider employees, the Examiner does note two

6938 See e.g., Global Notes Pertaining to Debtors Schedules and Statements, at 3640, In re Lehman Bros.

Holdings,Inc.,No.0813555(Bankr.S.D.N.Y.Mar.13,2009)(theLOTCSOFA).

1872

substantialtransfersthatLBHImadetoRichardFuldandJosephGregorytwomonths
prior to LBHIs bankruptcy. The Examiner sets forth the information gathered with
respect to these transfers, including evidence that appears to support a finding that
LBHIreceivedreasonablyequivalentvalueinexchangeforthosetransfers.
(2) Methodology
Transfer information was collected from the Debtors Statements of Financial
Affairs,Schedules3c(SOFA3c),whichsetsforthalistofpaymentsmadetoinsiders
withinoneyearbeforebankruptcy.6939TheDebtorsSOFA3csrevealedthattheDebtors
made 47 different types of transfers to insiders during this period.6940 These transfers
fellwithintwomajorcategories:(1)paymentsmadepursuanttoemploymentcontracts
and(2)noncontractrelatedpayments.Foremploymentcontractrelatedpayments,the
Examinerfocusedonpaymentstoinsidersexceeding$50,000intheapplicabletwelve

6939The

Examiner recognizes that the fraudulent transfer period extends back two years from the
respective petition dates (20062008). Because SOFA 3cs were not available during the first twelve
monthsofsuchperiod(20062007),theExaminerwouldhavehadtoderivethenecessarypaymentdata
from the Debtors accounting systems and underlying contractual documentation. In light of the
considerable time and expense necessary to do so, the Examiner limited the analysis to the 20072008
twelvemonthperiod.
6940TheExaminerconfirmedthattheinsidersidentifiedintheSOFA3cswereinsidersasdefinedunder
the Bankruptcy Code. The SOFA 3cs define insiders as follows: [F]or its response to Statement
questions3cand21,(i)LBHIhaslistedmembersofitsBoardofDirectorsandallemployeesthatare,or
were, Executive Officers (Chairman and Chief Executive Officer, Chief Financial Officer, Chief
Administrative Officers, President and Chief Operating Officer, and Chief Legal Officer) and Global
Headsand(ii)theremainingDebtorshavelistedPresidents,andcertainDirectors,ManagingDirectors,
Senior Vice Presidents, and Vice Presidents, as appropriate for their particular personnel structure.
LOTCSOFAat4;seealsoid.at9(citing11U.S.C.101forthedefinitionofinsider,butnotingthata
narrowerlistofinsideremployeeswasdisclosedinviewofthelargenumberofemployeeswhowould
haveotherwisemetthestatutorydefinitionofinsider).TheDebtorsdefinitionofinsiderisconsistent
with how the term is defined in the Bankruptcy Code. 11 U.S.C. 101(31)(B) (defining insider to
include, inter alia, (i) director of the debtor; (ii) officer of the debtor; (iii) person in control of
thedebtor....).

1873

month time period leading up to each Debtors respective petition date. For the non
contractrelated payments, the Examiner focused on payments to insiders exceeding
$50,000betweenthedateonwhichtherewassufficientevidencetoestablishafinding
thattherespectiveDebtorhadunreasonablysmallcapitalandthedatethatentityfiled
itsbankruptcypetition.
Tounderstandthesetransfers,theExaminercollectedandreviewedemployment
agreements, separation agreements, limited partnership agreements, Compensation
Committee meeting minutes, employment manuals, expense memoranda, expense
summary reports, receipts, and other relevant documentation.6941 The Examiner also
conductedinterviewswithcurrentandformerLehmanemployees.
(3) ApplicableLegalStandards
Constructively

fraudulent

transfers

may

be

avoided

pursuant

to

Section548(a)(1)(B) of the Bankruptcy Code and under state law.6942 The Bankruptcy
Coderequires,asathresholdmatter,thatthepotentiallyavoidabletransferhavebeen
madewithintwoyearsofthedebtorspetitiondate6943andthatthedebtorreceivedless
thanreasonablyequivalentvalueinexchangeforsuchtransfer.6944Section548thensets

6941The

Examiner notes that the Debtors were unable to produce all relevant employment contracts,
includinghiringandseparationagreements,aswellasothersupportingdocumentationformanyofthe
paymentstoinsidersidentifiedintheDebtorsrespectiveSOFAs.
6942TheExaminerdidnotreviewthepaymentsdiscussedhereinunderstatelaw.See11U.S.C.544(b).
Foramoredetaileddiscussionofthelawoffraudulenttransfers,seeAppendix1,LegalIssues,atSections
IV.A.,IV.C.
694311U.S.C.548(a)(1).
694411U.S.C.548(a)(1)(B)(i).

1874

forth four alternative subsections outlining the factual scenarios under which a
particulartransfermaybeavoided,assumingthethresholdrequirementsaremet.Two
ofthesubsectionshavepotentialrelevancehere.
Subsection II, relevant to the noncontractrelated payments, allows for
avoidance when, at the time of transfer, the debtor had unreasonably small capital.6945
Subsection IV, relevant to the payments made pursuant to employment contracts,
allows for avoidance regardless of the financial condition of the Debtor when the
transfer was made (1)to or for the benefit of an insider, (2)under an employment
contract and (3)not in the ordinary course of business.6946 The relevant elements of
Section548(a)arediscussedbelow.
Reasonably Equivalent Value as Used in Section 548(a)(1)(B)(i). The
BankruptcyCodedoesnotdefinereasonablyequivalentvalueasthattermisusedin
Section548(a)(1)(B)(i).6947 Courts interpreting this term, however, have indicated that
determination of whether a debtor received reasonably equivalent value is a twostep

694511U.S.C.548(a)(1)(B)(ii)(II)(allowingforavoidancewhenthedebtorwasengagedinbusinessora

transaction,orwasabouttoengageinbusinessoratransaction,forwhichanypropertyremainingwith
thedebtorwasanunreasonablysmallcapital).
694611U.S.C.548(a)(1)(B)(ii)(IV)(allowingforavoidancewhenthedebtormadesuchtransfertoorfor
the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an
employmentcontractandnotintheordinarycourseofbusiness).
6947See, e.g., Official EmploymentRelated Issues Comm. of Enron Corp. v. Arnold (In re Enron Corp.), 2005
Bankr.LEXIS3261,at*120(Bankr.S.D.N.Y.Dec.9,2005);Congrovev.McDonaldsCorp.(InreCongrove),45
Bankr. Ct. Dec. 59 at *9 (B.A.P. 6th Cir. 2005) (nonprecedential); see also 11 U.S.C. 101 (providing no
definitionforreasonablyequivalentvalue).

1875

analysis: (1) did the debtor receive value, and (2) was the payment reasonably
equivalenttothevalueextended?6948
Ifthedebtorreceivedatleastsomevalue,reasonablyequivalentvalueisthen
analyzed based upon the totality of the circumstances,6949 which is a factintensive
inquiry.6950Courtshavearticulatedanumberoffactorsthatmaybeconsideredunder
thetotalityofthecircumstancesanalysis.Theseinclude:(1)thefairmarketvalueof
thebenefitreceivedfromthetransfer;(2)whetheranarmslengthrelationshipexisted
between the debtor and the transferee; (3)the economic circumstances and
relationship of the parties; and (4) industry standards.6951 Moreover, whether a
payment was reasonably equivalent to the value extended does not have to be
preciselycalculated.6952Rather,theissueiswhetherthedebtorgotroughlythevalue
itgave.6953Courtshaveexaminedtheseandotherfactorsindeterminingtheexistence
ofreasonablyequivalentvalueinavarietyofcircumstancesthatappearrelevanthere.

6948Cohen v. UnLtd. Holdings, Inc. (In re Nelco, Ltd.), 264 B.R. 790, 813 (Bankr. E.D. Va. 1999); see also

PensionTransferCorp.v.BeneficiariesUndertheThirdAmend.toFruehaufTrailerCorp.Ret.PlanNo.003(Inre
FruehaufTrailerCorp.),444F.3d203,21213(3dCir.2006).
6949Id.at21213.
6950Sharpv.ChaseManhattanBankUSA,N.A.(InreCommercialFin.Servs.,Inc.),350B.R.559,577(Bankr.
N.D.Okla.2005).
6951In re Fruehauf Trailer Corp., 444 F.3d at 213 (factors (1) and (2)); Brandt v. nVidia Corp. (In re 3DFX
Interactive, Inc.), 389 B.R. 842, 863 (Bankr. N.D. Cal. 2008) (factors (3)and (4)) (citations omitted). In re
FruehaufTrailerCorp.recitesanadditionalfactor,thetransfereesgoodfaith.444F.3dat213.However,
atleastonebankruptcycourtintheSecondCircuithasheldthatthisfactorisnotrelevantunderSection
548. See Mishkin v. Ensminger (In re Adler, Coleman Clearing Corp.), 247 B.R. 51, 10607 (Bankr. S.D.N.Y.
1999).
6952InreFruehaufTrailerCorp.,444F.3dat205.
6953Id.

1876

For example, in holding that certain bonuses were avoidable due to lack of
reasonablyequivalentvalue,thebankruptcycourtinArnoldconsidered,interalia,that
(1)thedebtorknewthattheprofitsfromwhichtopaybonuseswouldbesignificantly
lowerthaninprioryearsornonexistent;(2)certaindefendantswereawarethatEnron
would soon declare bankruptcy; (3) bonuses were substantially higher than in the
preceding year, which was considered Enrons best; and (4) the bonuses were paid
immediatelyandabsentnegotiation.6954Thecourtfurtheragreedwithexperttestimony
thatperformancebonusesshouldnotgoupwhenperformancegoesdown.6955Bonus
payments have also been avoided where, among other reasons, there was no
explanation as to how the bonus amounts were calculated.6956 In holding that a
modification to a pension plan lacked reasonably equivalent value and was therefore
fraudulent,thecourt in Inre Fruehauf Trailer Corp.notedthat(1)themodification cost
twicetheamountofwhataretentionplanshouldcost(i.e.,theretentionplanwasnot
purchased for fair market value); (2) the benefits inured substantially to corporate
insiders; and (3) the modification was reviewed by those who would gain most,
suggestingthatthemodificationwasnotconductedatarmslength.6957

6954Arnold,2005Bankr.LEXIS3261,at*12223.
6955Id.at*123.
6956Lichtensteinv.Buttery(InreComputerPersonalitiesSys.),2002Bankr.LEXIS1625,at*16(Bankr.E.D.Pa.

2002).
6957444F.3dat21516.

1877

TheExaminernotesthattheSecondCircuithasnotaddressedwhetheradebtor
has received reasonably equivalent value with respect to prepetition severance
payments in the context of Section 548 of the Bankruptcy Code.6958 As such, the
Examinerhasrelieduponthetotalityofthecircumstancestest.
Employment Contract as Used in Section 548(a)(1)(B)(ii)(IV). Section
548(a)(1)(B)(ii)(IV) requires the transfer to be made under an employment contract.
To date, there are no reported decisions interpreting the term employment contract
for purposes of this Section, nor is this term defined in the Bankruptcy Code.6959
Notably, neither the Bankruptcy Code nor case law provides insight into whether an

6958TheSecondCircuitandothershaveextensivelyaddressedseparationagreementsinthepostpetition

setting, namely whether a postpetition severance payment is entitled to priority as an administrative

expense. In StrausDuparquet, Inc. v. Local Union No. 3 Intl Brotherhood of Elec. Workers, AFLCIO (In re
StrausDuparquet),theSecondCircuitheldthatsuchpostpetitionseverancepaymentsareearnedatthe
time of severance. 386 F.2d 649, 651 (2d Cir. 1967) (holding that employees had earned severance pay
when terminated during pendency of bankruptcy were entitled to administrative claim, because such
paymentservedtorecompense[them]forcertainlossesattributabletodismissal(citationomitted));see
alsoSuppleev.BethlehemSteelCorp.(InreBethlehemSteelCorp.),479F.3d167,17475(2dCir.2007).Courts
inothercircuits,however,haveheldthatsuchpaymentsareearnedoverthecourseofemployment.See,
e.g.,UnitedSteelworkersofAm.,AFLCIO,CLCv.OhioCorrugatingCo.(InreOhioCorrugatingCo.),116B.R.
572, 579 (Bankr. N.D. Ohio 1990); In re Chicago Lutheran Hosp. Assn, 75 B.R. 854, 856 (Bankr. N.D. Ill.).
These cases have limited applicability to the prepetition severance payments at issue here because (1)
theyaddresspostpetitionseverancepaymentsand(2)theDuparquetlineofcasesmaybelimitedtoan
analysisofmoremodestseverancepaymentsthanthoseatissuehere.See,e.g.,InreHookerInvestments,
Inc.,145B.R.138,146150(Bankr.S.D.N.Y1992)(questioningvitalityofDuparquetlineofcasesinviewof
intervening changes to the Bankruptcy Code and Supreme Court precedent, noting that the Second
Circuitsruleconflictswithothercircuits,andexplainingthattherulemayhavenocontinuingvitality
whenappliedtohighpowered,highpricedexecutiveswithindividuallynegotiatedcontractsproviding
for substantial termination payments); cf. In re Jamesway Corp., 199 B.R. 836, 83940 (Bankr. S.D.N.Y.
1996).
6959SeeInreWorldCom,Inc.,361B.R.675,681(Bankr.S.D.N.Y.2007);seealso11U.S.C.101(providingno
definitionforemploymentcontract).

1878

agreement at the time of separation, as opposed to at the time of employment,

constitutesanemploymentcontractforpurposesofSection548(a)(1)(B)(ii)(IV).
Whilethetextofthestatutedoesnotindicatewhetherseparationagreementsare
a type of employment contract, the legislative history of Section 548(a)(1)(B)(ii)(IV)
suggests that separation agreements could be interpreted to fall within the ambit of
employment contracts. The legislative history generally notes that subsection IV was
added to make it easier for a trustee to avoid prepetition transfers.6960 Moreover,
Congress added subsection IV to enhance the recovery of avoidable transfers and
excessive prepetition compensation,suchasbonuses,paid to insidersof adebtor.6961
ThetypesoftransfersthatCongresssoughttoavoidincludegoldenparachutesand
otherpaymentsmadetoadebtorsexecutives.6962And,asonecourthasnoted,golden
parachutesandseparationagreementssharecertainkeysimilarities,suchthatagolden
parachutemaybeviewedasatypeofseverancepay.6963
In view of the legislative intent behind Section548(a)(1)(B)(ii)(IV) that suggests
that this provision be construed broadly so as to facilitate the recovery of excessive
prepetition compensation, the Debtors severance payments made pursuant to

6960H.R.REP.NO.10931(I),1402(2005).
6961Id.
6962See5CollieronBankruptcy,548.05[5](15thed.2005).Atthesametime,regularbonusesgranted

toasalesforce,ortoadivision,willlikelynotbevulnerableunderthissection,evenifthedebtordidnot
receivereasonablyequivalentvalueinexchange.Id..
6963InreHooker,145B.R.at149(Sincethetriggeringeventsofagoldenparachuteincludetheseverance
of the employment relationship, characterization of a particular payment as a golden parachute would
notprecludethepossibilitythatagoldenparachutecouldbeviewedasaformofseverancepay.).

1879

separationagreementsmaybeappropriatelyreviewedundersubsectionIVintheevent
thatacourtdeterminedthatsuchagreementsqualifyasemploymentcontracts.6964
Not in the Ordinary Course of Business as Used in Section
548(a)(1)(B)(ii)(IV). As with the term reasonably equivalent value, neither the
Bankruptcy Code nor its legislative history provide any guidance as to how the term
not in the ordinary course of business should be interpreted for purposes of
Section548(a)(1)(B)(ii)(IV).6965 Likewise, as of this writing, no Court has issued a
decision interpreting this term for purposes of a constructive fraudulent transfer
analysis.
Courts have interpreted ordinary course of business and related terms
extensively in connection with preferences under Section547,6966 indicating that the
ordinary course of business exception under Section547(c)(2) is to be construed
narrowly.6967 A narrow construction of the ordinary course of business exception in

6964The

Examiner notes that the court In re WorldCom articulated a number of factors to consider in
evaluating whether an agreement is an employment contract for purposes of 11 U.S.C. 502(b)(7)
(limiting the amount of a prepetition claim arising from the termination of an employment contract).
The In re WorldCom factors that support characterizing the agreements at issue here as employment
contracts include: (1) provision for compensation and benefits; (2)withholding for taxes and social
securitybenefits;and(3)constrain[t]s[on]theemployeefromcertainotheractivities.361B.R.at682.
6965See11U.S.C.101(providingnodefinitionfornotintheordinarycourseofbusiness);seealsoH.R.
Rep.No.10931(I)(same).
6966Foramoredetaileddiscussionofthelawofpreferences,seeAppendix1,LegalIssues,atSectionIV.D.
6967OfficialComm.ofUnsecuredCreditorsofEnronCorp.v.Martin(InreEnronCreditorsRecoveryCorp.),376
B.R.442,458(Bankr.S.D.N.Y.2007)(Further,the[Section547(c)(2)]defenseisnarrowlyconstrued.);see
also Jobin v. McKay (In re M & L Bus. Mach. Co.), 84 F.3d 1330, 1339 (10th Cir. 1996) (Additionally, the
defense should be narrowly construed.); J.P. Fyfe, Inc. v. Bradco Supply Corp., 96 B.R. 474, 476 (D.N.J.
1988)(notingthatthecourtshouldnotgiveuntrammeledaccesstosection547(c)(2),butshouldconstrue
thestatutenarrowly).

1880

Section548(a)(1)(B)(ii)(IV)wouldlikewiseseemappropriateinviewofCongressintent
tomakeiteasiertorecoverexcessiveprepetitioncompensation.6968
While the aim of the preference exception under Section 547(c)(2) is to leave
ordinaryfinancialrelationshipsundisturbed,theexceptiondoesnotinterferewiththe
goal of discouraging unusual action when the debtor is financially distressed and
slidinginto bankruptcy.6969Inaddition,as particularlyrelevant here,the Bankruptcy
CourtfortheSouthernDistrictofNewYorkstated,inthecontextofwhetherseverance
payments were preferences, that section 547(c)(2) is intended to protect recurring,
customary trade transactions, but not onetime payments in settlement of contractual
claims. Thus, certain courts have refused to apply it when confronted with a single
transactionbetweenacreditorandadebtor.6970
Courts have noted that, as a general matter, evaluation of ordinary course of
business under Section547(c)(2) is a peculiarly factual analysis6971 such that
determination of whether a transfer occurred in the ordinary course of business
dependsonthefactsandcircumstancessurroundingthepayments.6972

6968H.R.Rep.No.10931(I),at154.
6969Martin,376B.R.at459(citingMcKay,84F.3dat133940).
6970Id.at45960;seealsoid.at46264(notapplyingtheordinarycourseofbusinessexceptiontoseverance

payment);seealsoIntercontlPublns,Inc.v.Perry(InreIntercontlPublns,Inc.),131B.R.at550(same).The
Examinernotes,however,thatsomecourtshavedeterminedthatafirsttimetransfermaybeconsidered
tohavebeenwithintheordinarycourseofbusiness.SeeKlevenv.HouseholdBankF.S.B.,334F.3d638,642
43(7thCir.2003).
6971McClartyv.Colletta(InreD.C.T.Inc.),295B.R.236,239(Bankr.E.D.Mich.2003).
6972Jacobsv.MatrixCapitalBank(InreAppOnline.com,Inc.),315B.R.259,284(Bankr.E.D.N.Y.2004)(citing
Tolz v. Signal Capital Corp. (In re Mastercraft Graphics, Inc.), 157 B.R. 914, 919 (Bankr. S.D. Fla. 1993)); see

1881

(4) Findings
(a) LBHIAffiliateSeverancePayments6973
The Examiners concludes that an argument can be made that severance
paymentsmadebyLOTCtoDirectorMarkC.Malinmaybeconstructivelyfraudulent
andavoidablepursuanttoSection548oftheBankruptcyCodebecausetheyappearto
havebeenmade(1)forlessthanreasonablyequivalentvalue,(2)toorforthebenefitof
an insider, (3) under an employment contract and (4) not in the ordinary course of
business.
MalinhaddualtitlesasaDirectorofLOTC6974andasaVicePresidentofLBHI.6975
For his services in 2007, his previous full year at Lehman, Malin received $200,000 in
basepayand$2.7millioninadditionalcompensation.6976PursuanttohisMay13,2008
separationagreement,Malinwastoreceiveatotalof$790,000fromLOTCinpayments
over two dates. Malin was to receive a $250,000 payment about four weeks after his
successfulcompletionof[a]transitionperiod,(theperiodfromMay13,2008toJuly

also,e.g.,EverlockFasteningSys.,Inc.v.HealthAlliancePlan(InreEverlockFasteningSys.),171B.R.251,254
(Bankr.E.D.Mich.1994)(applyingtotalityofcircumstancestestinevaluatingordinarycourseofbusiness
defense);Richardsonv.Phila.Hous.Auth.(InreRichardson),94B.R.56,62(Bankr.E.D.Pa.1988)(same).
6973 For the severance payments discussed herein, the Examiner requested additional supporting
documentation,includingMalinshiringagreement,butsuchinformationwasnotobtained.
6974LOTCSOFAat37.
6975StatementofFinancialAffairsofLehmanBrothersHoldingsInc.,at338,InreLehmanBros.Holdings,
Inc.,No.0813555(Bankr.S.D.N.Y.Mar.13,2009)(hereinafterLBHISOFA).
6976DebtorsPeopleSoftHRSystem;emailfromLaurenSheridan,Alvarez&Marsal,toHeatherMcArn,
Jenner&Block,etal.(Jan.4,2010)(hereinafterSheridanEmail).OfMalins$2.7millioninadditional
compensation,$1,250,000wasincashand$1,450,000wasinstock.Id.

1882

31,2008),andanadditionallumpseparationpaymentof$540,000inJanuary2009.6977
In addition, Malin would continue to receive his regular salary through the earlier of
August 13, 2009 or his employment with another firm.6978 Finally, Malins agreement
providednodetailsconcerninganyentitlementtoequityawards.6979
Infact,LOTCpaidMalin$250,000onAugust26,2008,$135,000onSeptember19,
2008,andatotalof$50,000inregularsalaryinpaymentsbetweenJuneandSeptember
2008.6980TheExaminernotesthatthe$135,000paymentisexactlytwentyfivepercentof
the $540,000 additional lump sum separation payment payable in January 2009

LetterfromAnthonyJ.Collerton,ManagingDir.,Lehman,toMarkMalin,Dir.,Lehman,re:separation
fromemployment(May13,2008)[LBEXAM340331],at5,6(hereinafterMalinAgreement);LOTC
SOFAat37.
6978MalinAgreement,2,4[LBEXAM340331].
6979However,Malindidreceiveequityawardsatthetimeofhistermination.TheExaminersreviewof
Malins Executive Compensation Summary and Lehmans annual equity benefits plans setting forth
eligibilityandvestingprovisionsindicatesthatMalinsequityawardsatterminationwereconsistentwith
thosebenefitsplans.Inmoredetail,priortoJuly31,2008,Malinhad15,327vestedrestrictedstockunits
(RSUs)valuedatapproximately$264,207,and6,850stockoptionshavingnovalueatthatpointintime
becausetheirexercisepricewasaboveLehmansstockprice.PursuanttoLehmanspoliciessetforthin
its annual equity benefits plans for employees involuntarily terminated without cause, Malin became
entitledasofhisterminationdatetoadditionallyreceivevestingof86,142RSUsvaluedatapproximately
$1,493,707,andtoexercise24,417optionsthat,however,hadnovalueatthatpointintimebecausetheir
exercise price was higher than Lehmans stock price. Lehman Brothers, Mark C. Malin Executive
Compensation Summary as of September 12, 2008 [LBEXAM 5641402]; Lehman Brothers, 2003 Equity
Award Program Managing Director, pp. 3, 9 [LBEXAM 5641446]; Lehman Brothers, 2004 Managing
Director Equity Award Program, p. 2 [LBEXAM 5641442]; Lehman Brothers, 2005 Equity Award
Program for BonusEligible and ProductionBased Employees, pp. 4, 8 [LBEXAM 5641430]; Lehman
Brothers, 2006 Equity Award Program for BonusEligible and ProductionBased Employees, pp. 4, 9
[LBEXAM 5641417]; Lehman Brothers, 2007 Equity Award Program, pp. 2, 5 [LBEXAM 5641408];
Lehman Brothers, 2003 Stock Option Award, p. 2 [LBEXAM 5641466]; Lehman Brothers, 2004 Stock
OptionAward,p.2[LBEXAM5641404].TheExaminernotesthatpursuanttoLehmansannualequity
benefitsplans,MalinwouldhavereceivedthesamequantitiesandvaluesofRSUsandstockoptionshad
he voluntarily terminated. The Examiner also notes that Malin could not have received value for his
RSUsatthetimeofhisterminationbecause,thoughtheywerevested,theywerenotissued.
6980LOTCSOFAat37.
6977

1883

pursuanttohisseparationagreement.6981Inexchangeforhispaymentsandcontinued
salary,Malinagreed(1)toremainanactiveemployeeforapproximatelytwoandahalf
months,(2)nottodisparageLehmanand(3)toreleaseLehmanfromanyemployment
relatedclaims.6982
Reasonably Equivalent Value. The Examiners review of the circumstances
surrounding Malins severance payments indicates that the conditions that Malin
agreed to perform in his separation agreement may not have provided LOTC with
roughlythevalueitgaveinexchangeforitspayments.6983
Foremost, Malin was free to take employment at another firm at any point in
time, yet would nonetheless remain eligible to receive the $250,000 and $540,000
separationpayments.6984BecauseMalinwouldnotforfeithisseparationpaymentseven
ifhecommencedemploymentatadifferentfirm,heeffectivelydidnotprovideLOTC
withanyguaranteedperiodofnoncompetition.6985HadMalinbeenrequiredtoremain

The Examiner notes that the $135,000 payment could also represent a lump sum payment for the
remainder of Malins regular salary through August 13, 2009, minus applicable withholding. Malin
Agreement, 10 [LBEXAM 340331]. Yet, pursuant to his agreement, Malin was only to receive his
regularsalaryinalumpsumintheeventthathebecameemployedbyanotherfirm.Id.TheExaminer
alsonotesthatboththe$250,000andthe$135,000paymentarelistedintheLOTCSOFAasLBSpecial
Term Pay, and that the term special term is used by LBHI to denote separation payments for other
insideremployees.SeeLBHISOFAat246,253.
6982MalinAgreement3,DisparagingRemarks,CompleteRelease[LBEXAM340331].
6983InreFruehaufTrailerCorp.,444F.3dat205.
6984MalinAgreement,10[LBEXAM340331].Moreover,Malinwasonlyrequiredtobeoncallduring
regularbusinesshoursduringhistransitionperiod,anddidnothavetoappearintheofficeotherwise.
Id.at3.
6985InthecourseoftheExaminersinvestigationofpotentiallyconstructivefraudulenttransfersmadeby
LBHI Affiliates to insider employees, the Examiner received and reviewed information concerning
severancepaymentsmadebyLBHItoseveralinsideremployees.TheExaminernotesthat,unlikeMalin,
6981

1884

at LOTC or to have been unable to compete for a specific duration, his severance
paymentscouldbeviewedasapproximatingthecompensationMalinwouldotherwise
havebeenpaidforthatsameduration.6986
Moreover, Malin was aware of Lehmans failing financial condition and, by
September15,2008,LBHIsbankruptcy.AtthetimeMalinreceivedtheAugust26,2008
($250,000) severance payment, LBHI was twenty days from filing its bankruptcy
petition. At the time Malin received the accelerated September 19, 2008 ($135,000)
severance payment, LBHI had already filed for bankruptcy. Courts have avoided
bonuspaymentstoinsidersaslackingreasonablyequivalentvaluewhere,inpart,the
partieswereawareofthedebtorsdecliningfinancialcondition.6987
Inaddition,severalcourtshaveindicatedthatpaymentstoinsiderssuggestthe
absenceofanarmslengthtransactionbetweenthedebtoranditscreditor,suchthatthe

theLBHIinsideremployeeswererequiredtonotcompetewithordisparageLehmanfortheperiodsof
timebetweentheirseparationagreementsandtheirseverancepayments.Theseinsideremployeeswould
forfeittheirseverancepaymentsiftheycommencedotheremploymentpriortothescheduledpayment
dates. See, e.g., Letter from Tracy Binkley, Managing Dir., Lehman, to Michael Gelband, Global Head,
Lehman, re: separation from employment (May 1, 2007), at p. 2 [LBEXAM 340311]; Letter from Tracy
Binkley,ManagingDir.,Lehman,toAlexKirk,CoChiefOperatingOfficer,Lehman,re:separationfrom
employment(Feb.4,2008),atpp.12[LBEXAM340324].
6986Malinstotalcompensationforhispreviousfullyearwas$2.9million.SheridanEmail.Forexample,
ifMalinsagreementhadasixmonthnoncompete,aseveranceagreementofabout$1.5millioncouldbe
viewedasapproximatingthecompensationheotherwisewouldhaveearnedduringthattime.
6987ThecourtinArnoldavoidedbonuspaymentstoinsidersaslackingreasonablyequivalentvalueinpart
becauseitwasobvioustodefendantsandEnronthatEnrons2001profits,ifany,fromwhichtopayany
2001 bonuses would be significantly lower than in prior years or nonexistent. Arnold, 2005 Bankr.
LEXIS3261,at*122.

1885

debtorhasnotreceivedreasonablyequivalentvalueinthecourseofthetransaction.6988
Finally, the nonspecific releases from claims or litigation contained in Malins
separation agreement do not appear to have provided LOTC with any significant
value.6989TheExaminerinInreRevcoD.S.,Inc.questionedthevalueprovidedbysuch
releasesbecausetheydidnotrelatetoanyspecificclaimsorlitigation.6990
To or For the Benefit of an Insider Under an Employment Contract. The
Examiner finds that, as a director of LOTC, Malin was likely an insider.6991 The
Examiner also finds that, consistent with the legislative intent behind Section
548(a)(1)(B)(ii)(IV), Malins separation agreement may be considered an employment
contract.6992
NotintheOrdinaryCourseofBusiness.Whilenocourthasinterpretednotin
the ordinary course of business, the Examiner finds that the timing of Malins
severance payments does not appear to be ordinary. The payments were made just
prior to and just followingLBHIs bankruptcy.Moreover,the $135,000September 19,
2008 payment was not made in accordance with Malins separation agreement. Such

See,e.g.,InreFruehaufTrailerCorp.,444F.3dat216(holdingthatbenefitofamendmenttopensionplan
reviewedandapprovedbyinsiderslackedreasonablyequivalentvalueinpartduetolackofarmslength
transaction);InreComputerPersonalitiesSys.,2002Bankr.LEXIS1625,at*14.
6989MalinAgreement,CompleteRelease[LBEXAM340331].
6990 1990 Bankr. LEXIS 2966, pt. 1 at *130 (Bankr. N.D. Ohio 1990). The Examiner also notes that the
separation agreements do not contain evidence of any calculation in support of the amounts of the
severancepayments.ThebankruptcycourtinInreComputerPersonalitiesSys.heldthatabonuslacked
reasonablyequivalentvalueinpartduetotheabsenceofevidenceforitscalculation.2002Bankr.LEXIS
1625,at*16.
6991LOTCSOFAat4.
6992H.R.REP.NO.10931(I),1402(2005).
6988

1886

payment,ifitrepresentedaportionofthe$540,000payableinJanuary2009,waspaid
more than three months in advance of the date set forth in Malins separation
agreement.6993 And if the $135,000 payment was not made pursuant to Malins
agreement, then it also appears to have been made not in the ordinary course of
business.Finally,inMartin,theU.S.BankruptcyCourtfortheSouthernDistrictofNew
York stated, in the context of analyzing potential preferences, that onetime transfers
suchasseverancepaymentsarenotrecurring,customarytradetransactionsforwhich
theordinarycourseofbusinessdefenseunderSection547applies.6994
(b) LBHIAffiliateBonusPayments
The Examiner concludes that there does not appear to be sufficient evidence to
support colorable claims that bonus guarantees at hiring and bonus buyouts paid by
LBHIAffiliates pursuant to employmentcontractswere constructivelyfraudulent and
avoidablepursuanttoSection548oftheBankruptcyCode.
CertainLBHIAffiliateinsidersreceivedbonusguaranteesathiring.OnJanuary
31, 2008, LBDP paid Managing Director Locke Randall McMurray a $567,529 bonus
guaranteeathiringpursuanttoaJune27,2007employmentcontract.6995Onthatsame

6993MalinAgreement,6[LBEXAM340331].

Martin,376B.R.at459(citingMcKay,84F.3dat133940).

6994

6995LetterfromScottWilloughby,ManagingDir.,Lehman,toLockeMcMurray,ManagingDir.,Lehman,

re:employmentcontract(June27,2007)[LBEXAM023996](hereinafterMcMurrayAgreement);Global
Notes Pertaining to Debtors Schedules and Statements, at 31, In re Lehman Bros. Holdings, Inc., No. 08
13899(Bankr.S.D.N.Y.Mar.13,2009),(hereinafterLBDPSOFA).

1887

date,BNCMortgagepaidManagingDirectorThomasNotoa$621,669bonusguarantee
athiringpursuanttoanApril2,2007employmentcontract.6996
McMurrayandNotoalsoreceivedbonusbuyoutspursuanttotheiremployment
contracts. On September 21, 2007, McMurray received a $78,770 bonus buyout from
LBDP pursuant to a June 27, 2007 employment contract.6997 McMurrays employment
contract provided him with this compensation in the form of special cash awards
becauseMcMurraywouldforfeitcertain[]awardsasaresultof[his]separation...
fromhispreviousemployer.6998
Similarly, on October 5 and December 28, 2007, Noto received a total of
$1,219,167 from BNC Mortgage pursuant to an April 2, 2007 employment contract.6999
NotoscontractprovidedhimwithcompensationintheformofSpecialCashAwards
because Noto would forfeit certain longterm incentive payments as a result of [his]
separation. . .fromhis previous employer.7000Notoscontractadditionally provided
himwith$816,667intheeventofthesaleortransferofthestockorassetsofhisformer

6996Letter from Scott Kimmel, Managing Dir., Lehman, to Thomas Noto, Dir., Lehman, re: employment

contract (Apr. 2, 2007) [LBEXAM 024128] (hereinafter Noto Agreement); Global Notes Pertaining to
DebtorsSchedulesandStatements,at31,InreLehmanBros.Holdings,Inc.,No.0910137(Bankr.S.D.N.Y.
Mar.13,2009)(hereinafterBNCSOFA).TheExaminernotesthatNotoisidentifiedonBNCsSchedule
3c,thoughhishiringagreementindicatesthatheisanemployeeofLBI.
6997McMurrayAgreementatp.3[LBEXAM023996];LBDPSOFAat31.
6998McMurrayAgreementatp.3[LBEXAM023996].
6999NotoAgreementatp.2[LBEXAM024128];BNCSOFAat31.
7000NotoAgreementatp.2[LBEXAM024128].

1888

employer,Ameriquest.7001AmeriquestwassoldtoCitigrouponoraroundAugust31,
2007.7002
The Examiner concludes that there is insufficient evidence to support colorable
claimsthattransfersmadebyLBDPandBNCMortgagewereconstructivelyfraudulent
andavoidablepursuanttoSection548oftheBankruptcyCodebecauseLBDPandBNC
Mortgage appear to have received reasonably equivalent value in exchange for the
respectivebonuspayments.
McMurrayandNotosbonusbuyoutsandbonusguaranteesathiringappearto
have served as inducements for them to leave their prior employment and to come
work for LBDP and BNC Mortgage, respectively.7003 The Examiner also notes that
McMurray and Notos employment contracts specify what each insider forewent in
leaving his prior employment, and how the particular bonus buyout was meant to
compensateforthatloss.7004
(c) LBHIsAssumptionsofLimitedPartnershipInterests
The Examiner notes that LBHI assumed certain Fuld and Gregory limited
partnership interests prior to LBHIs bankruptcy. Specifically, approximately two

7001Id.
7002The amounts presented in Notos employment contract dated April 2, 2007 were exactly 5% higher

than the bonus buyout amounts disbursed to him. The Examiner does not perceive this difference to
materiallyimpacttheanalysis.
7003InreIntercontlPublns,Inc.,131B.R.at549(holdingthatbonuspaymentsweremadeinexchangefor
reasonablyequivalentvalueinpartwhenthosepaymentswerenecessaryandreasonabletoinduce[the
employee]toworkfor[them]).
7004Cf. In re Computer Personalities Sys., 2002 Bankr. LEXIS 1625, at *16 (holding that a bonus lacked
reasonablyequivalentvalueinpartduetotheabsenceofevidenceforitscalculation).

1889

monthspriortothedateofLBHIsbankruptcypetition,FuldandGregoryreceived,by
wire transfer from LBHI, cash payments in exchange for their individual ownership
interests in limited partnerships.7005 Significantly, both Fuld and Gregory sold their
limitedpartnershipintereststoLBHIbecausetheyapparentlyfacedfinancialdifficulties
andneededliquidity.7006Fuldnotedthathesoldhislimitedpartnershipinterestsrather
than his stocks for fear of sending negative signals to the market.7007 The Board
employed this same reasoning in approving Fuld and Gregorys sale of their limited
partnerships in lieu of stock.7008 Before analyzing whether these payments constitute
constructively fraudulent transfers, it is first necessary to understand how the
partnershipfundsoperated.

7005Those

partnership funds were Lehman Brothers Capital Partners I, Lehman Brothers Capital
Partners II, Lehman Brothers Capital Partners III, Lehman Brothers Capital Partners IV, Lehman
BrothersMerchantBankingCapitalPartnersVI(Global),LehmanBrothersMerchantBankingCapital
PartnersVI(Europe),LehmanBrothersVentureCapitalPartnersI,LehmanBrothersVentureCapital
PartnersII,LehmanBrothersVentureCapitalPartnersII(Escrow),LehmanBrothersCommunication
Capital Partners I, Lehman Brothers Partnership Account 2000/2001, L.P., Lehman Brothers MLP
OppCapPartners,andLehmanBrothersLoanOppGroupFund.Debtors,DFJGBuyoutAnalysis,at
pp. 29 [LBEXAM 312390]; see also Debtors, Entries related to Richard Fuld & Joseph Gregorys
PartnershipInterestDisbursements(hereinafterDisbursementSchedule)[LBEXAM312400];Lehman
Brothers, Assumption Agreement at p. 5 (hereinafter Fuld Assumption Agreement) [LBEXAM
154086]; Lehman Brothers, Assumption Agreement, at p. 6 (hereinafter Gregory Assumption
Agreement) [LBEXAM 154232]; Memorandum of Conference between B. McCarthy and A. Rao,
Alvarez&Marsal,andT.Fleming,Duff&Phelps,etal.(Oct.1,2009),atp.2;MemorandumofConference
betweenB.McCarthy,Alvarez&Marsal,andA.Kopelman,Jenner&Block,etal.(Oct.20,2009),atp.1.
7006ExaminersInterviewofRichardS.Fuld,Jr.,Dec.9,2009,atpp.4,16;ExaminersInterviewofJohn
Akers,Apr.22,2009,atp.9.
7007ExaminersInterviewofRichardS.Fuld,Jr.,Dec.9,2009,atpp.4,16.
7008LBHI,MinutesoftheCompensationandBenefitsCommittee,June19,2008,atp.5[LBEXAM003769]
(discussingpotentialdisclosureimplicationsforacontemplatedloantocertainseniorexecutives.See
also LBHI, Minutes of the Compensation and Benefits Committee, July 1, 2008, at pp. 45 [LBEXAM
003812](discussingLoanandLiquidityforCertainExecutives).

1890

The Debtors offered certain employees the opportunity to participate in

employeeonly investment funds structured as limited partnerships (hereinafter
employeeonly funds).7009 These funds were only available to employees who were
accredited investors,7010 and included up to approximately 1,200 participants at a
giventime.7011Withoneexception,theassetsinthosefundswereidenticaltothosein
investment funds offered to thirdparty accredited investors by LBHIs Private Equity
group(hereinafterthirdpartyfunds).7012
Significantly, the limited partnership interests were considered illiquid
investments.7013Theintereststypicallyhadtenyeartermsandwerenotdesignedtobe
readily redeemed. Indeed, a buyback of interests normally occurred only if a

7009Participationinlimitedpartnershipsrequiredacommitmenttoinvestacertaindollaramountinthe

fund.MemorandumofConferencebetweenB.McCarthy,Alvarez&Marsal,andA.Kopelman,Jenner&
Block,etal.(Oct.20,2009),atp.1.Thisamountwasnotcollectedinfullattheinitialfunding.Id.Rather,
portionsofitwerecalledorcollectedatvarioustimesfromtheinitialfundingonward.Id.Failureto
provide a contribution on a call resulted in default, i.e., forfeiture of 25% of the participants total
investment(nottotalcommitment)backtothefund.Id.Inaddition,evenafteraparticipantexperienced
a 25% forfeiture penalty, the fund still exercised full discretion over the interest and could subject that
interesttofurtherforfeiturepenaltiesformissedcapitalcallsgoingforward.Id.Theabilitytoinvestin
the employeeonly funds was subject to the Compensation and Benefits Committee, as participation in
these funds was a benefit to the participants. See LBHI, Minutes of the Compensation and Benefits
Committee,July1,2008,atpp.45[LBEXAM003812].
7010See17C.F.R.230.501(1989);MemorandumofConferencebetweenB.McCarthy,Alvarez&Marsal,
andA.Kopelman,Jenner&Block,etal.(Oct.20,2009),atp.1.
7011Id.
7012Id.;MemorandumofConferencebetweenB.McCarthy,Alvarez&Marsal,andJ.Molenda,Jenner&
Block,etal.(Nov.6,2009),atp.1(statingthatLehmanBrothersCapitalPartnersIII,L.P.fundheldone
uniqueassetnotheldbyathirdpartyfund).
7013Memorandum of Conference between B. McCarthy and A. Rao, Alvarez & Marsal, and T. Fleming,
Duff&Phelps,etal.(Oct.1,2009),atp.1.

1891

participant left the company or passed away.7014 The only way for a participant to
monetizeaninterestwastosellittoanotheremployeeparticipant,ortoLBHI,anLBHI
Affiliate,oranotherLehmanentity.
Asforvaluationoftheprivate assetswithinthethirdpartyandemployeeonly
funds, prices were determined by an internal valuation committee, which included
personnelinchargeofprivateequityandmerchantbanking,aswellasrepresentatives
fromriskmanagementandtherelevantproductcontrollergroups.7015Asforvaluation
of the public assets within the thirdparty and employeeonly funds, pricing
informationwasobtainedfrompubliclyavailablepricingsources.Becausetheinternal
committeevaluedthecommonassetsintheemployeeonlyandthirdpartyfundsona
consistent basis, the Examiner did not investigate further the valuation of the
componentassetsoftheemployeeonlyfunds.
PaymentRecipientsandAmounts.Againstthisbackdrop,onJuly17,2008Fuld
and Gregory received wire payments of $3,933,929 and $4,614,564, respectively, from
LBHIonitsownbehalfandonbehalfofothernonDebtorentitiesinexchangefortheir
limitedpartnerships interests.The CompensationandBenefitsCommittee authorized

7014Id.;MemorandumofConferencebetweenB.McCarthy,Alvarez&Marsal,andJ.Molenda,Jenner&

Block,etal.(Nov.6,2009),atp.1.
7015Memorandum of Conference between B. McCarthy, Alvarez & Marsal, and A. Kopelman, Jenner &
Block,etal.(Oct.20,2009),atp.1;MemorandumofConferencebetweenB.McCarthy,Alvarez&Marsal,
andJ.Molenda,Jenner&Block,etal.(Nov.6,2009),atp.1.

1892

anddirectedLBHIspurchasesoftheinterests.7016ThepurchasesofFuldandGregorys
interestsappeartohavebeenanexceptiontoLehmansrulethatpartnershipinterests
werenotredeemableexceptoneventssuchasdeathorseverance.7017
Analysis. The Examiner analyzed LBHIs purchases of Fuld and Gregorys
interestsaspotentiallyconstructivefraudulenttransfersunderSubsectionIIofSection
548.7018
InterestoftheDebtorinProperty.Asathresholdmatter,LBHIspurchasesof
theFuldandGregorylimitedpartnershipinterestsinvolvedatransferofaninterestof
thedebtorinproperty.LBHIdirectlyorindirectlyfundedthepurchasesofFuldand
Gregoryslimitedpartnershipinterests.Withrespecttotwoofthefunds,LBHIdirectly
purchased the limited partnership interests on behalf of itself as a general partner.7019
With respect to the remaining funds, LBHI indirectly funded the purchases of the
limited partnership interests by funding the general partners purchases of those
interests.7020Inthelattercase,LBHIthenrecordedintercompanyreceivablesfromeach

7016Minutes from Compensation & Benefits Committee (July 1, 2008), at pp. 45 [LBEXAM 003812]; see

alsoExaminersInterviewofJohnAkers,Apr.22,2009,atp.9(discussinghowLBHIBoardofDirectors
didnotwantFuldorGregorytosellstock).
7017Memorandum of Conference between B. McCarthy, Alvarez & Marsal, and A. Kopelman, Jenner &
Block, et al. (Oct. 20, 2009), at p. 1 (stating that only Fuld and Gregory received limited partnership
buyouts). The only apparent exception to this rule was one buyout in which the owner of the limited
partnership interests had divorced, and because the interests were not severable, Lehman agreed to
purchasetheinterests.Id.
701811U.S.C.548(a)(1)(B)(ii)(II).
7019Fuld Assumption Agreement at p. 1 [LBEXAM 154086]; Gregory Assumption Agreement at p.1
[LBEXAM154232].
7020DisbursementSchedule,atp.3[LBEXAM312403].

1893

ofthesegeneralpartnersasaresultoffundingontheirbehalf.7021AsofNovember2009,
LBHIhadnotyetcollectedthosereceivables.7022
Reasonably Equivalent Value. It appears that there is sufficient evidence to
concludethatLBHIreceivedreasonablyequivalentvalueinexchangeforthepurchases
oftheFuldandGregorylimitedpartnershipinterests.LBHIvaluedthepublicassetsin
the employeeonly investment funds in accordance with publicly available pricing
sources.LBHIvaluedtheprivateassetsinthosefundsinaccordancewiththevaluesit
derived by way of an internal valuation committee. LBHI applied those private asset
valuations consistently to both the employeeonly investment funds and thirdparty
fundsavailabletoaccreditedinvestorsinthegeneralpublic.
4.

ExaminersInvestigationofPossibleBreachesofFiduciaryDutyby
LBHIAffiliateDirectorsandOfficers(FifthBullet)

ThisSectionoftheReportaddressesthefifthbulletoftheExaminerOrder,which
asks whether there exist any colorable claims for breach of fiduciary duties and/or
aidingorabettinganysuchbreachesagainsttheofficersanddirectorsofLBCCand/or
other Debtors arising in connection with the financial condition of the Lehman
enterprise prior to the commencement of the LBHI Chapter 11 case on September 15,

7021Id.
7022Memorandum

of Conference between B. McCarthy, Alvarez & Marsal, and J. Molenda, Jenner &
Block,etal.(Nov.6,2009),atp.1.

1894

2008.7023 To carry out his investigation, the Examiner reviewed the actions of the
officersanddirectorsoftheLBHIAffiliates7024andanalyzedwhetherthoseofficersand
directorsfulfilledorbreachedtheirfiduciaryduties.TheExaminerconcludes:
1.

Theevidencedoesnotsupporttheexistenceofcolorableclaimsforbreaches
offiduciarydutybytheofficersanddirectorsofanyoftheLBHIAffiliatesin
connectionwiththefinancialconditionoftheLehmanenterprisepriortothe
commencementoftheLBHIChapter11case.

2.

The evidence does not support the existence of colorable claims for aiding
andabetting abreach offiduciaryduty by theofficersand directors ofany
LBHI Affiliates in connection with the financial condition of the Lehman
enterprisepriortothecommencementoftheLBHIChapter11case.

Of the LBHI Affiliates considered in this Section, one entity LCPI7025 was
incorporated in New York, and the remaining seven entities LOTC,7026 LBDP,7027
LBCC,7028BNCMortgageLLC,7029LBFP,7030LBCS7031andLBSF7032wereincorporatedin

7023Ordersignedon1/16/09DirectingAppointmentofanExaminerPursuanttoSection1104(c)(2)ofthe

BankruptcyCode,atp.3,DocketNo.2659,InreLehmanBrothersHoldingsInc.,etal.,No.0813555(Bankr.
S.D.N.Y.Jan.16,2009).
7024For this Section of the report the Examiner has excluded CES Aviation IX, CES Aviation V, CES
Aviation and other LBHI Affiliate Single Purpose Entities. Because these entities were relatively
insignificant when compared to the other LBHI Affiliates, the Examiner concluded that it was an
imprudentuseofestateresourcestoinvestigateanypotentialclaimsfurther.Thus,allreferencestoLBHI
AffiliatesmadeinthisSectionIII.B.4shouldbeconstruedasreferringonlytoLOTC,LBDP,LBCC,BNC
MortgageLLC,LBFP,LBCS,LBSFandLCPI.

ThisSectionIII.B.4addressesonlythefiduciarydutiesoftheLBHIAffiliatesenumeratedabove.
It does not address the fiduciary duties of the directors and officers of LBHI, which is dealt with
elsewhereinthisReport.SeeSectionIII.A.1ofthisReportforadiscussionofthefiduciarydutiesofthe
directorsandofficersofLBHI.
7025Lehman,LCPIWorldRecordsReport(Sept.15,2008)[LBEXLL027825].
7026Lehman,LOTCWorldRecordsReport(Sept.15,2008)[LBEXLL027852].
7027Lehman,LBDPWorldRecordsReport(Sept.15,2008)[LBEXLL027856].
7028Lehman,LBCCWorldRecordsReport(Sept.15,2008)[LBEXLL027848].
7029Lehman,BNCMortgageLLCWorldRecordsReport(Sept.15,2008)[LBEXLL027795].
7030Lehman,LBFPWorldRecordsReport(Sept.15,2008)[LBEXLL027860].
7031Lehman,LBCSWorldRecordsReport(Sept.15,2008)[LBEXLL027844].

1895

Delaware.ThisSectionfirstanalyzestheactionstakenbythedirectorsandofficersof
LOTC, LBDP, LBCC, BNC Mortgage LLC, LBFP, LBCS and LBSF under Delawares
fiduciary duty laws. Then this Section analyzes the actions taken by directors and
officersofLCPIunder NewYorksfiduciary duty laws.Finally, thisSection analyzes
the actions taken by directors and officers of LBSF under Delawares aiding and
abettingabreachoffiduciarydutylaws.
a) FiduciaryDutyStandardforaWhollyOwnedAffiliateSubsidiary
underDelawareLaw
Because LOTC, LBDP, LBCC, BNC Mortgage LLC, LBFP, LBCS and LBSF are
incorporatedinDelaware,theactionsofthoseentitiesaregovernedbyDelawarelaw.7033
In Delaware, directors and officers have fiduciary duties of care, loyalty, and good
faith.7034Includedinthosedutiesarethedutytomonitorandthedutyofcandor.7035The
fiduciarydutiesofthedirectorsofawhollyownedsubsidiarynormallyflowdirectlyto
the parent corporation as sole shareholder.7036 Consequently, a director of a wholly
ownedsubsidiarycorporationmayactinawaythatbenefitstheparentbutnonetheless

7032Lehman,LBSFWorldRecordsReport(Sept.15,2008)[LBEXLL027833].
7033SeeTeleglobeUSAInc.v.BCEInc.(InreTeleglobeCommcnsCorp.),493F.3d345,38586(3dCir.2007).

Appendix1,LegalIssues,atSectionII.
7034Gantler v. Stephens, 965 A.2d 695, 70809 (Del. 2009) (holding that fiduciary duties of officers are
identical to those of directors); See, e.g., Desimone v. Barrows, 924 A.2d 908, 935 (Del. Ch. 2007); In re
TranskaryoticTherapies,Inc.,954A.2d346,35663(Del.Ch.2008).Appendix1,LegalIssues,atSectionII.A.
7035See,e.g.,Desimonev.Barrows,924A.2d908,935(Del.Ch.2007);InreTranskaryoticTherapies,Inc.,954
A.2d346,35663(Del.Ch.2008).Appendix1,LegalIssues,atSectionII.A.
7036SeeAnadarkoPetrol.Corp.v.PanhandleE.Corp.,545A.2d1171,1174(Del.1988).

1896

causes financial harm to the subsidiary, without violating that directors fiduciary
duty.7037
Theaboveanalysisassumes,asitmust,thatthesubsidiaryissolventwhensuch
actionsaremade.Ifthesubsidiaryisinsolvent,however,thedutiesofthedirectorsof
thesubsidiaryceasetoflowtotheparentcorporationandflowinsteadtothesubsidiary
corporationitselfand,throughthecorporation,toitscreditorsandshareholders.7038If
the subsidiary subsequently becomes insolvent, however, that does not retroactively
callintoquestionthepropriety ofactionstakenforthebenefitoftheparentwhilethe
subsidiarywasstillsolvent.7039
Regardlessofsolvency,toestablishabreachofaduty,onemustfirstovercome
the presumption established by the business judgment rule. Under the traditional
formulationofthebusinessjudgmentruleastodirectors,thereisapresumptionthat
inmakingabusinessdecisionthedirectorsofacorporationactedonaninformedbasis,
ingoodfaithandinthehonestbeliefthattheactiontakenwasinthebestinterestsof

7037InreTeleglobeCommcnsCorp.,493F.3dat36667,n.24([T]hereisnothingwrong(orevenunusual)

aboutaparentcausingitswhollyownedsubsidiarytoactinawaythatbenefitsthecorporatefamilybut
harms theindividualsubsidiary.)(citing TrenwickAm. Litig. Trustv.Ernst& Young., 906 A.2d 168,192
(Del. Ch. 2006), affd sub nom. Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007) ([T]he final
judgmentoftheCourtofChanceryshouldbeaffirmedonthebasisofandforthereasonsassignedbythe
CourtofChancery....)).
7038InreScottAcquisitionCorp.,344B.R.283,290(Bankr.D.Del.2006);seealsoTrenwick,906A.2dat195,n.
75.
7039Trenwick,906A.2dat202.

1897

thecompany.7040Thus,acourtwillnotsubstituteitsjudgmentforthatoftheboardif
thelattersdecisioncanbeattributedtoanyrationalbusinesspurpose.7041
Directors or officers of an insolvent subsidiary still enjoy the protection of the
business judgment rule in carrying out their duties, such that only grossly negligent
actionsorinactionswillgiverisetoliability.7042Insolvencydoesnotsubjectdirectorsto
anygreaterscrutinyinactingonbehalfofcreditorsthanthescrutinytowhichadirector
ofasolventcorporationwouldbesubjectedinundertakingactsonbehalfofitsparent
corporation.7043Whilethepartytowhomthedirectorsowetheirfiduciarydutiesshifts
uponinsolvency,thedegreeofscrutinyappliedtotheiractionsandtheapplicabilityof
thebusinessjudgmentruleremainsunchanged.7044
Directors or officers who hold obligations to parties other than the party to
whom they owe fiduciary duties are not protected by the business judgment rule.7045
TheDelawareGeneralCorporationLaw,however,establishesthatatransactionisnot
voidorvoidablesolelybecausethepartyisinterestedifanyoneofthefollowingthree
conditionsismet:(1)theinteresteddirectorsstatusisdisclosedorknowntotheboard
of directors or committee, and the board authorizes the transaction; (2) the interested

7040UnocalCorp.v.MesaPetroleumCo.,493A.2d946,954(Del.1985)(quotingAronsonv.Lewis,473A.2d

805,812(Del.1984))(internalquotationmarksomitted).
7041Id.(quotingSinclairOilCorp.v.Levien,280A.2d717,720(Del.1971));SeeAppendix1,LegalIssues,at
SectionII.A.1ofthisReportforamoredetailedanalysisofthebusinessjudgmentrule.
7042Trenwick,906A.2dat174.
7043Id.at195,n.75.
7044For a more detailed discussion of fiduciary duties of directors and officers of whollyowned
subsidiaries,seeAppendix1,LegalIssues,atSectionII.D.
7045Cede&Co.v.Technicolor,Inc.,634A.2d345,362(Del.1993).

1898

directors status is disclosed or known to the shareholders, and the transaction is

approved in a good faith vote by the shareholders; or (3) the transaction is fair to the
corporation.7046InTrenwick,theplaintiffalitigationtrustattemptedtoarguethatthe
directors and officers of the subsidiary were not disinterested in transactions with the
parent corporation due to the directors and officers status as employees of the
parent.7047 At the point the subsidiary became insolvent, thelitigation trustee
argued,the directors were no longer disinterested in transactions with the parent
becausetheirrelationshipwiththeparentputthemonbothsidesofthetransaction.7048
This placed the directors of the subsidiary in a position where their fiduciary duty to
theirparentemployer(transactioncounterparty)conflictedwiththeirfiduciarydutyto
the subsidiarys creditors.The courtdisagreed with the trustees contention that the
subsidiary was, in fact, insolvent at the time of the questioned transaction. The court
didnotreachthequestionofwhetherinsolvencyrenderedthedirectorsinterestedina
transaction with the parent but nonetheless commented in dicta that it was entirely
reasonableinaparentsubsidiaryrelationshipforthedirectorsofthesubsidiarytohave
acloserelationshipwiththeparentandinterestintheparentscontinuedsuccess.7049
The Trenwick Court recognized the unity of interest that exists between the
directorsofawhollyownedsubsidiaryandtheparentcorporationwhenthesubsidiary

7046Del.CodeAnn.tit.8,144(a)(1)(3).
7047Trenwick,906A.2dat20001.
7048Id.
7049Id.at201.

1899

is solvent. However, where a director or officer of an insolvent subsidiary is also an

employee of the parent corporation, a court may find the loyalties of that director or
officer are divided between its parentemployer and its creditorfiduciaries. A court
may find such director interested and not entitled to the business judgment rules
protection.Absenttheprotectionofthebusinessjudgmentrule,acourtwouldreviewa
transaction between parent and subsidiary under the heightened entire fairness
standard.
Theentirefairnessrulerequiresthecourttotakeastricterviewofachallenged
transaction than under the more deferential business judgment rule.7050 Under the
entirefairnessstandard,directorsmustshowthatthetransactionwasaproductoffair
dealing and that the corporation received a fair price.7051 The court will consider all
relevant factors to determine whether the transaction was fair.7052 In order for a
transaction to satisfy entire fairness, directors must demonstrate their utmost good
faithandthemostscrupulousinherentfairnessofthebargain.7053Hence,ifadirectoris
interested,employmentofproperproceduresalonewillnotprotectthedirector.
Applyingtheabovediscussedframework,theExamineranalyzedtheactionsof
the LBHI Affiliatesdirectors and officers. The Examiner found five LBHI Affiliates
LOTC,LBDP,LBCC,BNCMortgageLLC,LBFPweresolventasofasMay31,2008

7050Weinbergerv.UOP,Inc.,457A.2d701,710(Del.1983).
7051Id.711.
7052Id.
7053Id.

1900

andatleast through August31, 2008.7054TheExaminerconcludes that, sincedirectors

andofficersofwhollyownedsubsidiariesowedutiestotheirparentswhilesolvent,the
evidence does not support the existence of a colorable claim for breaches of fiduciary
dutiesbythedirectorsandofficersofthesefiveLBHIAffiliates.
The Examiner found two LBHI Affiliates LBCS and LBSF to have been
borderline solvent as of May 31, 2008 and as of August 31, 2008, meaning that their
balance sheets showed assets just slightly in excess of liabilities and a minimal write
down of asset values or a small unaccounted for liability would render these entities
insolvent.7055UnderDelawarelaw,becomingmarginallysolventorenteringthezone
of insolvency does not broaden the fiduciary duties of a subsidiarys directors or
officers to include a duty to creditors.7056 Rather, the directors and officers of a
marginallysolventwhollyownedsubsidiaryowedutiestotheirparents,justaswould
thedirectorsandofficersofafirmlysolventwhollyownedsubsidiary.Forthisreason,
theExaminerconcludesthattheevidencedoesnotsupporttheexistenceofacolorable
claimforbreachoffiduciarydutyagainstthedirectorsandofficersofLBCSorLBSF.

7054SeeSectionIII.B.3.cofthisReportforananalysisofthesolvencyoftheLBHIAffiliates.
7055SeeSectionIII.B.3.cofthisReportforananalysisofthesolvencyoftheLBHIAffiliates.
7056SeeN.Am.CatholicEducationalProgrammingFoundation,Inc.v.Gheewalla,930A.2d92,101(Del.2007);

seealsoTrenwickAm.Litig.Trustv.Ernst&Young,L.L.P.,906A.2d168,173(Del.Ch.2006),affdsubnom.
TrenwickAm.Litig.Trustv.Billett,931A.2d438(Del.2007).

1901

b) FiduciaryDutyStandardforaWhollyOwnedAffiliateSubsidiary
underNewYorkLaw
LCPIwasincorporatedinNewYork,andtheactionsofitsdirectorsandofficers
will be evaluated under New York law. Directors and officers of New York
corporationsowetheshareholdersofthecorporationsthesamegeneraldutiesofcare,
loyalty and good faith that directors of Delaware corporations owe shareholders.7057
AlthoughNew York courts have not delineated a duty to monitor within the same
parametersasDelawarecourts,NewYorklawdoesholdofficersanddirectorsofNew
York corporations liable for the actions of subordinates that should have been
discoverable by reasonable inquiry.7058 Thus, courts evaluating claims against officers
anddirectorsofNewYorkcorporationsforbreachesoffiduciarydutywouldutilizea
verysimilarframeworktothatestablishedunderDelawarelawforbreachesoftheduty
tomonitor.
InNewYork,thebusinessjudgmentruleprotectsthedecisionsofdisinterested
directors and officers against inquiry into the substance of a business decision.7059

7057SeeNechisv.GramatanGardens,Inc.,231N.Y.S.2d383,385(N.Y.Sup.1962)(holdingthatdirectorsand

officersowedutiesofcare,goodfaithandloyaltyandthattheirownpersonalinterestsmustbebeholden
tothoseoftheshareholders)(quotingWinterv.Anderson,275N.Y.S.373,375(N.Y.App.Div.1934));see
alsoN.Y.Bus.Corp.Law717(McKinney2009).
7058Higginsv.N.Y.StockExch.,Inc.,806N.Y.S.2d339,362(N.Y.Sup.2005)(holdingthatdirectorsmaybe
liablefortheactionsofanotheriftheydidnotobtainmaterialinformationormakeareasonableinquiry
intomaterialmatters).
7059SeeJacobsv.BoardofEd.,E.MeadowUnionFreeSch.Dist.,409N.Y.S.2d234,239(N.Y.App.Div.1978);
Dumont v. Raymond, 49 N.Y.S.2d 865, 868 (N.Y. Sup. 1944); Auerbach v. Klein, No. 1539102, 2008 WL
680730,at*10(N.Y.Sup.Feb.15,2008).

1902

Consequently,ifthedirectorsor officersofLCPIweredisinterestedand madeagood

faithdecisiononaninformedbasis,acourtwillnotsubstituteitsownjudgment.
Adirectororofficerisinterestedifthatdirectorhasdualrelationsthatprevent
anunprejudicialexerciseofjudgment.7060Adirectorisinterested(1)ifheisanofficer
ordirectorofanothercorporationinvolvedinthechallengedorquestionedtransaction,
(2) if he receives a direct financial benefit from the questioned transaction that is
differentfromthebenefitreceivedgenerallybytheshareholders,and(3)eventhough
hehasnopersonalinterestinthequestionedtransaction,heiscontrolledbyadirector
whohasaninterestinthetransaction.7061NewYorklawestablishesthatatransaction
is not void or voidable solely because the party is interested if either of the following
twoconditionsismet:(1)theinteresteddirectorsstatusisdisclosedorknowntothe
board of directors or committee and the board approves the transaction by a vote
sufficient for such purpose once the votes of interested directors are excluded or, if
there are insufficient votes to constitute a board action once interested voters are
excluded, by unanimous vote of the disinterested directors; or (2) the interested
directorsstatusassuchisdisclosedorknowntotheshareholdersandthetransactionis
approvedinagoodfaithvotebytheshareholders.7062

7060Auerbach,2008WL680730,at*11.
7061Id.
7062N.Y.BUS.CORPLAW713(McKinney2009).

1903

TheevidencesuggeststhatLCPIsdirectorsandofficerswereemployeesofLBHI
atalltimesrelevanttothisSectionsinquiry.7063LCPIwasawhollyownedsubsidiaryof
LBI,whichinturnwasownedbyLBHI.LCPIsdirectorsandofficersstatusasLBHI
employeesordinarily would not give risetoanyconflictofinterest;thedirectors and
officersdutyofloyaltyasemployeesandasfiduciariestoshareholderswasaligned.7064
The analysis, however, may change once LCPI became insolvent, at which point the
directors and officers also owed a duty of loyalty to LCPIs creditors.7065 Therefore, a
partymayarguethatthedirectorsandofficerswerenotdisinterestedduring2008and
would not be entitled to rely on the business judgment rule. In the discussion that
follows,theExamineranalyzeswhethertheLCPIdirectorsandofficersbreachedtheir
fiduciarydutyabsenttheprotectionsofthebusinessjudgmentrule.TheLCPIdirectors
andofficerswouldonlybedeprivedoftheprotectionofthebusinessjudgmentruleat
timeswhenLCPIwasinsolvent.

7063Lehman, spreadsheet, Employees as mapped to Legal Entities, (Sept. 20, 2008) [LBEXAM 5642400

2997].
7064RSP Communications PLC v. Bidirici, 649 F.Supp.2d 184, 212213 (S.D.N.Y. 2009) ([W]hile [the
subsidiary] was solvent, Defendants fiduciary duties required that [the subsidiary] be managed to the
benefitof[theparentcorporation].)(applyingNewYorklaw).
7065Id.at213([A]lthoughthepartiesdisagreeastothetimingof[thesubsidiarys]insolvency,thereisno
disputethatDefendantsfiduciaryobligationschangedwhen[thesubsidiary]becameinsolventandthe
interestsof[thesubsidiarys]creditorsbecamerelevantatthattime.)(applyingNewYorklaw).

1904

(1) LCPIsBackgroundandOfficersandDirectors
LCPIisawhollyownedsubsidiary7066ofLBIthatLehmanusedtobookloans,7067
including commercial loans, whole loans, real estate loans, and distressed debt
purchases.7068 Lehman also used LCPI to originate and trade secured and unsecured
loans.7069LCPIhadaboardofdirectorscomprisedofthreeindividualsatthetimeofthe
filing:FredS.OrlanelectedtotheBoardonMay22,2008;JamesP.Seeryelectedto
theBoardonSeptember06,2005;andGregL.SmithelectedtotheBoardonAugust
25,2005.7070Additionally,GregSmithhadservedasthepresidentofLCPIsinceJanuary
24,2008.7071PaoloTonucciwaselectedtreasureronJanuary24,2008.7072AdaShekwas
theLECcontrollerforLCPI.MichaelMontellaassistedShekincarryingoutherduties
intheweeksleadinguptoSeptember15,2008.7073

7066Lehman,LCPIWorldRecordsReport(Sept.15,2008)[LBEXLL027825].
7067ExaminersInterviewofFredOrlan,InterviewSummary,Sept.21,2009,atp.3;ExaminersInterview

ofJamesSeery,Nov.12,2009,atp.4.
7068Examiners Interview of Joselito Rivera, Oct. 13, 2009, at p. 5; Examiners Interview of James Seery,
Nov.12,2009,atp.4.
7069Lehman,LCPIWorldRecordsReport(Sept.15,2008)[LBEXLL027825];DebtorsMotionPursuantto
Sections105(a),363(b),363(c)and541(d)oftheBankruptcyCodeandBankruptcyRule6004forAuthority
to(A)ContinuetoUtilizeItsAgencyBankAccount,(B)TerminateAgencyRelationships,and(C)Elevate
LoanParticipations,DocketNo.3,InreLehmanCommercialPaper,Inc.,CaseNo.0813900(Bankr.S.D.N.Y.
Oct.6,2008),atp.3.
7070Lehman,LCPIWorldRecordsReport(Sept.15,2008)[LBEXLL027825].
7071Id.
7072Id.
7073ExaminersInterviewofAdaShek,Nov.24,2009atp.2;ExaminersInterviewofMichaelMontella,
Oct.26,2009,at2,9.

1905

LCPIreliedondesignatedLehmanemployeeswhoweresplitamongLehmans
variousoperatinggroups.7074Lehmansrecordsindicatethattherewereapproximately
120 Lehman employees who performed functions for LCPI.7075 LCPI funded its
operationsthroughrepurchaseagreements,bankcreditfacilities,andborrowingsfrom
LBHI,7076butitwasnotastandaloneentity.7077
LCPIs directors and officers owed duties both to its parent and to creditors
whenitbecameinsolvent.TheExaminerfoundsufficientevidencetosupportafinding
that LCPI was balance sheet insolvent during the interval of May 31, 2008 through
August28,2008,onwhichdateitreceiveda$900millioncapitalinfusionfromLBIthat
rendereditborderlinesolvent.7078Inexaminingwhetherthereisacolorableclaimthat
LCPIs directors or officers breached their fiduciary duties, the Examiner considered:
(1)whether the LCPI directors and officers breached their fiduciary duties to the
creditors by authorizing transfers made by LCPI during its period of insolvency and
(2)whethertheLCPIdirectorsandofficersfulfilledtheirdutytomonitor.

7074A&M,spreadsheetofemployeesmappedtolegalentities(Sept.20,2008)[LBEXAM5642400];email

from Paul Gregg, Lehman, to Peter Keavey, Lehman (Sept.16, 2008) (employees allocated to LBCS
discussing transfer of LBI employees to Barclays and noting thats us) [LBEXDOCID 3571486];
ExaminersInterviewofJonathanWilliams,Aug.5,2009,atp.4.
7075A&M,spreadsheetofemployeesmappedtolegalentities(Sept.20,2008)[LBEXAM5642400]
7076Lehman,LCPIWorldRecordsReport(Sept.15,2008)[LBEXLL027825].
7077ExaminersInterviewofFredOrlan,Sept.21,2009,atp.3;ExaminersInterviewofJamesSeery,Nov.
24,2009atp.at4.
7078Email from Anu Jacob to Kristie Wong, Lehman, et al. (August 28, 2008) [LBEXSIPA 005564]; See
SectionIII.B.3.cofthisReportforananalysisofthesolvencyoftheLBHIAffiliates.

1906

(a) DutyofCare
In accord with his duties set forth by the Examiner Order, the Examiner
investigatedwhetherLCPIsofficersanddirectorsbreachedtheirdutyofcarebyfailing
to maintain LCPIs solvency. Under New York law, the duty of care requires that
directorsactasordinarilyprudentpersonswoulddoinsimilarcircumstancesbeingin
possession . . . of the knowledge and information they possessed or could have
possessedbydiligentattentiontotheirduties.7079
As early as September 2007, LCPI bordered on insolvency.7080 From April 2008
through July 2008, LCPI was actually balance sheet insolvent.7081 During that time
period, LCPI made numerous transfers, the most significant of which was its June 19,
2008 transfer of $5.4 billion to LBHI, which LBHI in turn transferred to JPMorgan to
coverLBHIsriskbasedmargin.7082TheExaminerhasbeenadvisedininterviewsthat
trades involvingLBI andLBHIAffiliatesalwaysnetsettledcash.7083Nevertheless,the

7079MacnishLenox,

LLC v. Simpson, No. 26021/04, 2007 WL 3086028 (N.Y.Sup. Oct. 23, 2007) (quoting
SyracuseTel.v.Channel9,Syracuse,273N.Y.S.2d16,27(N.Y.Sup.1966)).
7080SeeSectionIII.B.3.cofthisReportforananalysisofthesolvencyoftheLBHIAffiliates.
7081Id.
7082EmailfromCraigJones,Lehman,toJohnFeraca,Lehman(June19,2008)[LBEXAM001775](Jones
informed Feraca: Today we moved several unencumbered assets (Sasco, Spruce, Pine, Fenway) to
LCPIs DTC box at Chase to generate an additional $5.4 billion of NFE. This will help us absorb the
increaseinintradaymarginingthatChasewantsustoimplement).
7083SeeDuff&PhelpsInterviewofWilliamBurke,Oct.28,2009(tradesbetweenLBIandaffiliateswere
alwayssettled,thesettlementamountwouldbenetofmargin;andduetoLBIscapitalrequirements,
there would be no benefit to not settling trades). Essentially, LBI would have to keep an equivalent
amount of assets on reserve for any unsettled trades; thus making it economically impractical. Duff &
Phelps Interview of Daniel J. Fleming, Oct.21, 2009 (trades between LBSF and LBI were at arms
length,aswasthecasewithotherintercompanytradingactivitybothwithandamongLBI,LBHI,and
LBHIAffiliates).

1907

Examiner was advised that any cash transferred to an LBHI Affiliate would be swept
intoLBHIsaccountsateachdaysend.7084
Throughout2008,LBImadevariousinfusionsofcapitaltoLCPIinanattemptto
reestablish LCPIs solvency.7085 Despite the infusions, LCPIs solvency was not
reestablisheduntilAugust2008.OnAugust28,2008,LBIrequestedacapitalinfusionof
$900 million from LBHI to LCPI to reestablish LCPIs solvency.7086 Tonucci approved
the payment,7087 and LCPI became borderline solvent and apparently maintained this
statusatleastthroughAugust31,2008.7088Therefore,LCPIcreditorssufferednoharm
byreasonoftheearliertransferof$5.4billiondollarstoLBHIonJune19,becausethe
directorsandofficersofLCPItookthestepsnecessarytorestoreLCPItosolvencyprior
to LCPIs bankruptcy. For this reason, the LCPI directors and officers did not breach
their duty ofcareto theextentthattheyauthorized orpermittedtheJune 19transfer.
Therefore,theExaminerconcludesthattheevidencedoesnotsupporttheexistenceofa
colorableclaimthatLCPIsofficersanddirectorsbreachedtheirfiduciarydutyofcare
byauthorizingorpermittingtransfersmadebyLCPIduringitsperiodofinsolvency.

7084SeeSectionIII.B.2.cofthisReportforananalysisofLBHIsuseofcashsweeps.
7085SeeSectionsIII.B.3.c.3.aandIII.B.3.e.8ofthisReport,whichaddressthemechanicsoftheLCPIcapital

infusions.
7086EmailfromHuiWang,Lehman,toHelenChu,Lehman,et.al(Aug28,2008)[LBEXSIPA0033201].
7087EmailfromKristieWong,Lehman,toWilliamT.Burke,Lehman,et.al(Aug.28,2008)[LBEXSIPA

00556466].
7088SeeSectionsIII.B.3.c.3.aandIII.B.3.e.8ofthisReport,whichaddressthemechanicsoftheLCPIcapital
infusions.ForadiscussionofsolvencyoftheLBHIAffiliatesafterAugust31,2008,seeSectionIII.B.3.cof
thisReport.

1908

(b) DutytoMonitor
The Examiner also analyzed whether the LCPI directors and officers breached
their duty to monitor by allowing LCPI to fall into insolvency for a portion of 2008.
Directors or officers of a New York corporation may be liable based on the actions of
subordinates if they either fail to obtain material information or to make a reasonable
inquiryintomaterialmatters.7089
AlthoughLCPIwasaseparatecorporateentity,Lehmandidnotoperate itas a
separatebusinessbutratherintegratedLCPIsbusinessaffairswithLBHIs.7090Though
not operated as a separate business, LCPI maintained its own corporate hierarchy.
LCPI had a board of directors and over 50 officers including multiple managing
directors,vicepresidents,andseniorvicepresidents.7091
Primary responsibility in monitoring LCPIs financial condition and reporting
that information to superiors fell to Shek, as LEC. Shek received assistance from
Montella in the final weeks of Lehman.7092 Shek was charged with monitoring and
reportingmanyentitiesastheirLEC,butshesaidherresponsibilityforLCPIwasmore

7089Higginsv.N.Y.StockExch.,Inc.,806N.Y.S.2d339,362(N.Y.Sup.2005).
7090ExaminersInterviewofJamesSeery,Nov.12,2009atp.4.
7091Lehman,LCPIWorldRecordsReport(Sept.15,2008)[LBEXLL027825].
7092Examiners

Interview of Ada Shek, Nov. 24, 2009 at pp. 2, 4; Examiners Interview of Michael
Montella,Oct.26,2009,atpp.2,9.

1909

onerousthanwiththeotherentitiesbecauseLCPIhaditsownseparaterepofacilityat
JPMorganandwasinvolvedinmanyintercompanyreposandreverserepos.7093
Interviews with Lehman finance personnel revealed that LECs generally were
charged with monitoring the solvency of LBIs subsidiaries and reporting capital
shortfalls to superiors, who would then authorize infusions from LBI.7094 However,
ShekexplainedthatLCPIsLECsonlystartedtomonitorcapitallevelsvigorouslyinthe
April through July 2008 time period.7095 While there were no overall guidelines other
than the principle of avoiding negative equity, LECs were aware of the fact that an
entity such as LCPI would be reviewed and questioned by regulators.7096 While the
directorsandofficersmayinsomeinstanceshaveunderestimatedLCPIsequityneeds
andthusfailedtoadequatelyprovideequityneartheendofeachmonth,management
still observed and attempted to monitor the actions of LCPI and ultimately restored
LCPI to solvency prior to the filing of Chapter 11 petitions. Therefore, the Examiner
concludesthattheevidencedoesnotsupporttheexistenceofacolorableclaimagainst
the LCPIs officers and directors for breaching their fiduciary duty to monitor in

7093ExaminersInterviewofAdaShek,Nov.24,2009atpp.2,4.
7094Examiners Interview of Kristie Wong, Dec. 2, 2009, at p. 2; Examiners Interview of Josalito Rivera,

Oct. 13, 2009, at pp. 56. Wong, who was head LEC, also explained that the capital infusions LCPI
receivedinMayandJulyof2008wereintendedtoallowittopostpositiveequity,butthattheamountof
capitalnecessarytodosowasunderestimated.ExaminersInterviewofKristieWong,Dec.2,2009,atp.
3.Thus,LECsattemptedtomaintainpositiveequityinLCPI,butwereoccasionallyunabletodoso.
7095ExaminersInterviewofAdaShek,Nov.24,2009atp.7.
7096ExaminersInterviewofMichaelMontella,Oct.26,2009,atpp.1012;ExaminersInterviewofKristie
Wong,Dec.2,2009,atp.2.

1910

connection with the financial condition of the Lehman enterprise prior to the
commencementoftheLBHIChapter11caseonSeptember15,2008.
c)

BreachofFiduciaryDutyforAidingorAbettingUnderDelaware
Law

In accord with the fifth bullet of the Examiner Order, the Examiner analyzed
whether there exist any colorable claims for aiding or abetting a breach of fiduciary
dutybytheLBHIAffiliates.Delawarelawrecognizesacauseofactionforaidingand
abetting a breach of fiduciary duty.7097 There are four elements to this claim: (1) an
underlying fiduciary duty; (2) breach of that duty by the fiduciary; (3) knowing
participation in the breach by a nonfiduciary; and (4) damages.7098 As set forth
elsewhere in this Report in the section dealing with Repo 105,7099 the Examiner
concludes that the Repo 105 transactions give rise to colorable claims for breach of
fiduciarydutyonthepartofcertainLBHIofficersfor,amongotherthings,causingor
allowingLehmantofilemisleadingfinancialstatementsthatmisrepresentedLehmans
treatmentofrepotransactionsandomittedmaterialinformationaboutLehmansRepo
105 practice. The Examiner has determined that certain of LBSFs securities were
involved in the Repo 105 transactions.7100 Although the Examiner has uncovered

7097See,e.g.,Malpiedev.Townson,780A.2d1075,1096(Del.2001).Somecasescallanaidingandabetting

breach of fiduciary duty claim a civil conspiracy. However labeled, the elements are the same. See
Weinbergerv.RioGrandeIndus.,Inc.,519A.2d116,131(Del.Ch.1986).
7098Id.Foramoredetaileddiscussionoftheelementsofanaidingandabettingbreachoffiduciaryduty
claim,seeAppendix1,LegalIssues,atSectionII.C.
7099SeeSectionIII.A.4ofthisReport,whichdiscussesRepo105.
7100Id.

1911

evidence that certain of the directors and officers of LBSF had knowledge of the
purposeandeffectofRepo105transactions,theExaminerhasnotdiscoveredsufficient
evidence that the directors and officers of LBSF themselves had any disclosure
obligations visvis LBHI (which was the entity with public reporting obligations) or
that they had knowledge that LBHIs public disclosures were materially misleading.
Consequently,theExaminerconcludesthattheevidenceuncoveredduringthecourse
of his investigation does not support a finding that there are colorable claims against
the LBSF directors or officers for aiding and abetting a breach of fiduciary duty for
failure todisclose inconnection withthefinancialconditionof theLehmanenterprise
priortothecommencementoftheLBHIChapter11caseonSeptember15,2008.
5.

ExaminersAnalysisofLehmansForeignExchangeTransactions
(SecondBullet)7101
a) Summary

TheExaminerwasaskedtoreporton[a]llvoluntaryandinvoluntarytransfers
to, and transactions with, affiliates, insiders and creditors of LBCC or its affiliates, in
respectofforeignexchangetransactionsandotherassetsthatwereinthepossessionor
controlofLBHIAffiliatesatanytimecommencingonSeptember15,2008throughthe
day that each LBHI Affiliate commenced its Chapter 11 case.7102 The Examiner
identified and investigated postpetition cash transfers in respect of foreign exchange

7101This

Section of the Report includes data extracted from Lehmans source systems, including, for
example,GCCM,GSSR,andRISC.
7102ExaminerOrderat3,secondbullet.

1912

(FX) transactions. This Section of the Report provides an overview of Lehmans

foreign exchange business and describes the impact of LBHIs bankruptcy filing upon
thesettlementofsuchtransactions.TheExamineranalyzedcashtransfersintoandout
of LBCC bank accounts in connection with foreign exchange transactions that either
settled,infull,inpart,orthatfailedtosettle.TheExaminerconcludesthattimingand
operationaldisruptionimpactedthesettlementofsuchtransactions.
b) ForeignExchangeatLehman
This Section of the Report addresses the relevant transfers and transactions in
respect of FX and begins with an overview of Lehmans FX business. Lehmans FX
business was a global operation, organized around centers in Tokyo, Hong Kong,
London and New York, and, at the time of Lehmans bankruptcy filing in September
2008,wasdevelopingapresenceinSingapore.7103Lehmanwasasignificantparticipant
in the global FX market.7104 Lehman engaged primarily in FX transactions on the
interbankmarket,whichinvolvedtradingwithother largefinancialinstitutionseither
for Lehmans own account or on behalf of its customers.7105 However, Lehman also
conducted FX transactions with counterparties that were not financial institutions.

7103ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.2;ExaminersInterviewofKleber

Rodriguez,Dec.18,2009,atp.2.
7104ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.2.
7105BankforInternationalSettlements,TriennialCentralBankSurvey:Foreignexchangeandderivatives
marketactivityin2007(December2007),availableathttp://www.bis.org/publ/rpfxf07t.pdf.

1913

Lehmans FX transactions were initiated either through telephone orders or through

variousecommercesystems.7106
Lehman Foreign Exchange Products. A typical FX transaction involves two
counterparties exchanging one currency for another.7107 The trade date is the date on
whichthepartiesagreetothetermsofthetransactionincludingtheexchangerate,the
typeandamountofthecurrenciesandthevaluedate.7108Thevaluedate(orsettlement
date) is the date on which counterparties actually exchange the two currencies (i.e.,
settlethetransaction).7109
Lehmans FX business focused primarily on spots, forwards and options.7110
Spotsandforwardsaretradesinwhichcounterpartiesexchangecurrenciesinasingle
transaction rather than as part of a series of exchanges.7111 In a spot transaction, a
specific amount of currency is exchanged at an agreedupon price for delivery and

7106Most of Lehmans FX transactions were initiated through telephone orders. However, as part of a

major strategic initiative, Lehman also developed a FX ecommerce business, which allowed clients to
place orders using different electronic systems. These systems enabled Lehmans clients to access the
interbank market and various other FX markets, including: (1) Electronic Communication Networks
(ECNs), which allowed users to execute transactions with multiple banks; (2) Single Bank Platforms,
whichalloweduserstotradewithasinglebank;and(3)OrderManagementSystems,whichroutedclient
orderstoothermarketsbasedonpredefinedalgorithms.Lehmanaccessedclienttradeinformationand
advertisedtoclientsthroughitsecommercebusiness.
7107SeeLehman,LehmanBrothersForeignExchangeTrainingManual,atp.2[LBEXLL3356480].
7108SeegenerallyLehman,LehmanBrothersForeignExchangeTrainingManual[LBEXLL3356480].
7109Seeid.atp.4.
7110Lehman was also involved in other FX transactions, such as structured notes, which comprised a
smallpercentageofLehmansFXbusiness.ExaminersInterviewofJonathanD.Williams,Nov.18,2009,
atp.3.
7111SeeLehman,LehmanBrothersForeignExchangeTrainingManual,atp.34[LBEXLL3356480].

1914

settlementwithinatwodayperiod.7112Inaforwardtransaction,counterpartiesagreeto
exchangeaspecificamountofcurrencyatapredeterminedrateonsomefuturedate,
ranging between three days and several years from the trade date.7113 Options are
derivativeinstrumentsgivingholderstheright,butnottheobligation,tobuyorsellthe
underlyingcurrencyatafuturedateatapredeterminedexchangerate.7114
LehmansFXbusinessalsoincludedFXswaps,whichinvolvetheexchangeand
reexchange of two currencies on two different value dates.7115 FX swaps consist of
various combinations of spots and forwards.7116 Because Lehmans FX trading group
only viewed the spots and forwards underlying these transactions, it did not
distinguishbetweenswapsandthespotsandforwardsrelatedtosuchswaps.7117
LehmansFXbusinessdidnotincludeinterestrateswapsorcurrencyfutures.7118
Lehmans derivatives group engaged in interest rate swaps, which are agreements
betweentwopartieswhereonestreamofpaymentsisexchangedforanotherbasedona
specifiedprincipalamount.7119Althoughinterestrateswapsmayinvolvepaymentsin
differentcurrencies,LehmandidnotcharacterizeinterestrateswapsasFXtransactions

7112Seeid.
7113Seeid.atp.40.Lehmanalsotransactedinasubsetofforwardscallednondeliverableforwards,which

arecontractswhereinnocurrenciesareexchanged.Instead,thesettlementamountreflectsthedifference
between the contract price and the prevailing currency exchange rate. Examiners Interview of Robert
Eby,Jan.6,2010,atp.2.
7114SeeLehman,LehmanBrothersForeignExchangeTrainingManual,atp.96[LBEXLL3356480].
7115Seeid.atp.71.
7116Seeid.
7117ExaminersInterviewofKleberRodriguez,Dec.18,2009,atp.3.
7118Id.;ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atpp.23.
7119ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.3.

1915

because interest rate swaps primarily involved interest rate risk rather than foreign
exchange risk.7120 As such, interest rate swaps were not handled by Lehmans FX
tradinggroup.
Lehman entities also transacted in currency futures, which are regulated
exchangetraded products that reflect the difference in the price of an underlying
currencyonthetradedateandonthesettlementdate.7121Afutureisgenerallysettledin
the underlying currency and does not reflect an exchange of currencies.7122 Thus,
Lehman did not consider currency futures to be FX transactions.7123 The Examiners
analysis of Lehmans FX transactions thus excludes both interest rate swaps and
currencyfutures.
LehmanEntitiesthatOfferedForeignExchangeProducts.Aspartofitsglobal
FXoperations,LehmanconductedFXtransactionsprimarilythroughLBIandLBCC.7124
Asabroker/dealer,LBIwassubjecttoregulationbytheNewYorkStockExchange,and
conductedonlyspotandforwardtransactions,notoptionstransactions.7125LBCCwas
anunregulatedentitythatconductedspot,forwardandoptionstransactions.7126

7120Id.
7121SeeFederalReserveBankofNewYork:AllabouttheForeignExchangeMarketintheUnitedStates

bySamCross(1998),atp.59,availableat
http://www.newyorkfed.org/education/addpub/usfxm/chap6.pdf.
7122Id.
7123Id.However,LehmanusedcurrencyfuturesforhedgingpurposesinconnectionwithFXtransactions.
Id.
7124Id.atpp.35.
7125Id.
7126Id.

1916

OtherLehmanentitiesthatengagedinFXtransactionsincludedLBIE,LBSF,LBJ
LBBAG,LBF,LBAsiaandLBCS.7127Theseentitiesconductedspot,forwardandoptions
transactions incidental to their general business transactions or to accommodate their
clients FX trading needs.7128 LBHI also conducted spot and forward transactions for
hedgingpurposes.7129
LehmansFXbusinesshadamultientitystructure,meaningthatmorethanone
Lehman entity was typically involved in a particular FX transaction.7130 Under this
arrangement,thereceiptandpaymentoffundswasdocumentedthroughintercompany
accounting.7131Forinstance,becauseLBCConlymaintainedU.S.dollarbankaccounts,
LBI received payments of foreign currencies from third parties on LBCCs behalf.7132
LBCC made the corresponding U.S. dollar payments to third parties.7133 Upon the
receiptoffundsbyLBIforthebenefitofLBCC,anintercompanypayablewasrecorded
onLBIsbooksandacorrespondingintercompanyreceivablewasrecordedonLBCCs
books.7134Consolidatedjournalentriesforcashandintercompanyactivityinconnection

7127Examiners

Interview of Jonathan D. Williams, Nov. 18, 2009, at p. 3.; RISC Monthly Statements
[LBEXLL3357479LBEXLL3357496].
7128ExaminersInterviewofKleberRodriguez,Dec.18,2009,atpp.35.
7129Id.
7130Id.
7131Id.
7132Id.
7133Id.
7134Id. Typically, multientity FX transactions involved intercompany payables and receivables, rather
thanthetransferoffunds.However,FXtransactionsinvolvingLBJrequiredatransferoffundsbecause
oflegaland/orregulatoryrequirements.ExaminersInterviewofRobertEby,Jan.06,2010,atp.5.

1917

with FX transactions were recorded in Lehmans general ledger on a daily basis.7135

Journal entries related to customer accounts payable and accounts receivable were
recorded in Lehmans general ledger on a monthly basis.7136 Journal entries were not
recordedforindividualtransactions.7137
AlthoughintercompanyentriesdocumentedtheamountowedbyLBItoLBCC,
the funds were not immediately transferred to LBCC.7138 Instead, when the
intercompany receivable from LBI to LBCC became substantial, LBCC typically
requestedthatLBItransferfundstopaydownthereceivable.7139LBIthenevaluatedits
ownliquidityneedstodeterminewhethersuchpaymentshouldbemade,anduponthe
approvalofanappropriateadministrator,madesuchpaymenttoLBCC.7140
Lehmans Foreign Exchange Trading Services. Generally, Lehman offered the
following services in connection with FX transactions: execution, confirmation and
settlement.7141Executionistheprocessbywhichanordertobuyorsellacurrencyon
specific terms is consummated on a foreign exchange market.7142 Confirmation is the
process by which an organization acts as an intermediary, reviews transaction terms

7135GCCMCustomReport[LBEXLL3371357LBEXLL3396034].
7136ExaminersInterviewofKleberRodriguez,Dec.18,2009,atp.7.
7137Id.atp.6.
7138Id. at

p. 4. LBCC was funded primarily by receipts from third parties. If LBCCs account had a
shortfallattheendoftheday,LBHIprovidedthenecessaryfundingtocovertheshortfall.Emailfrom
LaurenSheridan,LehmantoKenHalperin,DuffandPhelps,etal.(Jan.25,2010).
7139ExaminersInterviewofKleberRodriguez,Dec.18,2009,atpp.34.
7140Id.
7141ExaminersInterviewofFrancoisChuFong,Dec.18,2009,atp.2.
7142Id.

1918

andassumestheroleofabuyerandsellerfortransactionsinordertoreconcileorders
between transacting parties.7143 Settlement is the mutual delivery of currencies to the
partiestothetransactionpursuanttotheagreeduponterms.7144
Lehman conducted FX transactions both as direct trades at the request of its
clientsandaspartofitsFXprimebrokeragebusiness.7145InaFXdirecttrade,theclient
executed foreign exchange transactions exclusively with Lehman.7146 Lehman also
managedtheconfirmationandsettlementfunctionsinconnectionwiththetransaction
andallocatedtheclientsfundstoadesignatedaccount.7147
The FX prime brokerage business provided clients with the opportunity to
consolidate their portfolio in a single institution and leverage that institutions credit
ratingtotradecurrencies.7148Lehmaneither(1)servedastheprimebroker,confirming
andsettlingFXtransactionsthatclientsexecutedwithotherfinancialinstitutions;or(2)
executed FX transactions with clients that used the prime brokerage services of other
financialinstitutions.7149
Initscapacityasprimebroker,Lehmanhandledtheconfirmationandsettlement
functionsinconnectionwithFXtransactionsthatLehmansclientsexecutedwiththird

7143ExaminersInterviewofRobertEby,Jan.6,2010,atpp.23.
7144Id.atp.3.
7145ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.2.
7146Id.atp.2.
7147ExaminersInterviewofRobertEby,Jan.6,2010,atpp.23.
7148ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.2.
7149ExaminersInterviewofRobertEby,Jan.6,2010,atpp.34.

1919

parties.7150 In order to perform its confirmation and settlement functions, Lehman,

ratherthantheclient,becamethecounterpartywiththeexecutingthirdparty.Atthe
sametime,Lehmanenteredintoanoffsettingtransactionwithitsclient,forthepurpose
ofdeliveringthesettlementamounttotheclient.7151
Alternatively,whereclientsusedtheprimebrokerageservicesofotherfinancial
institutions, Lehman executed FX transactions with its clients and notified the clients
prime broker of such transactions.7152 The clients prime broker then performed the
confirmationandsettlementfunctionsinconnectionwithsuchtransactions.7153
Settlement of Lehmans Foreign Exchange Transactions. Lehman settled a
significantportionofitsforeignexchangetransactionsthroughCLS.7154Lehmanwasa
usermemberandshareholderofCLS,andreliedonCitibank,asitssettlementmember,
to settle its FX transactions.7155 CLS was created to, among other things, eliminate
settlement risk associated with dual currency payment instructions related to foreign
exchange transactions.7156 CLS simultaneously settles two payments related to an FX

7150ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.2.
7151ExaminersInterviewofRobertEby,Jan.6,2010,atp.4.
7152Id.
7153Id.
7154Examiners Interview of Jonathan D. Williams, Nov. 18, 2009, at p. 3. See Sections III.A.5.c.1.a and

III.A.5.c.1.f of this Report, which discuss Lehmans relationship with Citibank as it pertains to the
settlementofFXtransactionsthroughCLS.
7155Id.
7156See CLS, http://www.clsgroup.com/ForYou/CLSCorporates/Pages/default.aspx (last visited Jan. 28,
2010).

1920

transaction, eliminating the risk that one party to an FX transaction pays out the
currencyitsoldbutdoesnotreceivethecurrencyitbought(i.e.,thesettlementrisk).7157
CLSdidnotprovideLehmanwithstatementslistingindividualtransactionsthat
settled through CLS.7158 Instead, CLS provided the net amount owed to all
counterparties for each currency, and Lehman paid its total obligation rather than
makingpiecemealpaymentsassociatedwithindividualtransactions.7159
Transactions in currencies that were not eligible for CLS settlement, or with
counterparties that were not directly or indirectly affiliated with CLS, were settled by
direct payments between the parties to the transaction.7160 Unlike transactions settled
through CLS, transactions settled by direct payments posed a certain degree of
settlement risk because the exchange of currency was not simultaneous.7161 Lehmans
risk management team managed such risk by requiring collateral to be held or by
setting certain settlement risk limits based on a credit review of the transaction
counterparties.7162

7157Seeid.
7158ExaminersInterviewofRobertEby,Jan.6,2010,atp.6.
7159Id.atp.6.OnoraboutSeptember15,2008,LBHItransferredatotalamountof$500milliontoLBIin

connectionwithFXtransactionsthatsettledthroughCLS.LehmansFXtransactionsconductedthrough
CLSwereeithersettledorunwoundduringtheStubPeriod.UnliketransactionssettledoutsideofCLS,
transactions settled through CLS did not result in parties making payments without receiving
correspondingpaymentsinreturn.Id.
7160ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.3.
7161Id.
7162Id.

1921

LehmansFXtransactionsscheduledtosettlebydirectpaymentsoutsideofCLS
couldhavefailedforavarietyofreasons.Forexample,apartycouldhavefailedtopay
or to receive the funds in connection with the transaction. Alternatively, payment
instructions could be documented incorrectly.7163 Because the payment of funds in
connectionwithFXtransactionswasanautomatedprocessthatwasindependentofthe
receipt of funds, Lehman could deliver funds to a counterparty without receiving
currencies in exchange.7164 Lehmans Operational Control Group managed the
reconciliation system that documented such fails, while the FX Operations Group
reviewedandresolvedsuchfails.7165
Lehmans Risk Management with Regard to Foreign Exchange Transactions.
FXtransactionsinvolveseveraldiscreterisks,includingsettlementrisk(theriskthatthe
opposing party may not deliver the appropriate amount of currency) and market risk
(theriskthatthecurrenciestradedmaylosevaluebasedonmarketfluctuations).7166To
manage settlement risk, Lehman reviewed its clients creditworthiness and set
settlementlimitsbasedonsuchcreditreviews.7167Lehmanmonitoredclienttransactions

7163ExaminersInterviewofRobertEby,Jan.6,2010,atp.3.
7164Id.
7165Id.
7166SeeForeignExchangeCommittee,FederalReserveBankofNewYork,Foreign,GuidelinesforForeign

ExchangeTradingActivities(May,2008),atpp.1821,availableat
http://www.newyorkfed.org/fxc/annualreports/ar2007/fxar07re.pdf.
7167ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.3.

1922

toensurecompliancewithsuchlimits.7168Lehmanalsorequiredcertainclientstopost
collateral in connection with FX transactions.7169 Settlement risk was managed by the
LBHIriskmanagementgroup,bothregionallyandglobally.7170
With respect to market risk, Lehman established risk limits to keep potential
losseswithinacceptablerisktolerancelevels.7171Tomitigatesuchrisk,LBCCmonitored
trader activity and its overall risk exposure to ensure that the risk limits were not
exceeded.7172 LBCC took additional steps to reduce its market risk, including hedging
itsforeigncurrencyexposure.7173
c)

ForeignExchangeTransactionsDuringtheStubPeriod

Inordertoidentifyalltransfersto,andtransactionswith,affiliates,insidersand
creditorsofLBCCoritsaffiliates,inrespectofFXtransactionsduringtheStubPeriod,
theExaminerreviewedRISC7174systemstatementandbankaccountstatementdatafor
LBHI Affiliates, and reconciled such data to identify cash transfers related to the
settlementofFXtransactions.

7168ExaminersInterviewofKleberRodriguez,Dec.18,2009,atpp.56.
7169ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.3.
7170ExaminersInterviewofKleberRodriguez,Dec.18,2009,atpp.56.
7171Id.
7172Id.
7173Id.
7174RISCstandsforRealtimeInformationSystemsforCommodities.

1923

TheExamineralsoreviewedLBIspaymentsandreceiptsofforeigncurrencyto
theextentthesetransfersrelatedtocertainFXtransactionsinvolvingLBHIAffiliates.7175
The Examiners analysis excludes certain trading activity that took place during the
StubPeriod,whichmayhaveinvolvedtradeexecutions,butdidnotresultintransfers
ofcashinsettlementofFXtransactions.
The Examiner focused his analysis of Lehmans Stub Period FX transactions on
transfers of cash into and out of LBCCs bank accounts.7176 On the morning of
September 15, 2008, LBCCs bank account balance was $0.00.7177 The Examiner has
determinedthat,asaresultoftheLBHIbankruptcy,threeprimarysourcesoffunding
that LBCC relied upon to settle FX transactions were compromised: (1) receipts from
counterparties;(2)paymentsfromLBItoreduceLBCCsintercompanyreceivable;and
(3)cashtransfersfromLBHItocoverLBCCsshortfalls.Consequently,LBCCdidnot
havesufficientfundsonSeptember15,2008tosettleallofitsFXobligations.7178

7175InworkingtogetherwiththeLBISIPATrustee,theExaminerlearnedthatLBIdidnotreceivebank

accountstatements,butratherreceivedelectronictransactiondatathatwaselectronicallyreconciledwith
LBIs books and records. Consequently, the LBI Trustee was unable to provide the Examiner with
general data related to LBIs FX transactions, including transactions that settled through CLS. Instead,
the Examiner received and reviewed LBIs payments and receipts in connection with specific FX
transactions relevant to the investigation. Email from Sarah L. Cave, Hughes Hubbard and Reed, to
HeatherD.McArn,Jenner&Block(Nov.24,2009).
7176RISCdataindicatesthatFXtransactionsinvolvingLBCSandLBSFwerescheduledtosettleduringthe
StubPeriod.However,theExaminersfinancialadvisorsdeterminedthatbankstatementdataforthese
entitiescontainednopaymentsorreceiptsassociatedwiththesettlementofFXtransactions.
7177With respect to unregulated entities such as LBCC, it was part of Lehmans cash management
protocoltofundeverybankaccountto$0.00attheendofeachday.ExaminersInterviewofDanielJ.
Fleming,Dec.17,2009,atp.2.
7178Id.atpp.45.

1924

The Examiner sets forth below a series of tables illustrating the amounts LBCC
committedtopayinsettlementofFXtransactionsandtheactualpaymentsmadetoits
counterparties, as well as the amounts LBCC expected to receive in settlement of FX
transactionsanditsactualreceipts.
The Examiners financial advisors determined, as illustrated in the table below,
that LBCC committed to pay approximately $2.1 billion in settlement of nonCLS
transactions during the Stub Period.7179 However, LBCC ultimately paid only
approximately$400millioninconnectionwiththesetransactions.7180

7179These settlements were scheduled to occur during the period from Sept. 15 through Sept. 19, 2008.

GCCMDataExtraction[LBEXBARGCM010374LBEXBARGCM010395].
7180DebtorBankStatementData[LBEXAM5642100LBEXAM5642389].

1925


ScheduledandActualStubPeriodPaymentsbyLBCCtoFXCounterparties(a)7181

Date

TotalAmt.Due

TotalAmt.

%PaidofAmt.

TotalUnpaid

(b)

Paid(c)

Due

Amt.

9/15/2008

$1,184,160,821

$258,485,069

21.8%

$925,675,752

9/16/2008

$126,503,789

$50,562,787

40.0%

$75,941,003

9/17/2008

$600,812,093

$36,039,788

6.0%

$564,772,305

9/18/2008

$50,650,176

$38,150,176

75.3%

$12,500,000

9/19/2008

$175,591,322

$8,866,815

5.0%

$166,724,507

Totals

$2,137,718,201

$392,104,635

18.3%

$1,745,613,567

Notes:
(a)Basedonpaymentrequestdateanddoesnotnecessarilycorrelatetopaymentclearancedate.
(b)Source:GCCMDataExtraction[LBEXBARGCM010374LBEXBARGCM010395].
(c)Source:DebtorBankStatementData[LBEXAM5642100LBEXAM5642389].

Asnotedinthetableabove,approximately18%ofthetotalamountLBCCowed
to its counterparties during the Stub Period was paid to such counterparties in
settlement of FX transactions. An analysis of individual transactions indicates that
certain counterparties were paid in full; others, such as The Walt Disney Company
(WaltDisneyCo.),receivedpartialpayment;andothercounterpartieswerenotpaid
any of the amounts owed to them. The table below presents all LBCC counterparties

7181LBCC made no wire transfer requests to Citibank in connection with FX transactions after Sept. 19,

2008.

1926

identifiedbytheExaminersfinancialadvisorsthatwereowedamountsof$1millionor
moreduringtheStubPeriod,andindicateswhatpercentageoftheamountowedwas
paidtosuchcounterparties.
LBCC Stub Period Payments to FX Counterparties (a)
Counterparty (b)
Ppl's Bank of China/Safe
LBIE - I/C
Ford Global Treasury
J. Aron & Co.
Walt Disney Co.
UBS AG
Commerzbank AG Ffurt
JPMC NY/FC Stone
LB Aisa Holdings Ltd (019)
LB Finance SA
Morgan Stanley Cptlgrp
Deutsche Bank AG Ldn
Barclays Bank PLC
Bank Julius Baer Und Co.
Citibank Ldn/Julius Baer
Citibank NA NY
ABN Amro/Chicago
Cr. Suisse First Boston
Barclays Ldn/Rubicon
State St Bank & Trust/GS
ABN Amro Bank NV
Cr. Suisse Ldn/GS Emerg.
Merrill Lynch Ldn
HSBC Bank Ldn/GS
Merrill Lynch Captl Srvc
LB SEC Asia Ltd (130)
Phillip Morris Finance SA
RBS Ldn/Lily Pond Capital
Bank of America NY
Non-GCCM (e)
JPMC Bank Singapore
Merril Lynch Int Bank Ldn
ABN Amro/Mitsubishi
Intermobiliare Sim Spa
LBCC vs. LBFAPL

Total Amt. Due (c)

$
473,000,000
232,723,911
194,130,388
154,402,344
120,978,393
90,403,104
88,324,250
75,000,000
64,288,000
47,000,000
47,121,477
37,512,061
33,637,712
30,117,000
26,965,762
24,848,830
24,040,670
23,200,000
22,586,146
22,237,045
20,000,000
17,134,762
15,657,500
13,830,398
13,057,000
12,294,605
11,120,000
10,845,771
10,657,675
10,634,396
10,000,000
10,000,000
9,834,300
8,952,000
8,733,500

% Paid (d)
0.0%
32.0%
32.3%
1.0%
12.3%
5.9%
0.0%
0.0%
0.0%
40.4%
11.2%
14.9%
11.4%
0.4%
100.0%
100.0%
0.0%
8.6%
0.4%
4.9%
0.0%
24.7%
46.2%
26.3%
23.4%
0.0%
100.0%
0.0%
6.2%
100.0%
0.0%
0.0%
64.8%
100.0%
100.0%

Counterparty (b)
Total Amt. Due (c)
JPMC Bank UK
$
8,110,000
Std Chartered Bank, Ldn
7,638,750
RBS Ldn/Man Inv Ltd.
7,595,608
Lehman Brothers Japan
7,540,327
AIG Intl Inc
6,707,111
Calyon
6,701,900
LBCC - A/C Joint Trading
6,524,412
HSBC Bank PLC UK
6,283,510
BNP Paribas SA Paris
4,506,627
Citibank NA London
4,388,500
LB Comm. Corp. Aisa Ltd.
4,296,432
Fimat Altern. Strategies
3,113,942
LB Comm. Corp. Asia
3,034,417
Deutsche Bank Ldn - DE
2,986,100
RBS London
2,765,656
Citigroup Treasury
1,801,550
LBIE
1,759,486
BAE Systems PLC
1,756,726
Banca Delle Marche Ancona
1,694,580
LB Special Financing
1,659,620
Lux. Trading Finance
1,611,000
JPMC Bank NY
1,484,348
Zurcher Kantonalbank
1,467,208
Merril Lynch Intl/GS
1,447,643
BWA/the Wm. & Flora
1,412,037
BWA - Railpen C1A
1,358,025
BWA - Railpen C1Z
1,296,296
BWA - Brgwater Pure A
1,239,637
DBS Bank Ltd
1,204,469
BWA - Teamster A1A
1,149,691
BWA / TFL Pension Fund
1,149,012
ABN Amro/GS
1,121,439
Amercian Express Bank Ltd Ldn
1,000,000
Other Counterparties < $1 million
14,643,141
Total
$ 2,137,718,201

% Paid (d)
100.0%
18.8%
100.0%
0.0%
0.0%
100.0%
0.0%
100.0%
42.2%
100.0%
100.0%
100.0%
34.3%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
0.0%
100.0%
0.0%
0.0%
0.0%
100.0%
100.0%
0.0%
0.0%
100.0%
100.0%
77.2%
18.3%

Notes:
(a) This table only reflects counterparties that were owed amounts of $1 million or above.
(b) Source: RISC Monthly Statements [LBEX-LL 3357412 - LBEX-LL 3357674], [LBEX-LL 3371070 - LBEX-LL 3371355], [LBEX-LL 3396213 - LBEX-LL 3396252].
(c) Source: GCCM Data Extraction [LBEX-BARGCM 010374 - LBEX-BARGCM 010395].
(d) Source: Debtor Bank Statement Data [LBEX-AM 5642100 - LBEX-AM 5642389].

(e) Transaction amounts were not found in GCCM or in the RISC database.

TheExaminersfinancialadvisorsdeterminedthatduringtheStubPeriod,LBCC
expected to receive approximately $2.9 billion in payments from counterparties,
1927

primarilyinconnectionwithFXtransactions.However,itreceivedonlyapproximately
$400million.7182Thetablebelowcomparestheseamounts.
ScheduledandActualLBCCStubPeriodReceiptsFromFXCounterparties(a)

Date

TotalAmt.Due

TotalAmt.

(c)

Received(d)

%Receivedof TotalAmt.Not
Amt.Due

Received

9/15/2008

$931,977,932

$154,022,750

16.5%

$780,955,182

9/16/2008

$1,390,249,519

$15,928,250

1.1%

$1,374,321,269

9/17/2008

$104,620,891

$593,416

0.6%

$104,027,475

9/18/2008

$154,732,044

$3,682,220

2.3%

$154,049,824

9/19/2008

$50,851,891

0.0%

$50,851,891

NonGCCM(b)

$235,545,263

$235,545,263

100.0%

Totals

$2,867,977,539

$409,771,889

14.3%

$2,464,205,640

Notes:
(a)Basedonwiredateofexpectedreceiptanddoesnotnecessarilycorrelatetodateofactualreceipt.
(b)Requestdatenotavailableforthesereceipts.
(c)Source:GCCMDataExtraction[LBEXBARGCM004179LBEXBARGCM004215].
(d)Source:DebtorBankStatementData[LBEXAM5642100LBEXAM5642389].

The table below presents all LBCC FX counterparties identified by the

Examinersfinancialadvisorsthatowedamountsof$1millionormoretoLBCCduring
the Stub Period, and indicates what percentage of the amount owed was received by
LBCC.

7182TheExaminersanalysisofLBCCbankstatementsandRISCsystemdatasuggeststhatapproximately

$235millionofthisamountwasunrelatedtothesettlementofFXtransactions.

1928

LBCC Stub Period Receipts from FX Counterparties (a)

Counterparty (b)
Total Amt Due (c) % Received (d)
0.0%
LB Aisa Holdings Ltd (019) $
1,418,356,045
100.0%
Non-GCCM (e)
235,545,263
57.8%
LBIE - I/C
177,340,208
0.0%
Calyon
87,541,093
0.0%
LB Finance SA
82,068,662
0.0%
Barclays Ldn/Rubicon
74,242,355
0.0%
LB Special Financing
73,400,192
0.0%
Barclays Bank PLC
59,147,237
0.0%
Bear Stearns FOREX
58,744,908
0.0%
Caceis Bank Lux/CAAM
57,679,466
1.2%
UBS AG
53,993,415
0.0%
Morgan Stanley Cptlgrp
38,901,801
0.0%
HSBC Bank PLC UK
35,776,250
0.0%
JPMC Bank UK
32,016,027
38.2%
Unidentified (f)
26,144,050
0.0%
Deutsche Bank AG Ldn
25,184,734
0.0%
Commerzbank AG Ffurt
24,874,500
0.0%
Bank of America NY
23,324,375
100.0%
La Caixa Madrid
21,885,000
0.0%
HSBC Bank Ldn/GS
21,227,721
0.0%
ABN Amro/Chicago
20,532,392
0.0%
Merrill Lynch Ldn
19,922,450
0.0%
Bank of New York NY
17,731,728
0.0%
State St Bank & Trust/GS
15,199,324
100.0%
TD Bank - Toronto
15,000,000

Counterparty (b)
Total Amt Due (c) % Received (d)
0.0%
LB Comm. Corp. Asia
$
13,205,115
100.0%
AIG Intl Inc, FX for LBCC
12,000,000
13.4%
Bank Julius Baer Und Co.
10,050,000
0.0%
Barclays/Ellington - 3442
9,860,000
0.0%
LB SEC Asia Ltd (130)
9,265,497
0.0%
ABN Amro/Mitsubishi
7,565,474
40.6%
Citibank NA London
7,507,750
0.0%
BWA - Pure Alpha - A2a
7,392,435
0.0%
Ersel Sim SPA
7,000,000
61.0%
Credit Suisse First Boston
5,934,272
0.0%
RBS Ldn/Man Inv Ltd.
5,921,395
0.0%
J. Aron & Co.
5,879,603
0.0%
RBS Ldn/Peregrine
5,484,988
0.0%
Bayerische Hypo - und Vereins
4,800,000
0.0%
Citigroup Treasury
4,086,550
0.0%
BA BPATC, Pure Alpha
3,099,190
0.0%
Citibank Ldn/Elk River
2,589,950
0.0%
BWA - Pure Alpha - Euro
2,385,792
0.0%
Dresdner Bank AG, Ffurt
2,238,593
0.0%
BWA-Exel Pensions C1A
1,889,081
0.0%
RBS London
1,846,179
0.0%
Deutsche Bank Ldn - DE
1,572,000
0.0%
Barclays Bank Ldn/DeShaw
1,366,400
0.0%
JPMC NY /Koch Global
1,169,799
23.1%
Other Counterparties < $1 million
18,088,281
Total
$ 2,867,977,539
14.3%

Notes:
(a) This table only reflects counterparties that owed LBCC amounts of $1 million or above.
(b) Source: RISC Monthly Statements [LBEX-LL 3357412 - LBEX-LL 3357674], [LBEX-LL 3371070 - LBEX-LL 3371355], [LBEX-LL 3396213 - LBEX-LL 3396252].
(c) Source: GCCM Data Extraction [LBEX-BARGCM 004179 - LBEX-BARGCM 004215].
(d) Source: Debtor Bank Statement Data [LBEX-AM 5642100 - LBEX-AM 5642389].
(e) Transaction amounts were not found in GCCM or in the RISC database.
(f) The Examiner was unable to identify these counterparties through RISC statements.

The Examiner notes that approximately $1.7 billion of the approximately $2.5
billionshortfallinLBCCreceiptsfromcounterpartiesduringtheStubPeriodwasdueto
the nonpayment of funds by other Lehman entities. This amount accounts for
approximately 96% of the unpaid amount LBCC owed to its counterparties in
connectionwithFXtransactions.
The Examiner further notes that Citibank, the paying agent for LBCC in
connection with FX transactions, was also a counterparty in connection with certain

1929

LBCC Stub Period FX transactions. During this time, Citibank cleared 100% of the
approximately$59millionLBCCowedtovariousCitibankentities.However,various
Citibankentitiespaidonly21%oftheapproximately$14milliontheyowedtoLBCC.7183
The Walt Disney Company Transaction. A noteworthy series of FX
transactions,which didnot completely settle asaresultoftheLBHIbankruptcy, took
placebetweenLehmanandWaltDisneyCo.7184Infact,WaltDisneyCo.movedforthe
Examiners appointment, in part, to investigate the circumstances related to the
incompletesettlementofthesetransactions.7185
Walt Disney Co. entered into an ISDA7186 master agreement (the Master
Agreement) with LBCC on May 8, 1998 for the purpose of conducting currency
exchangetransactions.7187LBHIguaranteedtheobligationsofLBCCtoWaltDisneyCo.
in connection with such transactions.7188 Because LBCC did not maintain foreign

7183ThetablescontainedinAppendix24provideafullrecitationoftheinformationsummarizedinthis

Section:specifically,theexpectedandactualpaymentsandreceiptsinconnectionwithindividualLBCC
FXtransactions.
7184Thisseriesoftransactionsconsistedoftwentyforwardcontracts.Nineteenoftheseforwardcontracts
were executed between June 12 and August 13, 2008. The settlement date for such contracts was
September15,2008.AnadditionalforwardcontractwasexecutedonJuly24,2008.Thesettlementdate
for this contract was September 16, 2008. The Examiners analysis suggests that a number of these
forwardcontractswereexecutedaspartofFXswaptransactions.
7185SeeMotionoftheWaltDisneyCompanyforAppointmentofExaminerpursuanttoSection1104(c)(2)
of the Bankruptcy Code (Examiner Motion), at p. 6 ( 14), Docket No. 1143, In re Lehman Brothers
HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Oct.20,2008).
7186InternationalSwapsandDerivativesAssociation,Inc.
7187ISDAMasterAgreement[LBEXAM047043LBEXAM047059](referringtotheLBHIguaranty).
7188SeeISDAMasterAgreementatp.22[LBEXAM047043].

1930

currency bank accounts, LBI served as an agent for LBCC for the receipt of foreign
currencies.7189
During the period from September 11 through September 16, 2008, pursuant to
the Master Agreement, Walt Disney Co. wired foreign currencies in various amounts
into LBI Citibank foreign currency accounts for the benefit of LBCC.7190 According to
theExaminerMotion,LBCCwasrequiredtopayWaltDisneyCo.approximately$107
million in U.S. dollars on the same day.7191 Instead, LBCC paid Walt Disney Co.
approximately $15 million on October 2, 2008.7192 No other payments were made to
WaltDisneyCo.inconnectionwiththesetransactions.Thenetunpaidamountowedto
WaltDisneyCo.isapproximately$92million.7193
The Examiner has endeavored to further understand the impact of the
bankruptcy on Lehmans FX payments to counterparties, including Walt Disney Co.
Generally, there were three steps involved in the payment of funds by Lehman to

7189ExaminersInterviewofKleberRodriguez,Dec.18,2009,atp.3.
7190SeeschedulelistingWaltDisneyCo.sforeigncurrencypaymentstoLehmaninconnectionwiththese

transactions [LBEXAM 047073 LBEXAM 047074]. The foreign currency amounts are as follows:
20,000,000.00Australiandollars;20,000,000.00Canadiandollars;20,472,986.04Euros;17,061,453.56British
pounds sterling; 20,475,000.00 Singapore dollars; and 162,402,000.00 Japanese yen. In addition, Walt
Disney Co. instructed UBS to wire 4,302,101.92 Euros, 2,968,668.80 British pounds sterling, 1,118,000.00
Singaporedollars,and162,402,000.00JapaneseyentoLBCC.However,UBSdidnotconsummatethese
transactions.Id.
7191SeeExaminerMotion,atp.2(4),DocketNo.1143,InreLehmanBrothersHoldingsInc.,No.0813555
(Bankr.S.D.N.Y.Oct.20,2008).
7192This payment was made in connection with the forward contract executed on June 12, 2008, selling
Singapore dollars against U.S. dollars. Debtor Bank Statement Data [LBEXAM 5642207]; Walt Disney
Co.September2008RISCStatement[LBEXLL3354476].
7193ThedeterminationoftheexactamountowedtoWaltDisneyCo.isafactualquestion,dependent,in
part, upon the appropriate currency exchange rate used to determine the value of currencies not
deliveredbyWaltDisneyCo.toLehmanpursuanttotheforwardcontractsdiscussedabove.

1931

counterparties in these transactions: (1) the RISC system created a payment message,
notifying GCCM that a payment was due to a counterparty; (2) GCCM released
paymentinstructionstothepayingbank(Citibank,inthecaseofLBCC)tosendfunds
tothecounterparty;and(3)thebanktransferredtheappropriatefunds(i.e.clearedthe
payment)tothecounterpartysdesignatedbankaccount.
In addition to LBCC not having sufficient funds in its accounts to settle its FX
obligations as a result of the bankruptcy filing, the timing, implementation and
conclusionofthethreestepprocessoutlinedabovewasdisrupted.TheExaminersets
forth below examples of the impact that the bankruptcy and resulting operational
disruption had on the settlement process of FX transactions with Lehman
counterparties.
The following table summarizes the creation times for RISC payment messages
and the release times for GCCM payment instructions to Citibank in connection with
LBCCspaymentstocounterpartiestosettleFXtransactionsinamountsof$10million
ormoreduringtheStubPeriod,asidentifiedbytheExaminersfinancialadvisors.The
tablealsoindicateswhetherCitibankinfactclearedpayment.

1932

LBCC Requests to Citibank for Individual Payments $10 Million or Above to FX Counterparties

Party (a)

Amount (US D) (b)

RIS C Payment
Message Date
(b)

RIS C Created
Payment
Message
(ES T) (b)

GCCM Released
Payment
Instruction to
Citi (ES T) (b)

Result (c)

Walt Disney Co.

(33,364,108)

09/15/08

12:27 AM

12:33 PM

Not Paid

Walt Disney Co.

(19,218,700)

09/15/08

12:27 AM

12:33 PM

Not Paid

Walt Disney Co.

(19,537,241)

09/15/08

12:27 AM

12:33 PM

Not Paid

Walt Disney Co.

(32,453,441)

09/15/08

12:27 AM

12:33 PM

Not Paid

Walt Disney Co.

(14,891,429)

09/15/08

12:27 AM

12:33 PM

Paid 10/2/2008

Ford Global Treasury

(62,733,340)

09/15/08

12:36 AM

12:43 PM

Paid 9/15/2008

Cr. Suisse First Boston

(12,900,000)

09/15/08

6:03 AM

6:08 AM

Not Paid

LBIE - I/C

(11,035,656)

09/15/08

6:03 AM

6:08 AM

Not Paid

LBIE - I/C

(12,995,937)

09/15/08

6:03 AM

6:08 AM

Not Paid

LBIE - I/C

(11,903,565)

09/15/08

6:03 AM

6:08 AM

Not Paid

LB Finance SA

(20,000,000)

09/15/08

6:03 AM

6:09 AM

Not Paid

LBIE - I/C

(20,637,643)

09/15/08

6:03 AM

6:09 AM

Not Paid

LB Finance SA

(10,000,000)

09/15/08

6:03 AM

6:09 AM

Not Paid

JPM C Bank Singapore

(10,000,000)

09/15/08

6:03 AM

6:09 AM

Not Paid

JPM C NY / FC Stone

(75,000,000)

09/15/08

6:03 AM

6:09 AM

Not Paid

(150,860,219)

09/15/08

6:03 AM

6:09 AM

Not Paid

Citibank Ldn / Julius Baer

(26,965,762)

09/15/08

6:03 AM

6:10 AM

Paid 9/29/2008

LB Aisa Holdings Ltd (019)

(24,179,500)

09/15/08

6:03 AM

6:10 AM

Not Paid

LB Aisa Holdings Ltd (019)

(40,108,500)

09/15/08

6:03 AM

6:10 AM

Not Paid

Bank Julius Baer Und Co.

(30,000,000)

09/15/08

6:03 AM

6:11 AM

Not Paid

M erril Lynch Int Bank Ldn

(10,000,000)

09/15/08

6:03 AM

6:11 AM

Not Paid

ABN Amro Bank NV

(20,000,000)

09/15/08

6:03 AM

6:11 AM

Not Paid

UBS AG

(27,086,689)

09/15/08

6:03 AM

6:12 AM

Not Paid

Commerzbank AG Ffurt

(36,218,000)

09/15/08

9:22 AM

9:28 AM

Not Paid

Commerzbank AG Ffurt

(52,106,250)

09/15/08

9:22 AM

9:28 AM

Not Paid

LBIE - I/C

(64,994,000)

09/15/08

9:45 AM

9:50 AM

Paid 9/15/2008

Deutsche Bank AG Ldn

(11,651,680)

09/15/08

10:49 AM

10:55 AM

Not Paid

UBS AG

(20,337,500)

09/15/08

10:49 AM

10:55 AM

Not Paid

UBS AG

(37,650,000)

09/15/08

10:49 AM

10:55 AM

Not Paid

LBIE - I/C

(33,715,000)

09/15/08

1:31 PM

1:35 PM

Not Paid

J. Aron & Co.

M organ Stanley Cptlgrp

(25,000,000)

09/15/08

5:36 PM

6:19 PM

Not Paid

Barclays Bank PLC

(12,500,000)

09/16/08

6:04 AM

10:15 AM

Not Paid

LB SEC Asia Ltd (130)

(12,294,605)

09/16/08

6:04 AM

10:15 AM

Not Paid

LB Finance SA

(10,000,000)

09/16/08

6:04 AM

10:15 AM

Paid 9/17/2008

Barclays Bank PLC

(17,300,000)

09/16/08

6:04 AM

10:16 AM

Not Paid

Deutsche Bank AG Ldn

(20,281,250)

09/16/08

10:19 AM

10:54 AM

Not Paid

Ppl's Bank of China/Safe

(473,000,000)

09/17/08

6:05 AM

10:35 AM

Not Paid

Phillip M orris Finance SA

(10,000,000)

09/17/08

9:42 AM

12:00 PM

Paid 9/29/2008

Citibank NA NY

(24,848,830)

09/18/08

6:02 AM

9:15 AM

Paid 9/19/2008

Barclays Ldn/Rubicon

(10,000,000)

09/18/08

9:15 AM

6:02 AM

Not Paid

Bank of America NY

(10,000,000)

09/19/08

6:08 AM

10:12 AM

Not Paid

RBS Ldn / Lily Pond Capital

(10,845,771)

09/19/08

6:08 AM

10:12 AM

Not Paid

(131,397,048)

09/19/08

6:08 AM

10:12 AM

Not Paid

Ford Global Treasury

Notes:

(a) Source: RISC Monthly Statements [LBEX-LL 3357412 - LBEX-LL 3357674], [LBEX-LL 3371070 - LBEX-LL 3371355],
[LBEX-LL 3396213 - LBEX-LL 3396252].
(b) Source: GCCM Data Extraction [LBEX-BARGCM 010374 - LBEX-BARGCM 010395].
(c) Source: Debtor Bank Statement Data [LBEX-AM 5642100 - LBEX-AM 5642389].

1933

Thetimingsetforthinthetableaboverevealscertainanomalies.Specifically,the
timedifferencebetweenthecreationofpaymentmessagesinRISCandthegeneration
of payment instructions in GCCM, for scheduled payments by LBCC to various
counterparties on September 15,2008, ranged from five minutes to 12 hours. Prior to
September15,2008,ontheotherhand,thetimedifferencebetweenthecreationofthe
paymentmessageinRISCandthereleaseoftheGCCMpaymentinstructiontoCitibank
wastypicallylessthan20minutes.7194
ThepaymentinstructionsfromLBCCtoCitibankonSeptember15,2008provide
an illustration: RISC payment messages in connection with five scheduled payments
from LBCC to Walt Disney Co. (ranging in amount from $14,891,429 to $33,364,108)
were created at 12:27 a.m. EST. Corresponding GCCM payment instructions were
released approximately 12 hours later at 12:33 p.m.7195 Four of the five payments
associated with these payment instructions did not clear. The fifth payment in the
amountof$14,891,429clearedonOctober2,2008.
Incontrast,aRISCpaymentmessageinconnectionwithascheduledpaymentof
$64,994,000fromLBCCtoLBIEwascreatedat9:45a.m.EST(approximatelyninehours
after the creation of the Walt Disney Co. payment messages). The corresponding

7194Citibank

then typically cleared the payment on the same business day. Examiners Interview of
RobertEby,Jan.6,2010,atp.6.
7195LBCC instructed Citibank to make an additional payment to Walt Disney Co. in the amount of
$1,513,474onSept.16,2008,butthatpaymentdidnotclear.Inanyevent,WaltDisneyCo.didnotpay
LBCCtheforeigncurrencyfundsrelatedtothistransaction.

1934

GCCM payment instructions were released approximately five minutes later at 9:50
a.m.ThispaymentclearedonSeptember15,2008.7196
A RISC payment message for the payment of $62,733,3407197 to Ford Global
TreasuryInc.(Ford)wascreatedat12:36a.m.EST(approximatelynineminutesafter
the creation of the Walt Disney Co. payment messages). The corresponding GCCM
payment instructions were released approximately 12 hours later at 12:43 p.m. EST.
ThispaymentalsoclearedonSeptember15,2008.7198
The RISC payment messages (and associated GCCM payment instructions) for
thethreetransactionsof$10millionormorelistedbelowweregeneratedonetothree
daysafterthepaymentmessagesandinstructionsforLBCCspaymenttoWaltDisney
Co. These payments, which cleared during the period between September 17 and
September29,2008,wereasfollows:(1)apaymentof$10milliontoLBFinanceSAon
September17,2008;(2)apaymentof$10milliontoPhillipMorrisSAonSeptember29,
2008; and (3) a payment of $24,848,830 to Citibank (NY) on September 19, 2008. The

7196Similarly,aRISCpaymentmessageinconnectionwithapaymentof$26,965,762toCitibank(London)

was created at 6:03 a.m. EST (more than five hours after the creation of the Walt Disney Co. payment
messages), and a GCCM payment instruction was released seven minutes later at 6:10 a.m. EST on
September15,2008.ThispaymentclearedonSeptember29,2008.
7197AnadditionalpaymenttoFordintheamountof$131,397,048wasrequestedonSeptember19,2008,
butdidnotclear.FordSept.2008MonthlyRISCStatement[LBEXLL3261020LBEXLL3261033].
7198ItshouldbenotedthatthefiveGCCMinstructionsforpaymenttoWaltDisneyCo.correspondedto
theamountsoffiveforeigncurrenciespaidbyWaltDisneyCo.toLehman.Ford,ontheotherhand,paid
variousamountsinsixforeigncurrenciestoLehman.However,LBCCspaymenttoFordwasmadevia
one wire transfer. This netting of payments was typical of Lehmans arrangements with certain FX
counterparties.ExaminersInterviewofRobertEby,Jan.6,2010,atp.6.

1935

Examinerfurthernotesthat36scheduledpaymentsinamountsof$10millionormore
toLBCCscounterpartiesduringtheStubPerioddidnotclear.
Tofurtherunderstandthepriorityinwhichpaymentsmadeinconnectionwith
the transactions discussed above were cleared, the Examiner requested that Citibank
provideanexplanationofitspoliciesandproceduresinconnectionwiththesettlement
of LBCCs FX transactions on and after September 15, 2008. According to Citibank,
priortoSeptember15,intheordinarycourseofbusiness,CitibankwouldclearLBCCs
FX payments to counterparties according to a FIFO (firstin, firstout) priority.7199
According to Citibank, however, the payment clearing time did not necessarily match
the GCCM payment instruction time discussed above because, under certain
circumstances, scheduled payments to counterparties were held and not immediately
paid.7200 Citibank offered various reasons why a payment may have been held: (1)
formatting errors in the payment instruction, (2) insufficient funds, (3) debit nopost
restrictionsor(4)sanctionchecks(e.g.,theOfficeofForeignAssets&Controlsrequires
banks to hold payments going to Cuba or Iraq).7201 These payments were directed to
different queues in Citibanks systems and held there until they were cleared or
cancelled.7202

7199CitigroupsWrittenResponsestoExaminersInquiry(Jan.12,2010),atp.2.
7200Id.
7201Id.
7202Id.

1936

CitibankprovidedanoverviewofhowthepaymentprocessforLBCCsaccounts
changed upon the LBHI bankruptcy filing. On the morning of September 15, 2008,
CitibankplacedallofLehmansaccountsondebitnopostandcrisismanagement
status.7203 As a result, Citibank temporarily stopped processing all payments from
LBCCsaccounts.7204CitibankresumedthepaymentprocessforLBCCsaccountslater
in the afternoon on September 15, clearing the largest payments that could be made
withavailablefunds.7205Citibankrecalledthatpaymentsthatdidnotclearonthatday
becauseofinsufficientfundswereplacedinaqueueandclearedifthenecessaryfunds
becameavailable.7206
According to Citibank, payments from LBCCs accounts continued without
interruption from the late afternoon of September 15 through September 21, 2008.7207
During this time, the separately queued LBCC payments that had not cleared on
September 15 were processed simultaneously with LBCCs new payment
instructions.7208 Citibank explained that it may have processed new payments before
processing payments that had been pending since September 15 (because new
payments may have cleared in between attempts to clear pending payments).7209

7203Id.
7204Id.
7205Id.
7206Id.atpp.23.
7207Id.atp.3.
7208Id.
7209Id.

1937

Subsequently, on September 22 after an additional round of Lehman Affiliate

bankruptcy filings, Citibank again imposed payment restrictions on Lehmans bank
accounts. These restrictions were lifted on September 29, 2008.7210 Citibank informed
the Examiner that it did not receive any instructions from Lehman regarding the
prioritizationofLBCCsFXpaymentstocounterparties.7211
As discussed above, as a result of LBHIs bankruptcy, LBCC did not have
sufficientfundsinitsaccounttomeetallofitsobligationstoitsFXcounterpartiesand
operational disruption at both Lehman and Citibank impacted whether and in what
ordercounterpartieswerepaid.
6.

ExaminersReviewofIntercompanyTransactionsWithinThirtyDays
ofLBHIsBankruptcyFiling(SeventhBullet)
a) Summary

This Section of the Report provides an overview of the intercompany accounts

and transfers among LBHI and some of its direct and indirect subsidiaries, including
LBIE, LBSF, and LBCS during the thirtyday period preceding the commencement of
theChapter11casesbyeachdebtoronSeptember15,2008orthereafterorsuchlonger
periodastheExaminerdeemedrelevanttotheinvestigation.7212TheExaminerwasnot
askedtoinvestigatetheexistenceofpotentiallycolorableclaims,butrathertoprovidea

7210Id.
7211Id.atp.2.
7212ExaminerOrderatp.4,seventhbullet.

1938

narrative relating to accounts and transfers among LBHI and various other Lehman
entitiesofinterestinthethirtydayspriortoLBHIsbankruptcy.
The Examiner found that certain Lehman entities of interest, particularly LBHI,
LBIE, and LBSF, engaged in substantial intercompany funding and quasifunding
activity, as captured in Lehmans cash management system, GCCM, in the six weeks
prior to LBHIs bankruptcy. Notably, LBHI transferred a net amount of almost $22
billiontooronbehalfofLBIEduringthatsixweekperiod,includinganetamountofat
least$4billioninthelastweekpriortoLBHIsbankruptcy.
b) Discussion
Asaninitialmatter,theExaminernotesthatotherSectionsofthisReportaddress
intercompanytransfersrelatingtonoteworthyeventspriorto,andduring,thisperiod.
For example, the Examiner discussed collateral pledged to JPMorgan in August and
September 2008 and the intercompany transfers from LCPI to LBHI preceding that
pledge. Similarly, the Examiner addresses insider preferences and discusses transfers
betweenLBHIandcertainLBHIAffiliatesbetweenJune1andSeptember15,2008.7213
ToavoidduplicationbetweenthisandotherSectionsoftheReport,theExaminer
analyzed intercompany funding and quasifunding7214 activity between LBHI and

7213SeeAppendix No.22: Duff& Phelps,PreferencesAgainst LBHI and OtherLehman Entities(Feb. 1,

2010).
7214For purposes of this discussion, the term funding refers to the movement of cash between bank
accountsownedbytheLehmanentitiesofinterest.QuasifundingreferstoactivitywheretheLehman
entitiesofinterestengagedintransfersandtransactionswiththirdpartiesonbehalfofanotherLehman

1939

certaindebtorsinthedaysleadinguptoLBHIsbankruptcyonSeptember15,2008.7215
The Examiners financial advisors obtained from Barclays a report containing all
intercompany activity recorded in GCCM, including activity for August 1 through
September 15, 2008. The Examiner notes, however, that the data contains limited
information(andinsomecasesnoinformation)relatingtosomeentities,includingLBI.
Moreover, as discussed in several Sections of this Report, money was transferred
betweenandamongLehmanentitiesinwaysnotcapturedbyGCCM(orcontainedin
thefollowinganalysis).
The Examiner analyzed such data for August 1, 2008 to September 12, 2008,7216,
andforcomparisonpurposes,thecorrespondingtimeperiodin2007,fromGCCM.7217It
would have been impractical, in terms of time and resources, to identify and review
every means by which Lehman engaged in intercompany funding and quasifunding
activity.7218 Before turning to the intercompany funding and quasifunding analysis,

entity of interest, thereby generating intercompany adjustments to the payable and receivable accounts
betweenthem.
7215TheExaminerdidnotinvestigateactivityinvolvingLCPIbecauseitsmainbankaccountwastiedto
the MTS trading system, which was not integrated into GCCM. See Section III.B.3.e.8 of this Report,
whichdiscussesLCPIsfundingactivities.
7216TheExaminerextendedthelookbackperiodtoAugust1inordertocaptureafullaccountingcycle.
7217The Examiner selected the corresponding 2007 time period as a useful benchmark for comparison.
While Lehman did have adverse economic events that year, such as closing BNC Mortgage in August
2007,Lehmanpostedpositivenetrevenuesineveryquarterthatyear.LehmanBrothersHoldings,Inc.,
FiscalYear2007Report(Form10K)(Jan.29,2008),atp.135n.16.
7218WhileGCCMcapturedLehmansquasifundingactivity,theExaminerunderstandsthatGCCMdid
notcaptureaconsiderableamountofLehmansintercompanyfundingactivity.ExaminersInterviewof
DanielJ.Fleming,Dec.17,2009,atp.8.SeeSectionIII.B.3.e.8ofthisReport,whichdiscussesalternate
mechanismsofintercompanyfundingrelatedtransfers.

1940

however, a brief overview of GCCM is necessary to provide context.7219 GCCM

capturedtwotypesofintercompanyactivity:(1)activityoriginatingoutsideofGCCM
bywayofexternalfeedersystemsand(2)activityoriginatinginsideGCCMbywayof
internalGCCMpaymentfunctions.
With respect to activity originating outside of GCCM, four external feeder
systems are relevant to this analysis. Treasury Workstation (Summit) (TWS) was a
suite of applications that controlled Lehmans unsecured funding. TWSLON, a feeder
system analogous to TWS, was employed for Lehmans European operations. ASAP
was a feeder system for payments and settlements related to fixed income and equity
derivativetransactions,inadditiontoconsolidatingthecashflowsgeneratedbythose
derivatives.Finally,PrimeTransactionManager(PTM)wasasystemforhedgefund
relatedprimebrokerageactivity.
As for activity originating inside of GCCM, two internal GCCM payment
functions are relevant to this analysis. MANPMT was used to denote certain
transactions posted manually to the GCCM system. FUNDING was an internal
function that Lehman employed to initiate cash transactions, i.e., intercompany
transfersbetweenthebankaccountsoftheLehmanpartiesofinterest.Forpurposesof
clarity, the Examiner notes that funding transfers, that is, transfers involving the

7219Lehman

Brothers, Global Cash and Collateral Management Platform Initiative on Lehman Live
[LBEXLL3356455](hereinafterGCCMPlatformInitiative).

1941

movement of cash between bank accounts of the Lehman entities of interest, was
capturedbyGCCMfromtheinternalFUNDINGfunction.7220
c)

Analysis

TheExaminerconductedatwofoldanalysisofintercompanyfundingandquasi
fundingdatacapturedinGCCMforthevariousLehmanentitiesofinterest.First,the
Examiner analyzed that data on a macro level by examining the net intercompany
accountactivityfortheentire2007and2008periodsofanalysis.Fromthisanalysis,the
Examinersoughttounderstandeachoftheentitysrolesinintercompanyfundingand
quasifunding activity relative to the other Lehman entities of interest. The Examiner
then reviewed that data on a daily basis to identify any particularly notable
intercompanyactivityoccurringinthedaysimmediatelypriortoLBHIsbankruptcy.
d) AnalysisofOverallNetIntercompanyDataforthe2007and2008
PeriodsofAnalysis
(1) LBHI
TheExaminerobservedthatLBHItransferredanetamountofapproximately$43
billiontooronbehalfofcertainotherLehmanentitiesofinterestinthe2007periodof
analysis,andanetamountofapproximately$28billiontooronbehalfofcertainother
Lehman entities of interest in the 2008 period of analysis. This activity included net
fundingtransfersofabout$8.1billionandabout$3.2billionintherespective2007and
2008periodsofanalysis,aswellasnetquasifundingtransfersofabout$35billionand

7220Asdiscussedbelow,fundingactivitywasalsocapturedtosomeextentfromMANPMTandTWS.

1942

about $25 billion in the respective 2007 and 2008 periods of analysis. This activity is
presentedinthechartbelow,withnegativeactivitydepictingnetoutflowsofcashfrom
LBHI to or on behalf of other Lehman entities of interest with respect to the GCCM
sourcesystemsofinterest:
LBHI's Net Activity By GCCM Source System ($ in thousands)
Positive denotes cash transferred to or on behalf of LBHI by all other Lehman entities of interest;
Negative denotes cash transferred by LBHI to or on behalf of all other Lehman entities of interest
August 1, 2007 - September 12, 2007 and August 1, 2008 - September 12, 2008
$5,000,000
$0
($5,000,000)
($10,000,000)
($15,000,000)
($20,000,000)
($25,000,000)
($30,000,000)
($35,000,000)
($40,000,000)
($45,000,000)

ASAP

FUNDING

MANPMT

PTM

2007

TWS

TWSLON

Total

2008

Inthe2007and2008timeperiodsofanalysis,quasifundingactivitycapturedin
GCCM from the MANPMT source code comprised the vast majority of net transfers
(approximately $32.4 billion and approximately $21.8 billion in 2007 and 2008,

1943

respectively).7221 LBHI transferred virtually all of that cash to or on behalf of LBIE in

both years. As for funding activity captured in GCCM from the FUNDING source
code,theExaminerobservedthatLBHItransferrednetamountsofapproximately$8.1
billion and approximately $3.2 billion to various Lehman entities of interest in the
respective 2007 and 2008 periods of analysis. LBIE and LBSF were the primary
recipients of these net transfers in the 2007 period of analysis. In that period, LBHI
transferredanetamountofapproximately$4.0billiontoLBIEandapproximately$4.4
billion to LBSF. In the 2008 period of analysis, LBHI transferred a net amount of
approximately$3.9billiontoLBIE.7222
These data show that LBHI transferred substantial cash to various Lehman
entities of interest (funding) and made substantial payments on behalf of various
Lehmanentitiesofinterest(quasifunding),particularlyLBIE.Thesedataareconsistent
withtheExaminersunderstandingthatLBHIactedascentralbankerfortheLehman
entities and that LBIE, in particular, required significant funding and quasifunding
duringtheperiodimmediatelypriortothebankruptcyfilingasaresultofunwinding
primebrokerageservices.7223TheExaminerunderstandsthatthereisdisagreementasto

7221TheExaminernotesthepossibilitythatMANPMTcouldhavecapturedsomefundingtypetransfers.

Inviewoftimeandresourcelimitations,theExaminerdidnotattempttoquantifytheamountofthese
fundingtypetransfers.
7222TheLBHItransfersin2008werepartiallyoffsetbytransfersfromLBSFtoLBHI(roughly$0.6billion).
7223Lehman Brothers, Liquidity of Lehman Brothers (Draft) (Oct. 7, 2008), at p. 16
[LBHI_SEC07940_844701](presentationslideentitledBrokerDealerLiquidityPositionsexplainingthat
[d]uringtheweekofSeptember8,LBIElost$11.0billionprimarilyasaresultof[a]$4.2billiondecrease

1944

whethersubstantialsumsofcashflowedfromLBIEtooneormoreLehmanentitiesin
the days leading up to LBHIs bankruptcy.7224 The Examiner has not investigated this
issue,andthisanalysisisnotnecessarilymeanttoanswerthatquestion.TheExaminer
understandsthattherewerewaystomovemoneybetweenentitiesnotcapturedbythe
datacontainedinthisanalysis.
(2) LBIE
TheExaminerobservedthatvariousLehmanentitiesofinteresttransferredanet
amount of approximately $36.4 billion and $24.4 billion to or on behalf of LBIE in the
respective 2007 and 2008 periods of analysis. That activity included net funding
transfers of about $4.0 billion and about $3.9 billion in the respective 2007 and 2008
periodsofanalysis,aswellasnetquasifundingtransfersofapproximately$32.4billion
and approximately $20.5 billion in the respective 2007 and 2008 periods of analysis.
Thisactivityissetforthinthechartbelow:

in operational cash cushion of its prime broker business (although this cushion is meant to protect its
primebrokerbusiness,itiscommingledwithandincludedinLBIEliquidity)).
7224CarrickMollenkamp,et.al,OutcryGrowsOverTransferofU.K.FundsByLehman,WALL ST. J.,Sept.22,
2008,atC1;seealsoCassellBryanLow,LehmansLegacy:LehmanEuropeClaimsBegintoComeIn,WALL ST.
J.,Sept.25,2009,atC3.

1945

LBIE's Net Activity By GCCM Source System ($ in thousands)

Positive denotes cash transferred to or on behalf of LBIE by all other Lehman entities of interest;
Negative denotes cash transferred by LBIE to or on behalf of all other Lehman entities of interest
August 1, 2007 - September 12, 2007 and August 1, 2008 - September 12, 2008
$40,000,000

$35,000,000

$30,000,000

$25,000,000

$20,000,000

$15,000,000

$10,000,000

$5,000,000

$0

($5,000,000)

ASAP

FUNDING

MANPMT

PTM

2007

TWS

TWSLON

Total

2008

Withrespecttoquasifundingtransfers,MANPMTactivitycomprisednearlyall
of these transfers, including net amounts of about $32.4 billion in the 2007 period of
analysis and about $21.8 billion in the 2008 period of analysis. As discussed above,
LBHI transferred virtually all of these amounts to or on behalf of LBIE. GCCM also
capturednotablequasifundingactivityfromitsASAPsourcecodeinthe2008periodof
analysis.Inthatperiod,LBIEtransferredapproximately$1.7billiononbehalfofLBSF.
As for funding activity captured in GCCM from the FUNDING source code, the
Examiner observed that LBHI transferred net amounts to LBIE of approximately $4.0

1946

billion and approximately $3.9 billion in the respective 2007 and 2008 periods of
analysis.
TheforegoingdatashowthatLBIEwastherecipientofsubstantialfundingand
quasifundingfromvariousLehmanentitiesofinterest,particularlyLBHI.Thesedata
are consistent with the Examiners understanding that LBIE required significant
fundingandquasifundingduringtheperiodofthisanalysisasaresultofunwinding
primebrokerageservices.7225
(3) LBSF
The Examiner observed that various Lehman entities of interest transferred net
amountsofapproximately$6.8billionandapproximately$4.0billiontooronbehalfof
LBSF in the respective 2007 and 2008 periods of analysis. That activity included net
fundingtransfersofnearly$4.4billionintoLBSFinthe2007periodofanalysisandnet
fundingtransfersoutofLBSFofnearly$600millioninthe2008periodofanalysis.That
activity also included net quasifunding transfers of roughly $2.5 billion and roughly
$4.7billiontooronbehalfofLBSFintherespective2007and2008periodsofanalysis.
Thisactivityisprovidedinthechartbelow:

7225LehmanBrothers,LiquidityofLehmanBrothers(Oct.7,2008),atp.16[LBHI_SEC07940_944701].

1947

LBSF's Net Activity By GCCM Source System ($ in thousands)

Positive denotes cash transferred to or on behalf of LBSF by all other Lehman entities of interest;
Negative denotes cash transferred by LBSF to or on behalf of all other Lehman entities of interest
August 1, 2007 - September 12, 2007 and August 1, 2008 - September 12, 2008
$8,000,000

$7,000,000

$6,000,000

$5,000,000

$4,000,000

$3,000,000

$2,000,000

$1,000,000

$0

($1,000,000)

ASAP

FUNDING

MANPMT

PTM

2007

TWS

TWSLON

Total

2008

With respect to TWSrelated quasifunding transfers, LBHI was the sole

transferorinboththe2007and2008periodsofanalysis.LBHItransferrednetamounts
ofroughly$2.3billionandroughly$2.5billion,respectively,tooronbehalfofLBSF.7226
GCCMalsocapturednotablequasifundingactivity,nearly$2.6billion,fromitsASAP
sourcecodeinthe2008periodofanalysis.Inthatperiod,LBIEandLBHItransferred
net amounts of roughly $1.7 billion and roughly $750 million, respectively, on LBSFs
behalf.AsforfundingactivitycapturedinGCCMfromtheFUNDINGsourcecode,the
Examiner observed that LBHI was the entity primarily associated with such net

7226The Examiner notes the possibility that TWS could have captured some fundingtype transfers. In

view of time and resource limitations, the Examiner did not attempt to quantify the amount of these
fundingtypetransfers.

1948

transfers. In the 2007 period of analysis, LBHI transferred a net amount of

approximately $4.4 billion to LBSF, while in the 2008 period of analysis LBSF
transferredapproximately$600milliontoLBHI.
ThesedatashowthatLBSFwastherecipientofsubstantialnetfundingandnet
quasifunding from various Lehman entities of interest. The data showing LBSFs
ASAP activity is consistent with the Examiners understanding of LBSFs derivatives
trading activities during the period of analysis. In addition, the data showing LBHIs
involvement in FUNDING activity with LBSF are consistent with the Examiners
understandingthatLBHIactedascentralbankerfortheLehmanentities.
e) AnalysisofNetDailyIntercompanyDataforthe2007and2008
PeriodsofAnalysis
Withfewexceptions,thenetdailyintercompanydatafortherelevantperiodsin
2007and2008revealedlittlenotableactivityinthelastsixweekspriortoSeptember15,
2008.7227Inmanycases,anentityslevelofnetdailyactivityin2008generallymirrored
the same level of net activity in the preceding year. Moreover, in many cases, the
Examiner observed that the net daily activity in the last two to three weeks prior to
September 15, 2008 was either (1) minimal or nonexistent, or (2) consistent with prior
weeks,suggestingtheabsenceofnotableactivity.

7227The

net daily data for the relevant periods in 2007 and 2008 are set forth in Appendix No. 25,
IntercompanyTransactionsOccurringWithinThirtyDaysBeforeBankruptcy(Feb.1,2010).

1949

At the same time, the Examiner found several instances in which the net daily
activity may be of particular note. First, in reviewing LBHIs MANPMT activity with
LBIE,theExaminerobservedthatinthe2008periodofanalysis,LBHItransferredanet
amount of roughly $12 billion to or on behalf of LBIE in the last two weeks prior to
LBHIsbankruptcy,andanetamountofalmost$9billioninthelastweekalone.The
totalactivityforthesetwoweekscomprisedoverhalfofthenetactivityfortheentire
2008period.Atthesametime,inexaminingLBHIsFUNDINGactivitywithLBIE,the
Examinerobservedthatinthe2008periodofanalysis,LBHItransferredanetamountof
roughly$4billiontoLBIEinthelastweekpriortoLBHIsbankruptcy.Asnotedabove,
thereisdisagreementastowhethersubstantialsumsofcashflowedfromLBIEtoone
ormoreLehmanentitiesinthedaysleadinguptoLBHIsbankruptcy.7228
Second, in further reviewing LBHIs FUNDING activity, the Examiner also
observedinthe2008periodofanalysisthatLBHImadesizeablenettransfersofcashto
LBSF and LBCS in the last week prior to LBHIs bankruptcy. Those cash transfers
includednetamountsofapproximately$2.7billiontoLBSFandnearly$250millionto
LBCS. Including the $4 billion in net transfers to LBIE discussed above, LBHI
transferredanetamountofover$7billionincashduringthatlastweekin2008.

7228CarrickMollenkamp,et.al,OutcryGrowsOverTransferofU.K.FundsByLehman,WALL ST. J.,Sept.22,

2008,atC1;seealsoCassellBryanLow,LehmansLegacy:LehmanEuropeClaimsBegintoComeIn,WALL ST.
J.,Sept.25,2009,atC3.

1950

Finally, in analyzing LBHIs ASAP activity with LBSF, the Examiner observed
that in the 2008 period of analysis, LBHI transferred a net amount of roughly $650
million on behalf of LBSF on September 11, almost immediately prior to LBHIs
bankruptcy.TheExaminerfoundthissinglenettransferparticularlynotableinviewof
thefactthatitcomprisedalmost90%oftheactivityfortheentiresixweekperiod.
7.

ExaminersAnalysisofLehmansDebttoFreddieMac

The Federal Housing Finance Agency (FHFA), Conservator for the Federal
Home Loan Mortgage Corporation (Freddie Mac), requested the Examiners
assistance in investigating certain transactions between Freddie Mac and LBHI.7229
Pursuant to the eighth bullet of paragraph 2 of the Examiner Order, the Examiners
investigation extends to transactions . . . among the debtors and the prechapter 11
lenders and/or financial participants.7230 In this Section, the Examiner reports on his
investigationconcerningunsecuredloansfromFreddieMactoLBHIin2008thatLBHI
didnotrepay.

See Letter from Alfred M. Pollard, FHFA, to Anton R. Valukas, Jenner & Block, re: In re Lehman
BrothersHoldings,Inc.,etal.(Feb.23,2009),atp.2.AsConservatorforFreddieMac,FHFAholdsall
rights, titles, powers, and privileges of Freddie Mac. 12 U.S.C. 4617(b)(2). Further, FHFA has the
authority to avoid certain fraudulent transactions related to Freddie Mac. See id. 4617(b)(15). FHFA
claimssuperprioritytotheproceedsofsuchtransactions.Seeid.4617(b)(15)(D).TheExaminermakes
nolegalconclusionsastoFHFAspriority.
7230 Further, the Examiner Order provides that [t]he Examiner shall cooperate fully with any
governmentalagencies.OrderDirectingAppointmentofanExaminerPursuanttoSection1104(c)(2)of
theBankruptcyCode,atp.6(8),DocketNo.2569,InreLehmanBros.Holdings,Inc.,No.0813555(Bankr.
S.D.N.Y.Jan.16,2009).
7229

1951

Beginninginearly2008,FreddieMacengagedinaseriesofprivatelynegotiated
shorttermfundingtransactionswithLBHI,typicallyadvancingbetween$1billionand
$1.2billionforapproximatelyonemonthatatime.7231StevenEngel,LehmansGlobal
Head of Funding, described LBHIs transactions with Freddie Mac as plain vanilla:
Engel or another trader from Lehmans funding desk would speak with a broker,
typically Tullett Prebon, which would indicate that Freddie Mac was looking to lend
moneyandaskwhetherLehmanwasinterestedinborrowingthatmoney.7232Lehman
borrowedfromFreddieMactotakeadvantageofanattractiverate,anditwouldseekto
rollthetransactionwhentheratewasfavorable.7233
On August 19, 2008, Freddie Mac transferred $450 million to LBHI and on
August20,2008,FreddieMactransferred$750milliontoLBHI.7234Bothtransferswere
duetoberepaidonthemorningofSeptember15thedayLBHIfiledforbankruptcy

Letter from David A. Felt, FHFA, to Anton R. Valukas, Jenner & Block, re: In re: Lehman Brothers
Holdings,Inc.,etal.(Apr.17,2009),atp.2&Attach.2;ExaminersInterviewofStevenJ.Engel,Oct.30,
2009, at p. 4. Although FHFA and Lehman sometimes described these transactions as fed funds
transactions,StevenEngel,LehmansGlobalHeadofFunding,explainedthatthesetransactions,though
madethroughafedfundsbroker,werenotstrictlyfedfundstransactionsbecauseLBHIwasnotabank.
ExaminersInterviewofStevenJ.Engel,Oct.30,2009,atpp.78.
7232ExaminersInterviewofStevenJ.Engel,Oct.30,2009,atp.4.
7233Id.EngelneverspokewithFreddieMacdirectlyaboutthesetransactions.Id.RichardFuldinteracted
withRichardSyron,CEOofFreddieMac,asabankingclient,butFuldhadnorecollectionofdiscussing
these transactions with Syron. Examiners Interview of Richard S. Fuld, Jr., Apr. 28, 2009, at p. 14.
AccordingtoFHFA,SyronalsodidnotrecallspeakingwithFuldconcerningthesetransactions.Letter
from David A. Felt, FHFA, to Anton R. Valukas, Jenner & Block, re: In re: Lehman Brothers Holdings,
Inc.,etal.(Apr.17,2009),atp.4.AlthoughitappearsthatacallwasscheduledamongLehmansPaolo
Tonucci and others with Freddie Mac on August 1, 2008 to discuss liquidity, email from Daniel
Malone,Lehman,toPaoloTonucci,Lehman,etal.(July31,2008)[LBHI_SEC07940_53324],Tonuccicould
notrecallwhetherthecalltookplace,ExaminersInterviewofPaoloTonucci,Sept.16,2009,atp.28.
7234SeeemailfromKevinFarmer,TullettPrebon,toDavidForsyth,Lehman,etal.(Aug.19,2008)[LBEX
DOCID 450084]; email from Kevin Farmer, Tullett Prebon, to David Forsyth, Lehman, et al. (Aug. 20,
2008)[LBEXDOCID450083].
7231

1952

butneverwere.ThetradeswereexecutedthroughTullettPrebon,ataninterestrateof
2.55%, and the funds were initially placed into an LBHI account at Citibank.7235 This
Citibank account was the cash account to which LBHI typically issued payment
instructions.7236 Thus, the funds from Freddie Mac were not segregated from other
LBHIfundsand,uponreceipt,theyweremanagedaspartofLBHIsliquiditypool.7237
Because Freddie Mac was due to be repaid on the morning of Monday,
September15,preparationsforrepaymentshouldhaveoccurredonFriday,September
12.7238Thereisconflictingevidenceastowhetherpreparationsforrepaymenttookplace
onSeptember12.EngelexplainedthatinordertoprepareforrepaymentLBHIwould
havehadtoinvestpartofitsliquiditypoolFridaynightinaproductthatwouldrepay
byMondaymorning.HedidnotthinkthatsuchpreparationsweremadeonSeptember
12.7239 In a letter dated October 16, 2008, Lehmans counsel stated that LBHI did not
issuewireinstructionstorepayFreddieMaconSeptember15.7240However,Alvarez&
Marsalhasindicatedthat[t]hepaymentrequesttorepaythisloanwassystematically

Email from Kevin Farmer, Tullett Prebon, to David Forsyth, Lehman, et al. (Aug. 19, 2008) [LBEX
DOCID 450084]; email from Kevin Farmer, Tullett Prebon, to David Forsyth, Lehman, et al. (Aug. 20,
2008)[LBEXDOCID450083];ExaminersInterviewofStevenJ.Engel,Oct.30,2009,atp.5.
7236ExaminersInterviewofStevenJ.Engel,Oct.30,2009,atp.5.
7237Id.atpp.56.
7238Id.atp.6.
7239Id.
7240 Letter from Diane Harvey, Weil, Gotshal & Manges, to Karen Wagner, Davis, Polk & Wardwell, re:
Federal Home Loan Mortgage Corporation Funds Transfers (Oct. 16, 2008), at p. 2 (attached to
Declaration of George Kielman in Supp. of Mot. of Federal Home Loan Mortgage Corp. for Leave to
Conduct Rule 2004 Discovery, Docket No. 1181, In re Lehman Bros. Holdings, Inc., No. 0813555 (Bankr.
S.D.N.Y.Oct.22,2008)).
7235

1953

generated and waiting to be released to the bank on Monday, 9/15/08.7241 Moreover,

somedocumentationoverthecourseoftheweekendindicatedthatLehmanplannedto
repayFreddieMaconSeptember15.7242
Despite the magnitude of Lehmans transactions with Freddie Mac, the
transactions were not governed by a formal written agreement.7243 Rather, LBHI
documented the transactions with screenshots from its accounting system.7244 In
addition,thebrokerTullettPrebonwouldsometimessendLehmanemailsconfirming
thetransactionsandtheirbasicterms.7245FreddieMacalsomaintainedminimaltrading

EmailfromLaurenSheridan,Alvarez&Marsal,toJeromeL.Epstein,Jenner&Block,etal.(Oct.20,
2009).ThesewireinstructionswereissuedbyTWS(TreasuryWorkstation),anapplicationusedbyLBHI
to manage its treasury functions. See email from Lauren Sheridan, Alvarez & Marsal, to Heather D.
McArn,Jenner&Block,etal.(Dec.2,2009);TWSFreddieMacPaymentDetails[LBEXAM5640797];see
alsosupraSectionIII.B.2.c(discussingTWS).
7242 See email from Tamir Shafer, Lehman, to Daniel J. Fleming, Lehman, et al. (Sept. 13, 2008) [LBEX
DOCID 051810], attaching Spreadsheet [LBEXDOCID 059347] (showing repayment to Freddie Mac
scheduledfor9:00a.m.);emailfromTamirShafer,Lehman,toChristopherTsuboi,FRBNY,etal.(Sept.
14,2008)[LBEXAM049457],attachingSpreadsheet[LBEXAM049458](showingrepaymenttoFreddie
Macscheduledfor5:30p.m.).
7243SeeemailfromLaurenSheridan,Alvarez&Marsal,toHeatherD.McArn,Jenner&Block,etal.(Oct.
18,2009);ExaminersInterviewofStevenJ.Engel,Oct.30,2009,atp.5.TheEstatedoesnotdisputethe
existence of these transactions. Although Freddie Mac was not included on Lehmans initial list of its
largestunsecuredcreditors,seeVoluntaryPetition,atSched.1,DocketNo.1,InreLehmanBros.Holdings,
Inc.,No.0813555(Bankr.S.D.N.Y.Sept.15,2008),itwaslaterlistedonScheduleFasacreditorholding
an unsecured claim; that claim was listed as not contingent, not unliquidated, and not disputed, see
Schedules,atp.235,DocketNo.3078,InreLehmanBros.Holdings,Inc.,No.0813555(Bankr.S.D.N.Y.Mar.
12,2009).AccordingtoAlvarez&Marsal,FreddieMacsexclusionfromtheinitiallistwasinadvertent.
SeeemailfromLaurenSheridan,Alvarez&Marsal,toJeromeL.Epstein,Jenner&Block,etal.(Oct.20,
2009).
7244SeeemailfromLaurenSheridan,Alvarez&Marsal,toHeatherD.McArn,Jenner&Block,etal.(Oct.
18, 2009); Facsimile from Scott Alvey, Lehman, to Howard Comet, Weil, Gotshal & Manges (Oct. 30,
2008),atp.2[LBEXSE000001](screenshotofAugust20,2008transaction);Lehman,ScreenshotofAug.
19,2008Transaction[LBEXAM5640789].
7245 See, e.g., email from Kevin Farmer, Tullett Prebon, to David Forsyth, Lehman, et al. (June 25, 2008)
[LBEXWGM648915];ExaminersInterviewofStevenJ.Engel,Oct.30,2009,atp.5.
7241

1954

records of these transactions.7246 Engel could not speak to whether such minimal
documentation was typical from Lehmans perspective, as Lehman did not engage in
similartransactionswithotherentities.7247
Although the Examiner is aware of multiple possible reasons that Freddie Mac
wasnotrepaidonSeptember15,7248thecriticalfactisthatLBHIhadfiledforbankruptcy
protection early on the morning of September 15 and thus did not have to make the
payment.7249TheExaminerisnotawareofanybasistotreattheFreddieMacclaimas
anything other than an unsecured claim that is not contingent, not unliquidated, and

Letter from David A. Felt, FHFA, to Anton R. Valukas, Jenner & Block, re: In re: Lehman Brothers
Holdings,Inc.,etal.(Apr.17,2009),atAttach.45.
7247ExaminersInterviewofStevenJ.Engel,Oct.30,2009,atp.5.
7248LBHIcouldnotmakewiretransfersonSeptember15becausebanksshutdownitscashaccounts.See
supra Section III.B.2. In October 2008, however, Lehmans counsel offered a different reason for the
nonpayment that LBHIs Citibank account did not have sufficient funds to repay Freddie Mac on
September 15. Letter from Diane Harvey, Weil, Gotshal & Manges, to Karen Wagner, Davis, Polk &
Wardwell, re: Federal Home Loan Mortgage Corporation Funds Transfers (Oct. 16, 2008), at pp. 12
(attachedtoDeclarationofGeorgeKielmaninSupp.ofMot.ofFederalHomeLoanMortgageCorp.for
LeavetoConductRule2004Discovery,DocketNo.1181,InreLehmanBros.Holdings,Inc.,No.0813555
(Bankr. S.D.N.Y. Oct. 22, 2008)). Alvarez & Marsal, in turn, explained that [t]he loan was not repaid
becauseofthebankruptcyfiling.EmailfromLaurenSheridan,Alvarez&Marsal,toJeromeL.Epstein,
Jenner&Block,etal.(Oct.20,2009);ExaminersInterviewofStevenJ.Engel,Oct.30,2009,atp.7.
7249ItistruethatasubstantialamountoffundswerewithdrawnfromLBHIsCitibankaccountonFriday,
September12,tomeetJPMorgansSeptember11requestfor$5billioncashcollateral.SeesupraSection
III.A.5.b.1.k.ForadiscussionofanavoidanceanalysisconcerningLehmanstransactionswithJPMorgan,
see supra Section III.B.3.g.5.a. LBHI also appears to have transferred $500 million from its Citibank
account to LBI late on Sunday, September 14. Email from Julius Silbiger, Citigroup, to Thomas
Obermaier, Citigroup, et al. (Sept. 14, 2008) [CITILBHIEXAM 00104189] (stating that the $500 million
had moved by 9:42 p.m. that evening); email from Roger Barnes, Citigroup, to Naresh N. Kumar,
Citigroup, et al. (Sept. 14, 2008) [CITILBHIEXAM 00104189] (explaining that Citichecking opened at 9
p.m. that evening so the transfer could be made then); email from Thomas Fontana, Citigroup, to
Christopher M. Foskett, Citigroup, et al. (Sept. 14, 2008) [CITILBHIEXAM 00101129] (approving the
transfer).Anaccountstatement,however,liststhetransferdateasSeptember15.LehmanBrothersInc.
Account Report (Oct. 1, 2008), at p. 1033 [CITILBI 00024142] (account statement confirming that the
transaction transferred $500 million from Lehman Brothers Holdings Main Open Account 40615202 to
Lehman Brothers Inc. account 30544658). See Sections III.C.5.c..1.d.iii and III.B.3.g.5.b for further
discussionofthistransfer.
7246

1955

notdisputedasindicatedontheDebtorsScheduleF(CreditorsHoldingUnsecured
NonpriorityClaims).

1956


UNITEDSTATESBANKRUPTCYCOURT
SOUTHERNDISTRICTOFNEWYORK

x
:

Inre
:

:
LEHMANBROTHERSHOLDINGSINC.,
:
etal.,
:

Debtors.
:
x

Chapter11CaseNo.

0813555(JMP)

(JointlyAdministered)

REPORTOF
EXAMINERANTONR.VALUKAS

SectionIII.C:BarclaysTransaction

TABLEOFCONTENTS
C. DoColorableClaimsAriseFromTransfersofLBHIAffiliateAssetsto
Barclays,orFromtheLehmanALITransaction? ................................................1961
1. ExecutiveSummary ..........................................................................................1961
a) PurposeofInvestigation ...........................................................................1961
(1) BarclaysSaleTransaction...................................................................1961
(2) LehmanALITransaction ...................................................................1963
b) SummaryofConclusions ..........................................................................1963
(1) BarclaysTransaction...........................................................................1963
(2) LehmanALITransaction ...................................................................1965
2. Facts .....................................................................................................................1965
a) LehmanBusinessesandAssets ................................................................1965
(1) LBHIAffiliateOperatingCompanies ..............................................1970
(a) LBCS ............................................................................................. 1970
(b) LBCC............................................................................................. 1972
(c) LCPI .............................................................................................. 1975
(d) LBSF .............................................................................................. 1978
(e) LOTC ............................................................................................ 1980
(f) LBDPandLBFP........................................................................... 1981
(g) LBF ................................................................................................ 1984
(h) BNC............................................................................................... 1986
(2) LBHIAffiliateSinglePurposeEntities.............................................1987
(a) LB745 ........................................................................................... 1987
(b) CESAviationEntities ................................................................. 1987
(c) PAMIStatler ................................................................................ 1988
(d) EastDover.................................................................................... 1988
(e) ScottishFinance........................................................................... 1989
(f) LuxembourgS.A.R.L. ................................................................. 1989
(g) Navigator ..................................................................................... 1990
(3) SaleTransaction...................................................................................1991
3. WhetherAssetsofLBHIAffiliatesWereTransferredtoBarclays .............1997
a) AnalysisofSecuritiesTransferredtoBarclays.......................................1998
(1) SecuritiesTransferredtoBarclays ....................................................1999
(a) LehmansSecuritiesTradingRecordsandSystems .............. 2005
(i) General................................................................................ 2005
(ii) GFSSystemAssessment................................................... 2008
a. ComparisonofGFSDatatoLehmans10Q
Filings........................................................................... 2009

1957

4.
5.

b. ComparisonofGFSDatatoLehmansGeneral
Ledger .......................................................................... 2009
c. ReliabilityofSeptember12Data.............................. 2010
(iii) GFSDataExtractedbyExaminer.................................... 2010
(2) AnalysisofGFSData..........................................................................2012
(a) CUSIPsNotAssociatedWithLBHIAffiliateEntities............ 2014
(b) CUSIPsAssociatedSolelyWithanLBHIAffiliateEntity..... 2015
(c) CUSIPsAssociatedWithBothLBIandLBHIAffiliate
Entities .......................................................................................... 2016
(i) CUSIPsAssociatedWithSubordinatedEntities........... 2016
(ii) SecuritiesFinancingTransactions................................... 2021
(iii) AlternativeAnalyses......................................................... 2024
(d) 817CUSIPsWithNoGFSData................................................. 2025
(i) September19,2008GFSDataset ..................................... 2026
(ii) SearchbyISINNumberandProductID ....................... 2027
(iii) TMSSourceSystem........................................................... 2027
(iv) AdditionalDataSources .................................................. 2028
b) AnalysisofTangibleAssetTransfers ......................................................2030
(1) LB745....................................................................................................2033
(2) LBCS......................................................................................................2035
(3) LCPI ......................................................................................................2036
(4) LBSF ......................................................................................................2038
(5) CES ........................................................................................................2039
(6) CESV ....................................................................................................2041
(7) CESIX ...................................................................................................2042
c) AnalysisofIntangibleAssetTransfers....................................................2044
(1) CustomerInformationAssets ...........................................................2045
(2) ProprietarySoftware ..........................................................................2051
(3) AssembledWorkforce ........................................................................2054
LehmanALITransaction..................................................................................2055
Conclusions ........................................................................................................2063
a) Summary .....................................................................................................2063
b) ColorableClaimsArisingfromTransferofLBHIAssets.....................2064
(1) ThereAreNoColorableClaimsAgainstBarclaysArising
fromTransferofLBHIAffiliateSecurities ......................................2064
(2) ThereAreColorable,LimitedClaimsAgainstBarclays
ArisingfromTransferofLBHIAffiliateOfficeEquipment
andLBCSCustomerInformation .....................................................2076
(a) BankruptcyCodeClaims........................................................... 2077
(i) Section542 .......................................................................... 2077
1958

6.

(ii) Section548 .......................................................................... 2081

(b) CommonLawClaims................................................................. 2083
(i) RecoveryofChattel........................................................... 2083
(ii) Conversion ......................................................................... 2086
(iii) UnjustEnrichment ............................................................ 2088
(iv) TradeSecretMisappropriation ....................................... 2090
(v) UnfairCompetition........................................................... 2092
(vi) TortiousInterferenceWithEmploymentRelations ..... 2094
(3) ClaimsAgainstLBHIAffiliateOfficersandDirectors ..................2096
(a) DutyofCare ................................................................................ 2098
(b) DutyofGoodFaith..................................................................... 2100
(c) DutytoMonitor .......................................................................... 2101
c) LehmanALITransaction ..........................................................................2103
BarclaysTransaction .........................................................................................2103
a) PreBankruptcyNegotiations ...................................................................2104
(1) BarclaysInterestinaTransactionInvolvingLehman ..................2104
(2) NegotiationsBeforeSeptember15 ...................................................2110
b) LBHIBankruptcy .......................................................................................2116
(1) LBHIFilesChapter11 ........................................................................2116
(2) PostPetitionClearingandFinancing ..............................................2116
c) NegotiationsLeadingtoAPA ..................................................................2124
(1) Participants ..........................................................................................2127
(2) StructureofTransaction.....................................................................2129
(3) NegotiationsRegardingSecuritiesPositionstobePurchased
byBarclays ...........................................................................................2131
(a) OnSeptember15and16,LehmanandBarclaysReview
LehmansSecuritiesPositionsandMarks............................... 2131
(b) BarclaysAgreestoPurchaseLongSecuritiesPositions
WithaBookValueofApproximately$70Billion .............. 2138
(4) NegotiationsRegardingContractCureandEmployee
CompensationLiabilities ...................................................................2143
(a) ContractCureCosts.................................................................... 2143
(b) CompensationLiabilities ........................................................... 2147
d) ConsiderationandApprovalofTransactionDescribedinAPA
byLBHIandLBIBoardsofDirectors......................................................2153
e) TransactionDescribedtotheCourtonSeptember17 ..........................2155
(1) SaleMotion ..........................................................................................2155
(2) September17SaleProceduresHearing ...........................................2157
f) BetweenSeptember17and19,theSecuritiesPositionsBeing
AcquiredbyBarclaysChange ..................................................................2160
1959

(1) TheReplacementTransaction .......................................................2160

(2) $15.8BillionRepo................................................................................2170
(3) September19AgreementtoTransferAdditionalAssets..............2175
(a) Excess15c33Assets ................................................................... 2178
(b) AdditionalSecurities .................................................................. 2182
(c) OCCMargin ................................................................................ 2184
g) TheCourtsConsiderationandApprovaloftheProposed
Transaction..................................................................................................2188
(1) September19,2008SaleHearing ......................................................2188
(2) TheSaleOrder .....................................................................................2192
h) TransactionClosing ...................................................................................2194
(1) JPMorgan/BarclaysDisputes.............................................................2194
(2) TheCommitteesRole ........................................................................2197
(3) December2008SettlementBetweenTrustee,Barclaysand
JPMorgan..............................................................................................2208

1960

C. DoColorableClaimsAriseFromTransfersofLBHIAffiliateAssetsto
Barclays,orFromtheLehmanALITransaction?
1.

ExecutiveSummary
a) PurposeofInvestigation
(1) BarclaysSaleTransaction

ByOrderdatedSeptember20,2008,theCourtapproved,amongotherthings,the
sale of assets of LBHI, LBI and LB 745 to Barclays. The Court did not authorize the
transferofnondebtorassetstoBarclays.
After the September22, 2008 closing of the sale transaction, certain creditors
asserted that assets of LBHI affiliates (other than LBI and LB 745) may have been
transferredtoBarclaysinconnectionwiththesaletransaction.7250
TheCourtdirectedtheExaminertoinvestigate:
WhetherassetsofanyLBHIAffiliates(otherthanLehmanBrothers,Inc.)
weretransferredtoBarclaysCapitalInc.asaresultofthesaletoBarclays
CapitalInc.thatwasapprovedbyorderoftheBankruptcyCourtentered
September20,2008,andwhetherconsequencestoanyLBHIAffiliateasa
resultoftheconsummationofthetransactioncreatedcolorablecausesof
actionthatinuretothebenefitofthecreditorsofsuchLBHIsubsidiaryor
affiliate.7251

7250See,

e.g., Motion of The Walt Disney Company for Appointment of Examiner Pursuant to
Section1104(c)(2)oftheBankruptcyCode,atp.4(10),DocketNo.1143,InreLehmanBros.HoldingsInc.,
No. 0813555 (Bankr. S.D.N.Y. Oct.20, 2008); Motion of the Bank of New York Mellon Trust Company,
N.A. as Indenture Trustee, for Order Pursuant to Bankruptcy Rule 2004 Directing Examination of, and
Production of, Documents by Lehman Brothers Holdings Inc., Lehman Brothers, Inc., Lehman Brothers
Commodity Services Inc. and Barclays Capital Inc., Docket No. 1766, In re Lehman Bros. Holdings Inc.,
No.0813555(Bankr.S.D.N.Y.Nov.26,2008).
7251ExaminerOrder,atp.4(sixthbullet).

1961

The Examiner Order defines LBHI Affiliate(s) to include LBCC [and] any
otherentitythatcurrentlyisanLBHIchapter11debtorsubsidiaryoraffiliate.7252Asof
thedateoftheentryoftheExaminerOrder,thoseentitieswere:

LehmanBrothersCommodityServicesInc.
LehmanBrothersCommercialCorporation
LehmanCommercialPaperInc.
LehmanBrothersOTCDerivativesInc.
LehmanBrothersFinanceS.A.
LB745LLC
BNCMortgageLLC
LehmanBrothersSpecialFinancingInc.
LehmanBrothersDerivativeProductsInc.
LehmanBrothersFinancialProductsInc.
FundodeInvestimentoMultimercadoCreditoPrivadoNavigator
InvestimentoNoExterior
LehmanScottishFinanceL.P.
PAMIStatlerArmsLLC
EastDoverLimited
LuxembourgResidentialPropertiesLoanFinanceS.A.R.L.
CESAviationLLC
CESAviationVLLC
CESAviationIXLLC

AdditionalaffiliatesofLBHIfiledChapter11petitionsaftertheentryoftheExaminer
Order.7253 In addition, other affiliates of LBHI commenced foreign insolvency
proceedings.7254 Because the definition of LBHI Affiliates in the Examiner Order
includesneitherentitiesthatfiledbankruptcypetitionsaftertheentryoftheExaminer

7252ExaminerOrder,atp.3(firstbullet).
7253ThoseentitiesincludeStructuredAssetSecuritiesCorporation,LBRoseRanchLLC,LB2080Kalakaua

OwnersLLC,MeritLLC,LBSomersetLLCandLBPreferredSomersetLLC.
7254ThoseentitiesincludeLBIE,LBJandLBAHL.

1962

Ordernorentitiesthatcommencedforeigninsolvencyproceedings,thoseentitieswere
notwithinthescopeoftheExaminersinvestigation.
(2) LehmanALITransaction
On September19, 2008, shortly before the commencement of the SIPA
proceedingforLBI, LBItransferredownershipof 25 subsidiaries (and theirdirectand
indirectsubsidiaries)toLehmanALIInc.(LehmanALI),pursuanttoaPIKNoteand
Security Agreement,7255 an Assignment of Intellectual Property7256 and a Transfer
Agreement.7257
TheCourtdirectedtheExaminertoinvestigate:Thetransferofthecapitalstock
ofcertainsubsidiariesofLBIonoraboutSeptember19,2008toLehmanALIInc.7258
b) SummaryofConclusions
(1) BarclaysTransaction
The Examiner investigated whether assets of any LBHI Affiliates were
transferred to Barclays in connection with the sale transaction. The Examiner also
investigated certain aspects of the negotiation and consummation of the sale
transaction. The Examiner concludes that there is sufficient evidence to support a
finding that limited assets of three LBHI Affiliates were transferred to Barclays in

7255PIKNote&SecurityAgreementbetweenLehmanALIInc.andLehmanBrothersInc.(Sept.19,2008).
7256Intellectual Property Assignment Agreement among Lehman Bros. Holdings Inc., Lehman Brothers

Inc.,LB745LLCandBarclaysCapitalInc.(Sept.19,2008)(IntellectualPropertyAssignment).
7257Transfer Agreement among Lehman Brothers, Inc., LBI Group Inc., and Lehman ALI Inc. (Sept.19,
2008)[LBEXWGM000227].
7258ExaminerOrder,atp.4(ninthbullet).

1963

connection with the sale transaction,7259 namely: (1)information identifying LBCSs

customers, the products those customers traded and prices for those products; and
(2)office equipment owned by LBCS, LBSF and LCPI. The Examiner thus concludes
thatcolorableclaimsexistagainstBarclaysarisingfromthosetransfers.TheExaminer
alsoconcludes,however,thatthevalueofthoseassetsmaynotbematerial,particularly
in the context of the Debtors Chapter 11 cases. Specifically, the office equipment
transferredhadatotalnetbookvalueoflessthan$10million(andanactualvaluethat
was likely much less), and the customer information was of questionable value. The
Examiner also concludes that there is no evidence to support a finding that any
securitiestransferredtoBarclaysinconnectionwiththesaletransactionwereownedby
LBHIAffiliates.
The Examiner concludes that the evidence does not support the existence of a
colorableclaimthatdirectorsandofficersoftheLBHIAffiliatesbreachedtheirfiduciary
duties in connection with the transfer to Barclays of the limited assets referenced
above.7260
ToassistthepartiesandtheCourt,theExaminersetsforthbelowthefactshehas
developed relatingto thesaletransaction.However, in light of thependinglitigation
between the Debtors, the SIPA Trustee and the Official Committee of Unsecured
Creditors(CreditorsCommittee),ontheonehand,andBarclaysontheother,relating

7259SeeSectionsIII.B.3.b&III.B.3.cofthisReport.
7260SeeSectionIII.C.5.b.3ofthisReport.

1964

tothesaletransaction,includingtheextensivediscoverystillunderway,theExaminer
hasnotreachedanyconclusionsregardingwhetherLBHIorLBIhavecolorableclaims
arising from the acts and events relating to the sale transaction.7261 The Examiner sets
forthbelowthefactsrelatingtothesaletransaction.7262IftheCourtweretograntrelief
in connection with the motions and claims being brought by the Debtors, the SIPA
TrusteeortheCreditorsCommittee,however,theExaminernotesthatsuchreliefcould
inureinparttothebenefitofcreditorsoftheLBHIAffiliates.
(2) LehmanALITransaction
TheExamineranalyzeddocumentsanddataandinterviewedwitnessesinorder
to develop an understanding of the Lehman ALI transaction and whether colorable
claims arise from that transaction. The Examiner concludes that the Lehman ALI
transactionwastheproductofagoodfaith,wellgroundedbusinessjudgment,andthat
the evidence does not support the existence of a colorable claim (other than claims
arisingfromrightsprovidedforinthePIKNote&SecurityAgreementitself)fromthe
LehmanALItransaction.7263
2.

Facts
a) LehmanBusinessesandAssets

AtthetimeLBHIfileditsChapter11bankruptcypetitiononSeptember15,2008,
theLehmanorganizationconsistedofthousandsofentitiesthatcollectivelysupported

7261SeeSectionIII.C.6ofthisReport.
7262Seeid.
7263SeeSectionIII.C.3.cofthisReport.

1965

itsthreeprimarybusinesslines:CapitalMarkets,InvestmentBankingandInvestment
Management.7264
Lehmans Capital Markets division included secondary trading, financing,
mortgage origination and securitization, prime brokerage and research activities in
fixed income and equity products. Lehman served as an agent, marketmaker and
intermediary in the marketplace to facilitate these transactions on behalf of its clients.
TheproductsthatLehmanofferedinconnectionwiththisbusinessincludedavarietyof
cash, derivative, secured financing, structured instrument and investment products.
The Capital Markets division also engaged in investing for principals and proprietary
trading activities, including real estate, private equity and other longterm
investments.7265
Lehmans Investment Banking division advised corporate, institutional and
government clients with respect to mergers, acquisitions and other financial matters.
This division also raised capital for these clients by underwriting public and private
debt offerings and equity instruments. Lehman maintained investment banking hubs
in North America, Europe, the Middle East, Latin America and the Asia Pacific
region.7266

7264ExaminersInterviewofThomasE.Hommel,Apr.29,2009,atp.3;LehmanBrothersHoldingsInc.,

AnnualReportfor2007asofNov.30,2007(Form10K)(filedonJan.29,2008),atp.3(LBHI200710K).
7265LBHI200710K,atp.4.
7266Id.atp.7.

1966

Lehmans Investment Management Division provided strategic investment

adviceandservicestoinstitutionalandhighnetworthclients.7267Specifically,itoffered
assetmanagement,privateequity,wealthadvisoryandtrustexecutionservices.7268
Lehman functioned as an integrated company, and in general structured and
managed its businesses along different product lines within the three divisions.7269
LehmananditssubsidiariestypicallypresentedthemselvestothepublicasLehman
orLehmanBrothers.7270CustomerstypicallyhadarelationshipwithLBI,butLehman
employees would book certain trades to the legal entity within Lehman that
correspondedtotheproductbeingtraded,orthatsatisfiedtax,financingorregulatory
considerations.7271 Multiple Lehman entities often were used to structure particular
types of transactions.7272 As a result, customers whose relationships were with LBI
would, in fact, often have their business transacted through other Lehman entities.
Those customers generally did not rely on the credit rating of those Lehman entities;

7267Id.atp.8.
7268Id.atpp.89.
7269ExaminersInterviewofPeterA.Tennyson,Oct.13,2009,atpp.23;ExaminersInterviewofPeterA.

Tennyson,Dec.2,2009,atp.2;ExaminersInterviewofCliffordFeibus,Mar.12,2009,atp.2;Examiners
InterviewofThomasE.Hommel,Apr.29,2009,atp.5.
7270Cf.ExaminersInterviewofJamesP.Seery,Jr.,Nov.12,2009,atp.4;ExaminersInterviewofKleber
Rodriguez,Dec.18,2009,atp.4.
7271Examiners Interview of James P. Seery, Jr., Jan.14, 2010, at p. 2; Examiners Interview of PeterA.
Tennyson,Dec.2,2009,atp.2.
7272See, e.g., Lehman, Confidential Memorandum re $660,000,000 Main Street Natural Gas, Inc., Gas
Project Revenue Bonds Series 2008B (Jan.14, 2008) [LBEXAM 137776], attached to email from Evette
Saldana,Lehman,toCommitmentCommittee,Lehman(Jan.11,2008)[LBEXAM137775].

1967

indeed, those customers sometimes were not even aware that Lehman entities other
thanLBIwereinvolvedintheirtransactions.7273
LBHI and LBI generally directed and managed the operations of the entire
organization.Theseentities(andLBIinparticular)hired,employedandcompensated
mostLehmanemployees.7274Incertaincases,employeescompensationwasbookedas
anexpenseatthelegalentitiesforwhichtheyperformedservices.7275Thoseemployees,
however,generallyregardedthemselvesasemployeesofLBI,ratherthanasemployees
of the subsidiary for which they performed functions.7276 Most entities shared at least
somecommonofficersanddirectors.7277

7273Examiners Interview of James P. Seery, Jr., Jan. 14, 2010, at p. 2; Examiners Interview of Kleber

Rodriguez,Dec.18,2009,atp.4.LBDPandLBFP,discussedinSectionIII.C.2.a.f,areexceptionstothese
generalpropositions.
7274Examiners Interview of Tracy Binkley, Dec.22, 2009; see, e.g., letter from Christopher OMeara,
Lehman, to John DeRosa, Lehman, re: employment offer (Nov.10, 2006), at p. 2 [LBEXAM 023144]; e
mail from Kaushik Amin, Lehman, to Herbert H. McDade, III, Lehman (Sept.19, 2008)
[LBHI_SEC07940_656489].
7275ExaminersInterviewofCliffordFeibus,Mar.12,2009,atp.5.
7276Email fromPaul Gregg,Lehman, to Peter Keavey,Lehman(Sept.16,2008) [LBEXDOCID3571486]
(employeesallocated to LBCS discussing transfer of LBI employees to Barclaysand noting thatsus);
ExaminersInterviewofJonathanD.Williams,Aug.5,2009,atp.4.
7277See, e.g., Lehman, LBCS World Records Report (Sept.15, 2008) [LBEXLL 027844]; Lehman, LBCC
WorldRecordsReport(Sept.15,2008)[LBEXLL027848];Lehman,LBSFWorldRecordsReport(Sept.15,
2008) [LBEXLL 027833]; Lehman, LBFP World Records Report (Sept.15, 2008) [LBEXLL 027860];
Lehman, LBDP World Records Report (Sept.15, 2008) [LBEXLL 027856]; Lehman, LBF World Records
Report(Sept.12,2008)[LBEXLL027785];Lehman,BNCWorldRecordsReport(Sept.15,2008)[LBEXLL
027795]; Lehman, LB745 World Records Report (Sept.15, 2008) [LBEXLL 027840]; Lehman, CES World
RecordsReport(Sept.15,2008)[LBEXLL027772];Lehman,CESVWorldRecordsReport(Sept.15,2008)
[LBEXLL 027775]; Lehman, CES IX World Records Report (Sept.15, 2008) [LBEXLL 027779]; Lehman,
PAMI Statler World Records Report (Sept.15, 2008) [LBEXLL 027790]; Lehman, East Dover World
Records Report (Sept.15, 2008) [LBEXLL 027782]; Lehman, Navigator World Records Report (Sept.15,
2008) [LBEXLL 3668315]; Lehman, Scottish Finance World Records Report (Sept.15, 2008) [LBEXLL
027788]; Lehman, LOTC World Records Report (Sept.15, 2008) [LBEXLL 027852]. No World Records
ReportwasavailableforLuxembourgLLC.

1968

AsaconsequenceofthefunctionalapproachthatLehmantooktotheoperation
of its daytoday business, there was significant overlap between and among the
operations of the various Lehman entities. Nevertheless, the Lehman entities did
observe basic corporate formalities, such as maintaining corporate record books and
separate financial statements. Legal entities typically were assigned a legal entity
controller who was responsible for reviewing and verifying their financial statements,
and monitoring their regulatory financial requirements, if any.7278 When entities
required authorization from their directors to take certain actions, such authorization
generally was provided through unanimous consent resolutions rather than board
meetings.7279
In order to conduct his investigation of the operations and assets of the LBHI
Affiliates, and of the possible transfer of assets to Barclays, the Examiner divided the
businessesofLBHIAffiliatesintotwobroadcategories:(a)operatingcompanies;and
(b)singlepurposeentities.7280

7278ExaminersInterviewofCliffordFeibus,Mar.12,2009,atp.2.
7279Examiners Interview of James P. Seery, Jr., Nov.12, 2009, at p. 4; Examiners Interview of FredS.

Orlan,Sept.21,2009,atp.3;ExaminersInterviewofSatuS.Parikh,Aug.26,2009,atp.7.
7280Lehmanssubsidiaryandaffiliateentitiesgenerallywereorganizedintooneofthreetiersbasedonthe
type and value of assets that they held. Lehman, Description of Lehman Subsidiary Tier Categories
[LBEXLL 001750]. Tier I entities generally held the most significant assets while Tier II and Tier III
entitiestypicallyheldmuchlesssubstantialassets.ExaminersInterviewofAdaShek,Nov.24,2009,at
p. 2; Examiners Interview of Tracy C. Tanaka, Oct.21,2009,at p. 2. Most of Lehmans single purpose
entitieswereinTiersIIorIII,whiletheoperatingcompaniesweretypicallyTierI.

1969

(1) LBHIAffiliateOperatingCompanies
Several LBHI Affiliates were operating companies that regularly traded with
Lehmancustomersandcounterparties,includingcommodities,derivativesandforeign
exchange trading transactions. With the exception of LBCS, however, these entities
generally were used by Lehman to book transactions related to customers of LBI.7281
Lehman personnel asserted that customers did not rely on the credit ratings of these
entities,withtheexceptionofLBDPandLBFP,asdiscussedbelow.7282
(a) LBCS
Lehman Brothers Commodity Services, Inc. (LBCS) housed Lehmans
commodity trading business,7283 which was focused on natural gas, oil and power
trading.LBCSalsotradedavarietyofothercommoditiesandcommoditiesderivatives
forLehman,includingproductsrelatedtosulfurdioxide,carbondioxideandnitrogen
oxide emissions allowances,7284 coal,7285 metals and mining,7286 chemicals,7287 ethanol,

7281Examiners Interview of James P. Seery, Jr., Jan.14, 2010, at p. 2. For background on Lehmans

commodities operations generally, see Lehman, Global Commodities August 2008 YTD Performance
[LBEXDOCID680728];Lehman,CommoditiesWeeklyMetricsAsOf9/4/08[LBEXDOCID680596].
7282Examiners Interview of James P. Seery, Jr., Jan.14, 2010, at p. 2; Examiners Interview of Kleber
Rodriguez,Dec.18,2009,atp.4.
7283SeeLehman,LBCSWorldRecordsReport(Sept.15,2008)[LBEXLL027844];ExaminersInterviewof
SatuS.Parikh,Aug.26,2009,atp.8.
7284See,e.g.,emailfromJamesMacintosh,Lehman,toMaximilianCoreth,Lehman(Aug.25,2008)[LBEX
DOCID 3628450]; email from RGGI Auction Manager, World Energy, to James Macintosh, Lehman
(Aug.25, 2008) [LBEXDOCID 3563294]; email from James Macintosh, Lehman, to Adam Robinson,
Lehman (Aug.28, 2008) [LBEXDOCID 3510886]; email from James Macintosh, Lehman, to Robert
Forgrave,CIBC(Sept.15,2008)[LBEXDOCID3567571].
7285See,e.g.,emailfromJamesMacintosh,Lehman,toMaximilianCoreth,Lehman(Aug.25,2008)[LBEX
DOCID3567361].
7286See,e.g.,Lehman,CommoditiesPriorityList[LBEXDOCID3567397].

1970

exotics(includingindex,singleand multiassetcommodityderivativesand structured

notes),agriculturalproductsanduraniumandnuclearproducts.7288
AlthoughLBCSoriginallyhadfocusedontradingenergyderivatives,atthetime
ofLehmansbankruptcy,itwasintheprocessofbuildingaphysicaltradingpresence
and had acquired Houstonbased Eagle Energy Partners as part of that growth
strategy.7289LBCSalsoengagedinalimitednumberofproprietarytradingactivitiesfor
Lehman.7290
The sophisticated parties with whom LBCS traded typically requested parent
guarantees(fromLBHI)whendealingwithLBCS.7291
As of LBHIs bankruptcy filing, Lehmans records indicate that approximately
100 people who were employed by LBI performed functions for LBCS.7292 LBCSs
primary operations were centralized on the seventh floor of Lehmans New York
headquarters.7293

7287See, e.g., email from Lawrence Jollon, Lehman, to Laurence Jollan, Lehman (Sept.14, 2008) [LBEX

DOCID3601573].
7288See, e.g., Max Coreth, North America Gas & Power Trading Power New York [LBEXDOCID
3458961],attachedtoemailfromPaulGregg,Lehman,toSatuS.Parikh,Lehman(Sept.16,2008)[LBEX
DOCID3460953].
7289Examiners Interview of Satu S. Parikh, Aug. 26, 2009, at pp. 67; Examiners Interview of Michael
Montella,Oct.26,2009,atp.8.
7290ExaminersInterviewofSatuS.Parikh,Aug.26,2009,atp.9.
7291Id.atp.8.
7292A&M,SpreadsheetofEmployeesMappedtoLegalEntities(Sept.20,2008)[LBEXAM5642400];accord
ExaminersInterviewofDavidM.Perlman,July10,2009.
7293ExaminersInterviewofSatuS.Parikh,Aug.26,2009,atp.8.

1971

LBCSs commodity trading business was separate and distinct from LBIs
commodities business, which primarily executed domestic futures and options
exchangecleared trades for LBIs customer base.7294 LBI also cleared all domestic
futuresandexchangetradedoptionscontractsforotherLehmanentities.7295
(b) LBCC
LehmanBrothersCommercialCorporation(LBCC)wastheentitythatLehman
usedtobookthemajorityofitsforeignexchange(FX)trades,includingcurrencyand
FXoptions,spotsandforwards.7296LBCCalsoenteredintoswaps(particularlyinterest
rateswaps)tohedgeitstransactions.7297
LBCC engaged solely in overthecounter (OTC) transactions. 7298 It did not
serviceasignificantretailcustomerbase,andinsteadtypicallydealtwithsophisticated
institutional clients and hedge funds.7299 LBCC also was involved in the interbank
market, which meant that it engaged in OTC transactions with entities such as
JPMorganandGoldmanSachs.7300

7294ExaminersInterviewofSatuS.Parikh,Jan.4,2010.
7295ExaminersInterviewofSatuS.Parikh,Aug.26,2009,atp.9.
7296Lehman, LBCC World Records Report (Sept.15, 2008) [LBEXLL 027848]; Examiners Interview of

MichaelMontella,Oct.26,2009,atp.7.
7297Examiners Interview of Peter A. Tennyson, Oct.13, 2009, at p. 2; Examiners Interview of Francois
ChuFong,Dec.18,2009,atp.2.
7298ExaminersInterviewofPeterA.Tennyson,Oct.13,2009,atp.2.
7299Id.atp.3.
7300Id.atp.3.

1972

LBCCwasusedtobookthreeprimarytypesofFXtransactions:spots,forwards
andoptions.7301SpotFXtransactionsconsistofanagreementtoexchangeonecurrency
for another within one to two business days.7302 A forward FX transaction is one in
which counterparties agree to exchange currencies more than three days after the
agreement date.7303 FX options are derivative instruments that give holders the right
(thoughnottheobligation)tobuyorselltheunderlyingcurrencyatafuturedatefora
predeterminedprice.7304
AlthoughLBCCwasusedtobookmostofLehmansFXandcurrencytrades,it
was not the only entity that engaged in these types of activities. Many other entities
engagedinsuchtradesaswellbecausehedgeaccountingrulesoftenrequiredthatthe
hedge involve the same legal entity as the position being hedged.7305 Thus, LBSF also
tradedheavilyininterestrateswaps;LBIEwasengagedinFXtradingthroughitsrole
as the UK brokerdealer; and LBI engaged in spot FX transactions with Street
counterpartiessuchasothercommercialbanks.7306LBIalsohandledsomevanillaFX
trades for highly rated or institutional counterparties,7307 while trades with
counterpartiesthatpresentedsomecreditrisk,includingPIMcustomers,typicallywere

7301ExaminersInterviewofKleberRodriguez,Dec.18,2009,atp.2.
7302ExaminersInterviewofFrancoisChuFong,Dec.18,2009,atp.2.
7303Id.
7304Id.
7305ExaminersInterviewofPeterA.Tennyson,Oct.13,2009,atpp.23.
7306ExaminersInterviewofKleberRodriguez,Dec.18,2009,atp.3.
7307ExaminersInterviewofJonathanD.Williams,Aug.5,2009,atp.3.

1973

bookedatLBCC.7308LBIdidnotengageinFXoptionstransactions,becauseitsabilityto
do so was constrained by regulatory requirements.7309 Rather, LBI booked FX options
transactionsevenforhighlyratedcounterpartiesatLBCC.7310
SomeofLBCCsFXtradesweredonebacktobackwithotherLehmanentities.7311
If an existing customer already had an account with a Lehman entity, the customer
could engage in the FX trade with that entity, and LBCC would enter into a backto
back FX trade with the Lehman entity where the customer maintained the account.7312
ThisalsoworkedintheoppositedirectionifLBCCwastheentitywherethecustomer
hadarelationship.7313Generallyspeaking,however,theprimaryLehmaninterfacefor
mostclientswasLBI.7314
LBCC was whollyowned and fully guaranteed by LBHI.7315 LBCC had a few
dedicated traders, and used LBHI and LBI employees to support its broader

7308Examiners

Interview of Peter A. Tennyson, Dec.2, 2009, at p. 3; Examiners Interview of Kleber

Rodriguez,Dec.18,2009,atpp.3,5.
7309ExaminersInterviewofKleberRodriguez,Dec.18,2009,atpp.3,5;ExaminersInterviewofFrancois
ChuFong, Dec.18, 2009, at p. 3; Examiners Interview of Jonathan D. Williams, Nov.18, 2009, at p.3;
ExaminersInterviewofRobertEby,Jan.6,2010,atp.4.ForfurtherdiscussionofLehmansFXbusiness,
seeSectionIII.B.5.
7310Examiners Interview of Kleber Rodriguez, Dec.18, 2009, at p. 3; Examiners Interview of Francois
ChuFong, Dec.18, 2009, at p. 3; Examiners Interview of Jonathan D. Williams, Nov.18, 2009, at p.3;
ExaminersInterviewofRobertEby,Jan.6,2010,atp.4.
7311ExaminersInterviewofPeterA.Tennyson,Dec.2,2009,atp.3;ExaminersInterviewofJonathanD.
Williams,Nov.18,2009,atp.2.
7312ExaminersInterviewofJonathanD.Williams,Aug.5,2009,atp.3;ExaminersInterviewofPeterA.
Tennyson,Dec.2,2009,atp.3.
7313ExaminersInterviewofPeterA.Tennyson,Dec.2,2009,atp.3.
7314ExaminersInterviewofKleberRodriguez,Dec.18,2009,atp.4.
7315Lehman, LBCC World Records Report (Sept.15, 2008) [LBEXLL 027848]; Amended Corporate
Ownership Statement Pursuant to Federal Rule of Bankruptcy Procedure 1007(a)(1) and Local Rule of

1974

infrastructurerequirements.7316Generally,LehmanemployeesdidnotthinkofLBCCas
adistinctentity.7317LBCCwasthinlycapitalizedandcouldnothavesurvivedwithout
LBHI.7318
(c) LCPI
LehmanCommercialPaper,Inc.(LCPI)wasusedbyLehmantobookandhold
loans,7319 including commercial loans,7320 whole loans, real estate loans and distressed
debtpurchases.7321Italsooriginatedandtradedsecuredandunsecuredloans.7322Ina
typical origination transaction, LBHI or LBI would underwrite the loan, a different
Lehman entity would fund it, and the loan would be recorded at LCPI.7323 This was
done in part to obviate the need for regulated entities, such as LBI, to record capital

Bankruptcy Procedure 10073, Docket No.8, In re Lehman Bros. Commercial Corp., No. 0813901 (Bankr.
S.D.N.Y.Oct.23,2008);LehmanUnanimousWrittenConsenttotheExecutiveCommitteeoftheBoardof
DirectorsofLehmanBrothersHoldingsInc.(June9,2008)[LBEXAM003415].
7316ExaminersInterviewofKleberRodriguez,Dec.18,2009,atp.5.
7317Examiners Interview of Jonathan D. Williams, Aug. 5, 2009, at p. 2; Examiners Interview of
JonathanD.Williams,Nov.18,2009,atp.6.
7318ExaminersInterviewofJonathanD.Williams,Aug.5,2009,atp.2;ExaminersInterviewofPeterA.
Tennyson,Oct.13,2009,atp.3;ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.5.
7319ExaminersInterviewofFredS.Orlan,Sept.21,2009,atp.3;ExaminersInterviewofJamesP.Seery,
Jr.,Nov.12,2009,atp.4.
7320ExaminersInterviewofJoselitoM.Rivera,Oct.13,2009,atp.5.
7321ExaminersInterviewofJamesP.Seery,Jr.,Nov.12,2009,atp.4.
7322Lehman,LCPIWorldRecordsReport(Sept.15,2008)[LBEXLL027825];DebtorsMotionPursuantto
Sections105(a),363(b),363(c)and541(d)oftheBankruptcyCodeandBankruptcyRule6004forAuthority
to(A)ContinuetoUtilizeItsAgencyBankAccount,(B)TerminateAgencyRelationships,and(C)Elevate
Loan Participations, at p. 3, Docket No.3, In re Lehman Commercial Paper, Inc., No. 0813900 (Bankr.
S.D.N.Y.Oct.6,2008).
7323ExaminersInterviewofJamesP.Seery,Jr.,Nov.12,2009,atp.4.

1975

charges pertaining to the loan.7324 LCPI also extended warehouse loans that were
securedbymortgageloansandotherassets.7325
Inaddition,LCPIwasinvolvedintheadministration,syndicationandtradingof
commercialloans.7326Intheprimaryloanmarket,LCPIservedasalender,syndication
agent and administrative agent for commercial loans, and also bought and sold loans
thatotherfinancialinstitutionsoriginated.7327Itsportfolioofloansincludedbothfully
funded loans and unfunded loans (loans as to which it had future funding
obligations).7328
When LCPI acted as an administrative agent, it served as an intermediary
between lenders and borrowers and performed functions such as monitoring loans,
collecting advances from lending syndicate members and transferring these funds to
borrowers, and collecting payments of principal and interest from borrowers and

7324Id.
7325Lehman,

LCPI World Records Report (Sept.15, 2008) [LBEXLL027825]. The process of

warehousing loans consisted of extending warehouse lines of credit to finance the operations of
mortgage originators in exchange for the right to sell securities backed by a pool of mortgages.
ExaminersInterviewofMadelynAntoncic,Feb.25,2009,atp.4.
7326Lehman,LCPIWorldRecordsReport(Sept.15,2008)[LBEXLL027825];DebtorsMotionPursuantto
Sections105(a),363(b),363(c)and541(d)oftheBankruptcyCodeandBankruptcyRule6004forAuthority
to(A)ContinuetoUtilizeItsAgencyBankAccount,(B)TerminateAgencyRelationships,and(C)Elevate
Loan Participations, at p. 3, Docket No.3, In re Lehman Commercial Paper, Inc., No. 0813900 (Bankr.
S.D.N.Y.Oct.6,2008).
7327Debtors Motion Pursuant to Sections 105(a), 363(b) and 541(d) of the Bankruptcy Code and
BankruptcyRule6004forAuthorityto(A)ContinuetoUtilizeItsAgencyBankAccount,(B)Terminate
Agency Relationships, and (C) Elevate Loan Participations, at pp. 34, Docket No.3, In re Lehman
CommercialPaper,Inc.,No.0813900(Bankr.S.D.N.Y.Oct.6,2008).
7328Id.atp.4.

1976

distributing the funds to syndicate members.7329 LCPI sometimes had no economic

interestinaparticularloan,whileinothertransactionsitservedbothaslenderandas
an administrative agent.7330 LCPI received a fee for its services as an administrative
agent.7331
WhenLCPIactedasasyndicationagent,itoriginatedcommercialloansandsold
interestsinthemtothirdparties.7332Thesethirdpartiespledgedtofundaportionofthe
lendersfutureobligationsinexchangeforaproportionateshareoftheproceedsfrom
repayment of the loans.7333 In a typical syndication transaction, LCPI would sell a
participation.Theparticipantwouldinturnreceivetherighttoreceiveprincipaland
interestpaymentsfromtheloan.Theparticipantwouldassumeanobligationtofunda
proportionalunfundedamountoftheloan.7334Theparticipantdidnotbecomealender
of record, however, and there was no direct contractual relationship between the
borrower and the participant in these transactions.7335 LCPI also would buy
participations in loans that other financial institutions originated and sell sub
participationsofitssharetothirdparties.7336

7329Id.
7330Id.
7331Id.
7332Id.
7333Id.
7334Id.
7335Id.atpp.45.
7336Id.atp.5.

1977

LCPI was the primary entity through which Lehman engaged in

securitizations.7337 LCPI maintained a repo facility at JPMorgan, and was actively
involvedinintercompanyrepoandreverserepofinancing.7338
Early in its history, LCPI had been engaged in issuing commercial paper, but
notwithstanding its name, was no longer active in that business line at the time of
bankruptcy.7339
Lehmans records indicate that approximately 120 LBI and LBHI employees
performedfunctionsforLCPI.7340LCPIfundeditsoperationsthroughrepoagreements,
bankcreditfacilitiesandborrowingsfromLBHI.7341LCPIcouldnotfunctionasastand
aloneentity.7342
(d) LBSF
Lehman Brothers Special Financing, Inc. (LBSF) was used by Lehman as its
primary vehicle for trading in derivatives,7343 and was fully guaranteed by LBHI.7344

7337ExaminersInterviewofAdaShek,Nov.24,2009,atp.4.
7338Id.
7339Examiners Interview of Joselito M. Rivera, Oct.13, 2009, at p. 5; Examiners Interview of JamesP.

Seery,Jr.,Nov.12,2009,atp.4.
7340A&M,SpreadsheetofEmployeesMappedtoLegalEntities(Sept.20,2008)[LBEXAM5642400].
7341Lehman, LCPI, World Records Report (Sept.15, 2008) [LBEXLL027825]; Examiners Interview of
KristieY.Wong,Dec.2,2009,atp.1.
7342ExaminersInterviewofFredS.Orlan,Sept.21,2009,atp.3.
7343Examiners Interview of Kristie Y. Wong, Dec.2, 2009; Examiners Interview of Ada Shek, Nov.24,
2009,atp.10;ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.6.
7344Lehman,LBSFWorldRecordsReport(Sept.15,2008)[LBEXLL027825];Lehman,UnanimousWritten
ConsentoftheExecutiveCommitteeoftheBoardofDirectorsofLehmanBrothersHoldingsInc.(June9,
2008)[LBEXAM003415].

1978

LBSF was used to book transactions for products including interest rate swaps,7345
interest rate and equity derivatives,7346 mortgagebacked securities,7347 currency
derivatives,7348 credit default swaps,7349 total return swaps,7350 collateralized debt
obligations7351 (including structured finance collateralized debt obligations and
corporatebackedsyntheticcollateralizeddebtobligations)7352andmunicipalbondsand
derivatives.7353
Although LBSF was Lehmans primary swap trading entity, other entities also
wereusedtobookswapsfor,amongotherthings,hedgingpurposes.7354LBSFalsowas
used as a swap counterparty for trades originating at other Lehman entities.7355 If a
clientmaintainedarelationshipwithadifferentLehmanentity,butwantedtoexecutea

7345Examiners Interview ofJonathanD.Williams, Aug.5, 2009,atp. 3; Examiners Interview of Kleber

Rodriguez,Dec.18,2009,atp.4;ExaminersInterviewofPeterA.Tennyson,Dec.2,2009,atp.2.
7346See,e.g.,memorandumfromAjayNagpal,Lehman,toAllysonCarine,Lehman(Nov.4,2004)[LBEX
DOCID3525376];memorandumfromJanetHurley,Lehman,etal.,toTransactionManagementGroup,et
al.,Lehman(July21,2006)[LBEXDOCID3568131].
7347See, e.g., letter from Lehman Brothers Special Financing Inc. to Credit Industriel et Commercial
(Nov.16,2006)[LBEXDOCID3678372].
7348EmailfromJessicaLaut,Lehman,toKathleenKalaher,Lehman,etal.(Aug.28,2008)[LBEXDOCID
3620744].
7349ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.6.
7350Email from Jonathan Lai, Lehman, to John Gatsos, Lehman, et al. (Sept.15, 2008) [LBEXDOCID
3621679].
7351Email from Terrence Glomski, Lehman, to Stephen Lukow, Lehman (Sept.15, 2008) [LBEXDOCID
3620796].
7352See,e.g.,Lehman,CDOEntityList[LBEXDOCID3501971].
7353See,e.g.,memorandumfromGeraldRizzieri,Lehman,etal.,toMatthewLooney,re:Lehman,Closing
Memorandum (Aug. 25, 2008) [LBEXDOCID 3517551]; email from Patrick Scott, Lehman, to Gerald
Rizzieri,Lehman,etal.(Aug.27,2008)[LBEXDOCID3547534];Lehman,MunicipalDerivativesBusiness
andMarketRiskOverview,atp.4(Sept.2008).
7354ExaminersInterviewofPeterA.Tennyson,Dec.2,2009,atp.2.
7355ExaminersInterviewofSatuS.Parikh,Aug.26,2009,atp.10.

1979

tradeinaproductthatLBSFtypicallybooked,LBSFwouldoftenmakethetradeback
tobackwiththeotherLehmanentity.7356
LBSF had a dedicated trading desk that was used to trade and manage the
productsdescribedabove.7357However,LBSFdidnothaveitsownsalesforce.7358LBSF
couldnothavesurvivedasastandaloneentity.7359
(e) LOTC
Lehman Brothers OTC Derivatives, Inc. (LOTC) was an overthecounter
(OTC) derivatives dealer regulated by the SEC.7360 It faced customers in the United
States, and was subject to lower capital requirements than a fullservice brokerdealer
such as LBI.7361 By limiting its activities to eligible OTC derivative products and risk
mitigating transactions, LOTC was permitted to calculate its regulatory capital
requirementusingVaRmodels.7362ThereducedcapitalrequirementsallowedLehman
to offer lower prices on these transactions than a traditional brokerdealer with more
substantialcapitalrequirements,suchasLBI,couldoffer.LOTCwassubjecttoregular

7356Id.
7357ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.6.
7358Idatp.6.
7359ExaminersInterviewofKaushikAmin,Sept.17,2009,atp.10.
7360ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.9.
7361Id.
7362LehmanBrothersCompanyOverview,ThirdQuarter2007,atp.4[LBEXLL2165164].

1980

reportingrequirements,strictinternalcontrols,andannualreviewbytheSEC.7363LOTC
waswhollyownedandfullyguaranteedbyLBHI.7364
(f) LBDPandLBFP
Lehman Brothers Derivative Products, Inc. (LBDP) and Lehman Brothers
Financial Products, Inc. (LBFP) were AAArated derivatives trading entities.7365 The
AAAratings were important because some OTC derivatives trading counterparties
requiredaAAAcounterpartycreditratinginordertodobusinesswithLehman.7366
To maintain their AAA ratings, LBDP and LBFP were subject to numerous
requirements, including yearend audits, regular issuance of financial statements and
monitoring by onsite auditors.7367 Both had to comply with certain operating
guidelines,whichLehmansharedwithratingagenciesandauditors.7368Theyalsowere
requiredtosubmitverificationstotheratingagenciesconfirmingtheircompliancewith
operatingandcapitalrequirements.7369

7363Id.
7364Lehman,

LOTC World Records Report (Sept.15, 2008) [LBEXLL027825]; Corporate Ownership

Statement Pursuant to Federal Rule of Bankruptcy Procedure 1007(a)(1) and Local Rule of Bankruptcy
Procedure 10073, Docket No. 2, In re Lehman Bros. OTC Derivatives, Inc., No. 0813893 (Bankr. S.D.N.Y.
Oct.3,2008);Lehman,UnanimousWrittenConsentoftheExecutiveCommitteeoftheBoardofDirectors
of Lehman Brothers Holdings Inc. (June9, 2008) [LBEXAM 003415]. Further details about LOTCs
businessarefoundatSectionIII.C.2.a.1.cofthisReport.
7365ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.4;Lehman,LBFPWorldRecordsReport
(Sept.15,2008),[LBEXLL027860];LBDPWorldRecordsReport(Sept.15,2008)[LBEXLL027856].
7366Examiners Interview of Michael Montella, Oct.26, 2009, at p. 4; Examiners Interview of Murtaza
Bhalloo,Sept.14,2009.
7367Examiners Interview of Michael Montella, Oct.26, 2009, at p. 4; Examiners Interview of Clifford
Feibus,Mar.12,2009,atpp.45.
7368ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.4.
7369Id.

1981

LBFP and LBDP monitored their capital levels daily to ensure that they fully
complied with the formulas used to calculate their capital requirements.7370 The
formulas established minimum capital requirements based on the credit ratings of
LBFPs and LBDPs counterparties and their exposures to those counterparties.7371 As
the market began to decline in the months leading up to LBHIs bankruptcy, these
capital requirements increased, but LBFP and LBDP still retained their AAA ratings
untiltheiractualbankruptcyfilings.7372
Both LBDP and LBFP were used to engage in swap and derivative
transactions.7373 They were used primarily for interest rate swaps, and neither entity
was involved in credit default swaps.7374 The entities counterparty trades were
mirroredandsupportedwithmarginandcollateralfromLBSF.7375TheLBDPandLBFP
capital structures were very expensive to maintain, however, so Lehman traders were
discouragedfrombookingtradesthroughthem.7376
Although LBFP and LBDP were used to trade similar products, they were
designedtooperatedifferentlyupontheoccurrenceofcertaintriggeringevents.

7370Id.
7371Id.
7372Id.
7373Id.atp.5;Lehman,LBFPWorldRecordsReport(Sept.15,2008)[LBEXLL027860].
7374ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.5.
7375Id.;emailfromMahavirSaida,Lehman,toJohnE.Martinelli,Lehman,etal.(Sept.15,2008)[LBEX

DOCID3620842].
7376ExaminersInterviewofKristieY.Wong,Dec.2,2009,atp.5.

1982

LBFP was a bankruptcy remote vehicle7377 and was created as a continuation

structure, which meant that if certain triggering events occurred (such as its holding
company filing for bankruptcy), a contingent manager would step in and continue to
tradeLBFPspositions.7378
In contrast, LBDP was organized as a termination structure7379 that had a hard
termination feature.7380 Under this arrangement, all of LBDPs swaps terminated
automatically if certain triggering events occurred.7381 LBDPs termination events
included: (1) a downgrade in LBDPs rating; (2) LBSFs failure to deliver or procure
delivery of required collateral; (3) LBDPs failure to maintain designated capital
requirements;and(4)bankruptcyofLBHIorLBSF.7382
NeitherLBFPnorLBDPcouldhavesurvivedwithoutLBHIorLBIbecausethey
hadnoindependentabilitytoraisefunds.7383

7377Lehman,

LBFP World Records Report (Sept.15, 2008) [LBEXLL 027860]; email from SethL.
Konheim,Lehman,toAlexanderPevzner,Lehman,etal.(Sept.18,2008)[LBEXDOCID3620957].
7378ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.6;Lehman,LBFPOperatingGuidelines
[LBEXBARLEG0001886].
7379Lehman, LBDP World Records Report (Sept.15, 2008) [LBEXLL 027856]; Examiners Interview of
MichaelMontella,Oct.26,2009,atp.5.
7380Email from Gerald Rizzieri, Lehman, to Brian Finnegan, Lehman (Sept.17, 2008) [LBEXDOCID
3592595].
7381ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.5;Lehman,LBDPOperatingGuidelines,
ArticleTen(July16,1998),atpp.2430[LBEXBARLEG00001824].
7382Lehman, LBDP Operating Guidelines, Article Ten (July 16, 1998), at pp. 2526 [LBEXBARLEG
00001824].
7383ExaminersInterviewofMurtazaBhalloo,Sept.14,2009,atp.4.

1983

(g) LBF
FormerdebtorLehmanBrothersFinance,S.A.(LBF)wasawhollyownedand
fully guaranteed subsidiary of LBHI, and was the entity through which Lehman
conductedasubstantialportionofitsequityderivativesbusiness.7384Approximately50
percentofLehmansequityderivativestransactionswerebookedinLBF.7385Ingeneral,
LBFwasusedtostructureandtradeglobalOTCequityderivatives,7386includingequity
derivatives involving complex disbursement formulas.7387 Most of its counterparties
wereprofessionalmarketparticipants.7388
LBF was organized in Switzerland, where it qualified to operate as an
unregulated entity.7389 To maintain this status, LBF restricted its activities to the
following:

execution of OTC derivatives (i.e., options, forwards and swaps) on

underlyingassetsorproducts;

7384Lehman, LBF World Records Report (Sept.15, 2008) [LBEXLL 027785]; Joint Declaration of Pascal

Portmann and Christiana Suhr Brunner, as Representatives of PricewaterhouseCoopers AG, Zurich, as

BankruptcyLiquidatorofLehmanBrothersFinanceAG,inLiquidation,a/k/aLehmanBrothersFinance
SA,inLiquidation,inSupportofChapter15PetitionandMotiontoDismiss,atp.3,DocketNo.10,Inre
LehmanBros.Finance,No.09B10583,andInreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.
Feb.10,2009);ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.9;ExaminersInterviewof
KleberRodriguez,Dec.19,2009,atp.4.
7385PricewaterhouseCoopers AG, Zurich, First Report of PricewaterhouseCoopers AG, Zurich, as
appointedliquidatorstothecreditorsofLehmanBrothersFinanceS.A.,Zurich,inliquidation(Sept.25,
2009),atp.2.
7386Lehman,LBFWorldRecordsReport(Sept.15,2008)[LBEXLL027785].
7387PricewaterhouseCoopers AG, Zurich, First Report of PricewaterhouseCoopers AG, Zurich, as
appointedliquidatorstothecreditorsofLehmanBrothersFinanceS.A.,Zurich,inliquidation(Sept.25,
2009),atp.2.
7388Id.
7389Lehman,LBFWorldRecordsReport(Sept.15,2008)[LBEXLL027785].

1984

issuanceofwarrantsandcertificates;

trading of securities and listed derivatives only to the extent that it was
hedgingriskonitsderivativesportfolio;and

securities borrowing and lending or repos only when done with other
Lehmanentitiesandwhenrelatedtothesettlementorfinancingofsecurities
hedgingpositions.7390

LBFwasnotpermittedtoborrowSwisssecurities,andanytradingactivitythatdidnot
fallintothecategoriesenumeratedabovewasstrictlyforbidden.7391
LBFwashighlyintegratedintotherestoftheLehmanorganizationandreliedon
employees from other groups to process and book most of its transactions.7392 LBF
reliedondataprocessingsystemsusedbyotherLehmanentities.7393
LBF filed for bankruptcy on October 3, 2008.7394 It subsequently moved to
dismiss its United States bankruptcy proceeding on February10, 2009.7395 LBF argued
thatitwasinvolvedinconcurrentbankruptcyproceedingsinSwitzerlandthatshould
berecognizedasforeignmainproceedingsunderChapter15oftheBankruptcyCode,

7390Id.
7391Id.
7392PricewaterhouseCoopers

AG, Zurich, First Report of PricewaterhouseCoopers AG, Zurich, as

appointedliquidatorstothecreditorsofLehmanBrothersFinanceS.A.,Zurich,inliquidation(Sept.25,
2009),atp.3.
7393Id.
7394Voluntary Petition, at p. 1, Docket No. 1, Lehman Bros. Finance S.A., No. 0813887 (Bankr. S.D.N.Y.
Oct.3,2008).
7395Motion Pursuant to Section 305 of the Bankruptcy Code for an Order Dismissing Chapter 11 Case
upon Recognition of Foreign Main Proceeding Under Chapter 15, Docket No. 2789, In re Lehman Bros.
FinanceAG,InLiquidation,a/k/aLehmanBros.FinanceSA,InLiquidation,No.09B10583,InreLehmanBros.
HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Feb.10,2009).

1985

and that dismissal of the Chapter 11 proceeding was therefore appropriate.7396 LBF
asserted that the Chapter 11 proceeding had been filed on its behalf without
appropriateboardapprovalandthatithadlimitedconnectionstotheUnitedStates.7397
On March 12, 2009, the Court recognized the Swiss proceedings as foreign main
proceedings for purposes of Chapter15 of the Bankruptcy Code, and dismissed LBFs
Chapter11 proceeding.7398 As a result of the dismissal, the Examiner conducted no
investigationofthisentity.
(h) BNC
BNCMortgage,Inc.,thepredecessortoBNCMortgageLLC(BNC),originated
subprime mortgages.7399 BNC Mortgage, Inc. was converted to an LLC, which was
organizedinDelawareonMarch1,2007,inordertotakeadvantageofcertainstatetax
rules.7400 Despite this change in corporate structure, BNC continued to originate
subprimemortgageloansforaperiodofseveralmonths.7401Asaresultofthecollapse

7396Id.
7397Id.
7398Order Dismissing Chapter 11 Case of Lehman Brothers Finance AG a/k/a Lehman Brothers Finance

SA(No.0813887)andGrantingRelatedRelief,atp.3,InreLehmanBros.FinanceAG,InLiquidation,a/k/a
LehmanBros.FinanceSA,InLiquidation,Chapter15No.0910583,InreLehmanBros.HoldingsInc.,No.08
13555,atp.3.
7399Examiners Interview of Susan Harrison, Apr. 28, 2009, at p. 4; Examiners Interview of Marie Jean
Burruel,Apr.28,2009,atp.4.
7400Lehman,BNCWorldRecordsReport(Sept.15,2008)[LBEXLL027795];emailfromLaurenSheridan,
A&M,toHeatherD.McArn,ExaminersCounsel(Dec.30,2009).
7401Examiners Interview of Susan Harrison, Apr. 28, 2009, at p. 4; Examiners Interview of Marie Jean
Burruel,Apr.28,2009,atp.4(describingthebusinessofBNCMortgage,Inc.,whichwasaprecursorto
BNCMortgageLLC).

1986

ofthemarketforsubprimemortgagesandrelatedsecuritizedproducts,Lehmanshut
downBNCsmortgageoriginationbusinessinAugustof2007.7402
(2) LBHIAffiliateSinglePurposeEntities
The other LBHI Affiliates were single purpose entities used as holding
companiesforvariousrealestate,physicalandfinancialassets.
(a) LB745
LB 745 LLC (LB 745) was used to acquire and hold Lehmans headquarters
building at 745 Seventh Avenue in Manhattan.7403 According to Schedule1(b) of the
ClarificationLetter,LB745alsoownedLehmansCranford,NewJerseyfacility.7404
(b) CESAviationEntities
TheCESAviationentitieswerepartofLehmansCorporateExecutiveServices
group.7405CESAviationLLC(CES)wasusedtoacquireandholdaGulfstreamGIV
jet7406fortheuseofLehmansexecutives.7407CESAviationVLLC(CESV)wasusedto
acquireandholdaSikorskyS76C+helicopter7408fortheuseofLehmansexecutives.7409

7402ExaminersInterviewofMarieJeanBurruel,Apr.28,2009,atp.10;ExaminersInterviewofMartha

Evans,May22,2009,atp.14;LBHI200710Katp.5.
7403Lehman,LB745WorldRecordsReport(Sept.15,2008)[LBEXLL027840].
7404 Letter agreement among Lehman Brothers Holdings Inc., Lehman Brothers Inc., LB 745 LLC and
BarclaysCapital,Inc.(Sept.20,2008)(Clarificationletter),atSchedule1(b).
7405ExaminersInterviewofAmyLederer,Oct.22,2009,atp.2.
7406Lehman,CESWorldRecordsReport(Sept.15,2008)[LBEXLL027772].
7407Examiners Interview of Amy Lederer, Oct.22, 2009, at p. 2; Debtors Motion for Entry of an Order
Pursuant to Section 363 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 6004
Authorizing Lehman Brothers Holdings Inc. to Enter into a Sale and Purchase Agreement, at pp. 34,
DocketNo.1033,InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Oct.15,2008).
7408Lehman,CESVWorldRecordsReport(Sept.15,2008)[LBEXLL027775];DebtorsMotionPursuant
toSections105and363oftheBankruptcyCode,FederalRulesofBankruptcyProcedure2002,6004,and

1987

CESAviation IXLLC (CESIX) was usedto acquire and holda Falcon50jet7410for the
useofLehmansexecutives.7411
(c) PAMIStatler
PAMIStatlerArmsLLC(PAMIStatler)wasaholdingcompanythatownedand
operated an apartment building located at 1127 Euclid Avenue in Cleveland, Ohio.7412
PAMI Statler was a subsidiary of PAMI, the parent company for Lehmans real estate
holdingandassetmanagementbusiness.7413
(d) EastDover
EastDoverLimited(EastDover)wasanIrishcompany7414thatleasedaircraftto
thirdparties.7415By2008,however,EastDovernolongerownedthoseoperatingassets,
andinsteadheldonlyanintercompanypayableandthirdpartyreceivables.7416

9014, and Rules 60041, 90061 and 90141 of the Local Bankruptcy Rules for Approval of the Sale of
DebtorsAircraftPursuanttoanAircraftSaleandPurchaseAgreementandPaymentofRelatedFeesat
p.2,DocketNo.3003,InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Mar.5,2009).
7409ExaminersInterviewofAmyLederer,Oct.22,2009,atp.2.
7410Lehman, CES IX World Records Report (Sept.15, 2008) [LBEXLL 027779]; CES IX Summary of
Schedules,InreLehmanBros.HoldingsInc.,No.0813907(Bankr.S.D.N.Y.).
7411Examiners Interview of Amy Lederer, Oct.22, 2009, at p. 2; Debtors Motion for Entry of an Order
PursuanttoSections105and363oftheBankruptcyCode,FederalRulesofBankruptcyProcedure2002,
6004and9014,andRules60041,90061and90141oftheLocalBankruptcyRulesApprovingtheSaleof
theDebtorsAircraftPursuanttoanAircraftSaleandPurchaseAgreement,atp.3,DocketNo.1464,Inre
LehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Nov.12,2008).
7412Motion of Debtors Seeking Entry of an Order Pursuant to Section 1112(b) of the Bankruptcy Code
DismissingChapter11CaseofPAMIStatler,atpp.34,DocketNo.3650,InreLehmanBros.HoldingsInc.,
No.0813555(Bankr.S.D.N.Y.May26,2009).
7413Corporate Ownership Statement Pursuant to Federal Rule of Bankruptcy Procedure 1007(a)(1) and
Local Rule of Bankruptcy Procedure 10073, Docket No. 2, In re PAMI Statler Arms LLC, No. 0813664
(Bankr.S.D.N.Y.Sept.23,2008);ExaminersInterviewofJoselitoM.Rivera,Oct.13,2009,atp.2.
7414Lehman,EastDoverWorldRecordsReport(Sept.15,2008)[LBEXLL027782].
7415Lehman,EastDoverWorldRecordsReport(Sept.15,2008)[LBEXLL027782];ExaminersInterview
ofAdaShek,Nov.24,2009,atp.3;ExaminersInterviewofMichaelMontella,Oct.26,2009,atp.9.

1988

(e) ScottishFinance
Lehman Scottish Finance L.P. (Scottish Finance) was a singlepurpose entity
usedtoinvestandholdequityinLuxembourgFinanceS.A.R.L.(anentitydistinctfrom
LBHI Affiliate Luxembourg Residential Properties Loan Finance S.A.R.L., described
below).7417 Luxembourg Finance S.A.R.L. was involved in the financing of an equity
linked note.7418 In that transaction, Luxembourg Finance S.A.R.L. entered into an
agreement with Relationship Funding Company (RFC), pursuant to which RFC
issued notes linked to a basket of equity securities.7419 RFC loaned the proceeds to
Luxembourg Finance S.A.R.L., which then reloaned the proceeds to LBIE and other
Lehmanaffiliates.7420
(f) LuxembourgS.A.R.L.
Luxembourg Residential Properties Loan Finance S.A.R.L. (Luxembourg
S.A.R.L.) was a singlepurposeentity that held loan assets as part of a financing and
asset investment transaction.7421 As of its bankruptcy filing, S.A.R.L. held

7416ExaminersInterviewofAdaShek,Nov.24,2009,atp.3.
7417Examiners Interview of Joselito M. Rivera, Oct. 13, 2009, at p. 4; Examiners Interview of Gerald

Haupt,Nov.12,2009.
7418Examiners Interview of Gerald Haupt, Nov.12, 2009; Examiners Interview of Joselito M. Rivera,
Oct.13,2009,atp.4.
7419ExaminersInterviewofGeraldHaupt,Nov.12,2009,atp.2;LoanAgreementbetweenLuxembourg
Finance S.A.R.L. and Relationship Funding Company (March 2, 2007), at pp. 4, 11 [LBEXDOCID
1030326].
7420Loan Agreement between Luxembourg Finance S.A.R.L. and Relationship Funding Company
(March2,2007),atpp.1,5,11,21[LBEXDOCID1030326].
7421ExaminersInterviewofGeraldHaupt,Oct.13,2009,atp.2.

1989

$596,884,125.52 in U.S. corporate loans,7422 consisting of one tranche of loans from the
multitrancheArchstoneloantransaction.7423
(g) Navigator
Fundo de Investimento Multimercado Credito Privado Navigator Investimento
NoExterior(Navigator)wasaBraziliancompanythattradedagriculturalnotesand
commoditiesderivatives7424forLehmansEmergingMarketsGrouptradingdesk.7425
NavigatorfiledforbankruptcyonOctober5,2008.7426Itsubsequentlymovedto
dismissitsbankruptcycaseonFebruary4,2009.7427Navigatorallegedthatithadfiled
bankruptcybecauseitheldasubstantialcashbalanceatthetimeofLehmanscollapse,
and an inaccurate notation in Lehmans internal records indicated that it was
headquartered in Delaware, not Brazil.7428 Navigator argued that its inclusion in the
United States bankruptcy proceedings inhibited its ability to wind down its Brazilian

7422Luxembourg

Residential Properties Loan Finance S.A.R.L. Summary of Schedules, at p.13, In re

LehmanBros.HoldingsInc.,No.0910108(Bankr.S.D.N.Y.Mar.11,2009).
7423ExaminersInterviewofGeraldHaupt,Oct.13,2009,atp.2;emailfromLaurenSheridan,Alvarez&
Marsal,toHeatherD.McArn,ExaminersCounsel(Dec.30,2009).
7424ExaminersInterviewofAdaShek,Nov.24,2009,atp.9;MotionSeekingEntryofanOrderPursuant
to Sections 1112(b) or 305 of the Bankruptcy Code Dismissing the Chapter 11 Case of Fundo de
InvestimentoMultimercadoCreditoPrivadoNavigatorInvestimentoNoExterior,atp.3,DocketNo.9,
InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Feb.4,2009).
7425Lehman,FundodeInvestimentoMultimercadoCreditoPrivadoNavigatorInvestimentoNoExterior
WorldRecordsReport(Sept.15,2008)atp.1[LBEXLL3660315].
7426VoluntaryPetition,InreFundodeInvestimentoMultimercadoCreditoPrivadoNavigatorInvestimentoNo
Exterior,No.0813903(Bankr.S.D.N.Y.Oct.5,2008).
7427Debtors Motion Seeking Entry of an Order Pursuant to Sections 1112(b) or 305 of the Bankruptcy
Code Dismissing the Chapter 11 Case of Fundo de Investimento Multimercado Credito Privado
Navigator Investimento No Exterior, at p. 3, Docket No. 2726, In re Lehman Bros. Holdings Inc., No. 08
13555(Bankr.S.D.N.Y.Feb.4,2009).
7428Id.

1990

business,anddismissalwasthereforeappropriate.7429TheCourtdismissedNavigators
bankruptcy case on February24, 2009.7430 As a result, the Examiner conducted no
investigationofthisentity.
(3) SaleTransaction7431
AfterLBHIfiledforbankruptcy,LehmanandBarclaysreachedanagreementfor
BarclaystobuycertainassetsofLBI,thebroker/dealer.Certaincreditorshavealleged
thatBarclaysmayhavereceivedassetsbelongingtotheLBHIAffiliatestowhichitwas
notentitled.
ShortlyafterLBHIfileditspetitionunderChapter11oftheBankruptcyCodeon
September15,2008,LehmanandBarclaysbegantonegotiatethesaleofLBIsbusiness
andassetstoBarclays.
OnSeptember17,LehmanandBarclaysexecutedanAssetPurchaseAgreement,
whichwasdatedasofSeptember16,2008(theAPA).TheAPAprovidedforthesale
toBarclaysofthefollowingassets,amongothers:

theLehman headquartersbuilding that was located at 745 Seventh Avenue

inNewYorkCityandLehmanstwoNewJerseydatacenters;7432

7429Debtors Motion Seeking Entry of an Order Pursuant to Sections 1112(b) or 305 of the Bankruptcy

Code Dismissing the Chapter 11 Case of Fundo de Investimento Multimercado Credito Privado
NavigatorInvestimentoNoExterior,atpp.48,DocketNo.2726,InreLehmanBros.HoldingsInc.,No.08
13555(Bankr.S.D.N.Y.Feb.4,2009).
7430Order Dismissing the Bankruptcy Case of Fundo de Investimento Multimercado Credito Privado
NavigatorInvestimentoNoExterior,atpp.12,DocketNo.2913,InreLehmanBros.HoldingsInc.,No.08
13555(Bankr.S.D.N.Y.Feb.24,2009).
7431The Examiner sets forth here the facts pertinent to the analysis of potential LBHI Affiliate asset
transfersthatfollows.Amoredetailedaccountoffactsrelatingtothesaletransactionissetforthbelow
inSectionIII.C.6.

1991

thebusinessofLBHIandLBI,whichwasdefinedtoincludetheU.S.and
Canadian investment banking and capital markets business of Seller
including the fixed income and equities cash trading, brokerage, dealing,
trading and advisory businesses, investment banking operations and LBIs
businessasafuturescommissionmerchant;7433

all of the assets of [LBHI and LBI] and [their] subsidiaries used in
connectionwiththeBusiness(excludingtheExcludedAssets);7434

50%ofeachpositionintheresidentialrealestatemortgagesecurities;7435

longpositionswithabookvalueofapproximately$70billion;7436and

theFurnitureandEquipment.7437

On September 17, the Debtors filed the Sale Motion7438 asking the Court to
scheduleasalehearingandestablishsaleprocedures.
On September 19, certain creditors filed responses and objections to the Sale
Motion.SeveralcreditorsallegedthatthetermsoftheAPAwereambiguousenoughto
permitassetsofLehmansnondebtorsubsidiariestobeincludedinthesale.7439

7432AssetPurchaseAgreementamongLehmanBrothersHoldingsInc.,LehmanBrothersInc.,LB745LLC

andBarclaysCapitalInc.(Sept.16,2008)(theAPA),atp.6(1.1).
7433APA,atp.2(1.1).
7434Id.atp.6(1.1).
7435Id.
7436Id.
7437Id. The APA defines Furniture and Equipment to include: all furniture, fixtures, furnishings,

equipment, vehicles, leasehold improvements, and other tangible personal property owned or used by
SelleranditsSubsidiariesintheconductoftheBusiness,including,alldesks,chairs,tables,Hardware,
copiers, telephone lines and numbers, telecopy machines and other telecommunication equipment,
cubiclesandmiscellaneousofficefurnishingsandsupplies.Hardwareisdefinedtoinclude:anyand
all computer and computerrelated hardware, networks, and peripherals, including, but not limited to,
information and communications systems, computers, file servers, facsimile servers, scanners, color
printers,laserprinters,andnetworks.Id.at4(1.1).
7438DebtorsMotionto(A)ScheduleaSaleHearing;(B)EstablishSalesProcedures;(C)ApproveaBreak
Up Fee; and (D) Approve the Sale of the Purchased Assets and the Assumption and Assignment of
ContractsRelatingtothePurchasedAssets,DocketNo.60,InreLehmanBros.HoldingsInc.,No.0813555
(Bankr.S.D.N.Y.Sept.17,2008)(SaleMotion).

1992

On September 19, the Court held a sale hearing to consider the proposed
transaction with Barclays. At the hearing, the Debtors represented that no assets of
nondebtoraffiliateswerebeingsold,includingthosebelongingtoLBCS.7440
OnSeptember20,2008,theCourtenteredtheSaleOrderapprovingthetermsof
the sale as embodied in the APA, the First Amendment thereto and an additional
clarifyingdocument.7441
On September 22, 2008, the parties executed a Clarification Letter, which was
datedasofSeptember20,2008.TheClarificationLetterprovided,amongotherthings,
that the Purchased Assets Barclays was buying included none of the assets of
Subsidiaries of LBHI (other than assets of LBI) except as otherwise specifically
provided.7442
On Monday, September 22, the sale transaction closed. In connection with the
sale,almostallofLBIsassetsandemployeesweretransferredtoBarclays.

7439See,e.g.,ResponseofTheWaltDisneyCompanytoDebtorsMotionDatedSeptember17,2008forSale

Approval, at pp. 24, Docket No. 183, In re Lehman Bros. Holdings Inc., No. 0813555 (Bankr. S.D.N.Y.
Sept.19, 2008); Limited Objection and Reservation of Rights of Ad Hoc Committee of Bondholders to
DebtorsMotionto(A)ScheduleaSaleHearing;(B)EstablishSalesProcedures;(C)ApproveaBreakUp
Fee;and(D)ApprovetheSaleofthePurchasedAssetsandtheAssumptionandAssignmentofContracts
RelatingtothePurchasedAssets,atp.3,DocketNo.161,InreLehmanBros.HoldingsInc.,No.0813555
(Bankr.S.D.N.Y.Sept.19,2008).
7440Transcript of hearing, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.19,
2008,atpp.8889,226(Fife).
7441OrderUnder11U.S.C.105(a),363,and365andFederalRulesofBankruptcyProcedure2002,6004
and6006AuthorizingandApproving(A)theSaleofPurchasedAssetsFreeandClearofLiensandOther
Interestsand(B)AssumptionandAssignmentofExecutoryContractsandUnexpiredLeases,atpp.1,12,
DocketNo.258,InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Sept.20,2008).
7442ClarificationLetter,atp.1.

1993

Barclays immediately took over Lehmans facilities at 745 Seventh Avenue.7443

BecausemanyoftheLBHIAffiliatesconductedtheiroperationsoutofthe745Seventh
Avenueheadquarters,whenittookoverthebuilding,Barclaysassumedpossessionof
many of the fixed assets used in LBHI Affiliate business operations, such as furniture
and computer and communications equipment.7444 Given the integrated manner in
whichLehmanoperateditsbusinessandtheshortperiodoftimesurroundingthesale,
theExaminerhasconcludedthatitwouldhavebeennearlyimpossibleforLehmanor
Barclaystoidentifywhichfixedassetsbelongedtowhichlegalentitiespriortothesale,
andtheDebtorsdidnotattempttodosountillater.7445
As part of the sale transaction, Barclays acquired various intellectual property
assets from Lehman.7446 Though Lehman separated some hardware and software
componentsforNomura,andalsosegregatedmostofNeubergerBermansintellectual
property assets, all other technology assets were transferred to Barclays wholesale.7447
The Examiner was advised that it would not have been feasible to isolate software
componentsinthelimitedtimeavailableduringtheweekbetweenthesalenegotiations

7443ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon,

andJeffreyDonaldson,Jan.22,2010.
7444Id.
7445Id.
7446APA at p. 8 (1.1); see also Intellectual Property Assignment Agreement Among Lehman Brothers
HoldingsInc.,LehmanBrothersInc.,LB745LLCandBarclaysCapitalInc.(Sept.22,2008),atp.1.
7447ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon
andJeffreyDonaldson,Jan.22,2010.

1994

and the beginning of the transition.7448 As a result, any intangible assets of the LBHI
AffiliatesthatwerehousedinLehmansconsolidatedcomputersystemsandnetworks
wouldhavebeensweptupinthetransfer.
There was no effort made to segregate employees allocated to LBHI Affiliates
from the group to whom Barclays offered employment in the context of the sale. As
partofitspurchaseofLBIsassets,Barclayswastopurchasemostofthebusinessesthat
comprised Lehmans Fixed Income Division (FID). Lehman human resources
personnelcompiledalistofallFIDemployees,identifiedafewwhohadalreadybeen
given notice of termination prebankruptcy, as well as certain corporate officers, legal
staff and human resources personnel who were essential to the wind down of the
Debtors business, and designated the remainder for transfer to Barclays.7449 It would
havebeendifficult(ifnotimpossible)toidentifyandholdbackemployeesallocatedto
the LBHI Affiliates during that time period, particularly given that most Lehman
employees were actually employed by LBI and did not understand that they were
employees of an LBHI Affiliate, even though they may have performed services for
them.7450

7448Id.;AccordExaminersInterviewofJeffreyOsterman,Jan.28,2010.
7449ExaminersInterviewofTracyBinkley,Dec.22,2009;emailfromTracyBinkley,Lehman,toSteven

Berkenfeld,Lehman(Sept.23,2008)[BCIEX(S)00005498].
7450Examiners Interview of Tracy Binkley, Dec.22, 2009; see, e.g., letter from Christopher M.OMeara,
Lehman, to John DeRosa, Lehman, re: employment offer (Nov.10, 2006), at p. 2 [LBEXAM 023144]; e
mail from Kaushik Amin, Lehman, to Herbert H. McDade, III, Lehman (Sept.19, 2008)
[LBHI_SEC07940_656489]; email from Paul Gregg, Lehman, to Peter Keavey, Lehman (Sept.16, 2008)
[LBEXDOCID3571486](employeesallocatedtoLBCSdiscussingtransferofLBIemployeestoBarclays

1995

Asaresult,theDebtorswereleftwithfewlegacyLehmanemployeestoassistin
the wind down of their businesses, and only limited access to Lehmans books and
computersystemsintheimmediateaftermathofLBHIsbankruptcyfilingandthesale
toBarclays.7451TheDebtorslackofaccesstocomputersystemsandpersonnelmadeit
verydifficulttomanagethewinddownoftheDebtorsremainingbusinesses,andthey
hadlittleinstitutionalknowledgeuponwhichtodraw.7452
Throughout the fall and winter of 2008, the Debtors pushed Barclays to grant
additionalaccesstolegacyLehmansystemsthatBarclayshadreceivedinthesale,and
several disputes arose concerning transition service obligations.7453 The situation
improvedovertime.
The Debtors and Barclays eventually engaged in discussions over who owned
certainformerassetsoftheDebtors.7454Inthesummerof2009,theDebtorsultimately
movedtheBankruptcyCourttoauthorizearepurchaseofcertainequipmentandother

andnotingthatsus);ExaminersInterviewofJonathanD.Williams,Aug.5,2009,atp.4;transcriptof
deposition testimony of BryanP. Marsal, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr.
S.D.N.Y.,Dec.22,2009,atp.32.
7451ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon
andJeffreyDonaldson,Jan.22,2010.
7452Id.;transcriptofdepositiontestimonyofBryanP.Marsal,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Dec.22,2009,atpp.2930.
7453ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon
andJeffreyDonaldson,Jan.22,2010;transcriptofdepositiontestimonyofBryanP.Marsal,InreLehman
Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Dec.22, 2009, at pp. 3738; Alvarez & Marsal,
Lehman Bros. Holdings Inc., Report to Unsecured Creditors Committee (Nov.13, 2008), at pp. 2931
[LBEXAM5641910].
7454ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon
andJeffreyDonaldson,Jan.22,2010.

1996

physicalassetsfromBarclaystoallowittorenegotiateitslease.7455Thatmotiondidnot
addressanyLBHIAffiliateAssetsthatmayhavebeentransferredtoBarclays.7456
ThoughBarclaysandtheDebtorshaveengagedindiscussionsandnegotiations
toresolveassetownershipissuesasbetweenthemselves,includinginconnectionwith
transitionservicesdisputesandnegotiationsrelatingtothesummer2009repurchaseof
furniture and equipment, the Examiner has investigated the assets of LBHI Affiliates
pursuanttotheCourtscharge.
3.

WhetherAssetsofLBHIAffiliatesWereTransferredtoBarclays

As indicated above, in the Examiner Order the Court directed the Examiner to
investigate:
WhetherassetsofanyLBHIAffiliates(otherthanLehmanBrothers,Inc.)
weretransferredtoBarclaysCapitalInc.asaresultofthesaletoBarclays
CapitalInc.thatwasapprovedbyorderoftheBankruptcyCourtentered
September20,2008,andwhetherconsequencestoanyLBHIAffiliateasa
resultoftheconsummationofthetransactioncreatedcolorablecausesof
actionthatinuretothebenefitofthecreditorsofsuchLBHIsubsidiaryor
affiliate.7457
AsinstructedbytheCourt,withrespecttoeachLBHIAffiliate,theExaminerperformed
aninvestigationtodeterminetheassetsthateachLBHIAffiliateownedpriortoLBHIs
bankruptcyfiling,andexaminedwhethertherewereindicationsthatanyofthoseassets
were improperly transferred to Barclays in connection with the sale. The Examiner

7455SeeMotionofLehmanBros.HoldingsInc.PursuanttoSections105(a)and363oftheBankruptcyCode

for Authorization to Purchase Certain Furniture, Fixtures and Equipment from Barclays Capital Inc.,
DocketNo.3774,InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.June4,2009).
7456Id.
7457ExaminerOrder,atp.4(sixthbullet).

1997

used the following methodologies to reach the factual conclusions set forth in this
sectionoftheReport.
a) AnalysisofSecuritiesTransferredtoBarclays
Most of the assets LBI transferred to Barclays in connection with the sale were
securities. Several LBHI Affiliates were involved in securities trading and financing
activities. Consequently, a natural area of inquiry for the Examiner was to determine
whetheranyofthesecuritiestransferredtoBarclayswerenotownedbyLBI,butrather
byLBHIAffiliates.
SomeLBHIAffiliatesownedorheldmajorityinterestsinsubsidiariesthatwere
not the subject of bankruptcy proceedings, but were engaged in substantial securities
trading and financing activities (LBHI Affiliate Subsidiaries). Transfers of their
securitiestoBarclays,ifmade,wouldhavenegativelyimpactedthevalueoftheLBHI
Affiliates assets namely a reduction in the value of their stock or other ownership
interestsintheLBHIAffiliateSubsidiaries.ForpurposesofthisSectionoftheReport,
therefore, the Examiner also investigated whether securities owned by any LBHI
AffiliateSubsidiariesweretransferredtoBarclays.7458
In order to evaluate whether any securities owned by LBHI Affiliates or LBHI
Affiliate Subsidiaries (LBHI Affiliate Entities) had been transferred to Barclays, the

7458The

Examiners financial advisors identified LBHI Affiliate Subsidiaries based upon organization
chartssourcedfromLehmansWorldRecords[LBEXLL3668280314].Baseduponthisreview,theonly
LBHI Affiliate Subsidiary associated with a security transferred to Barclays was L.B. PassThrough
Securities,Inc.,whichwasidentifiedasanLCPIsubsidiary.

1998

Examiners financial advisors first tested the integrity of the various Lehman systems
used to track ownership and transfers of securities held by Lehman entities.7459 The
Examiners financial advisors then used those systems to determine whether any
securitiesownedbyLBHIAffiliateEntitiesweretransferredtoBarclays.TheExaminer
investigated not only whether any securities reflected in the securities inventories of
LBHI Affiliate Entities were transferred to Barclays, but also (where applicable) how
securities were transferred from LBHI Affiliate Entities to LBI in order to determine
whetherLBIhadtherighttointurntransferthesecuritiestoBarclays.Aspartofthis
inquiry,theExamineralsoexaminedwhetheranysecuritiestransferstoLBItookplace
after September12, 2008; after that date, it is questionable whether any LBHI Affiliate
EntitiesshouldhavecontinuedtoexpectthatLBIwouldbeabletosatisfyintercompany
obligations arisingfromnoncash settledtransfersofsecuritiesfroman LBHI Affiliate
EntitytoLBI.TheExamineralsoconductedinterviews,andconsultedwithpartiesin
interestintheDebtorscases,toconfirmhisfindings.
(1) SecuritiesTransferredtoBarclays
Securities worth tens of billions of dollars were transferred to Barclays in
connectionwiththesaletransaction.However,thosesecuritieswerenotthesamesetof
securitiesdescribedintheAPAandSaleMotion.TheAPAandSaleMotiondescribed
the transfer to Barclays of a relatively balanced book of short and long securities

7459AsexplainedintheintroductiontothisSection,thisReportdoesnotaddressLBHIAffiliateEntities

whosechapter11caseshavebeendismissed,andwhicharenolongerpendingbeforethisCourt.

1999

positionsinwhichBarclaysdidnotholdapreexistinginterest.Incontrast,mostofthe
securities that ultimately were transferred to Barclays were securities that were the
subjectoftheReplacementTransaction,7460andthusweresecuritiesoverwhichBarclays
alreadyexertedcontrolpriorto the sale;those securitieswere listed onSchedule A to
the final version of the Clarification Letter. LBI also was supposed to transfer to
BarclaysthesecuritieslistedonScheduleBtotheClarificationLetter(thesocalledbag
ofhammers).7461
Documents and witness interviews show that Schedules A and B to the
Clarification Letter were not prepared and finalized contemporaneously with the
September22, 2008 closing of the sale to Barclays. Instead, a number of days elapsed
after the sale closing during which Barclays, the SIPA Trustee and the Debtors
continuedtonegotiateandreconcilepreciselywhichsecuritieshadbeentransferredto
Barclaysaspartofthesale.AslateasSeptember29,2008,accordingtoanemailfrom
PaoloR. Tonucci, SchedulesA and B included what we believe to have been
transferredtoBarclays,andwhatweexpecttotransfertoBarclaysintheforthcoming

7460AsdescribedinSectionIII.C.6.f.1oftheReport,theReplacementTransactionwastheSeptember18,

2009presaletransactionpursuanttowhichBarclaysreplacedtheFRBNYastheprimaryrepolenderto
LBIandsteppedintotheFRBNYs$45billionrepolendingposition.
7461Bag of hammers was a phrase coined during the closing weekend to describe the basket of
miscellaneous additional securities that were identified for transfer to Barclays. As explained in one
interview,themiscellaneoussecuritieswerelikeabagofhammersbecausealthoughasinglehammer
mightbeavaluabletool,anentirebagofhammerswouldbeclumsyandlessdesirable(andthereforeless
valuable)becauseaworkerdoesnotneedanentirebagofhammers,anditwouldtakesignificanttime
and effort for the worker to deal with all of the hammers. Examiners Interview of James P. Seery, Jr.,
Nov.12,2009.

2000

days, and Tonucci was awaiting final confirmation of that fact.7462 Tonucci further
statedthatScheduleBincludedthoseassetsthathavenotyetbeentransferredbutwe
expect to transfer,as well as assetstransferredon Friday19September.7463Thus, the
partiescontinuedtorefinewhichsecuritieswereincludedinSchedulesAandB,andto
effectuate the transfer of certain of those securities to Barclays, well after the closing
date.
Itappearsthatthepartiesfinallysettleduponthesecuritiesthatweresupposed
tocompriseScheduleAandScheduleBinearlyOctober.ScheduleAconsistedof8,514
different CUSIP identifiers,7464 and included a list of par amounts and brief
descriptions.7465 In total, $69.8 billion in par value is represented on Schedule A.
Schedule B consisted of 3,917 CUSIP identifiers, and also included par amounts and
briefdescriptions.7466Intotal,$2.8billioninparvalueisrepresentedonScheduleB.The
total number of unique CUSIPs presented on Schedule A was 7,913, and the total
number of unique CUSIPs presented on Schedule B was 3,834. Of the CUSIPs
appearing on Schedules A and B, 490 CUSIP identifiers appeared on both schedules.
TheaggregatenumberofuniqueCUSIPidentifiersonSchedulesAandBwas11,257

7462EmailfromPaoloR.Tonucci,Lehman,toDavidMurgio,Weil,etal.(Sept.29,2008)[WGM00002540].
7463Id.
7464CUSIP stands for Committee on Uniform Securities Identification Procedures. A CUSIP identifies

most securities, including: stocks of all registered U.S. and Canadian companies, and U.S. government
andmunicipalbonds....The[CUSIP]numberconsistsofninecharacters(includinglettersandnumbers)
that uniquely identify a company or issuer and the type of security. See Securities and Exchange
Commission,CUSIPNumber,http://www.sec.gov/answers/cusip.htm(lastvisitedFeb.2,2010).
7465ClarificationLetter,atp.1(1(a)(ii)(A))(providingforScheduleA).
7466Id.atp.1(1(a)(ii)(B))(providingforScheduleB).

2001

(the11,747totalnumberofCUSIPspresentedonSchedulesAandB,lessthe490non
uniqueCUSIPidentifiersappearingonbothSchedulesAandB).
AnumberofthesecuritieslistedonScheduleBapparentlywereneverdelivered
toBarclays.OnDecember29,2008,BarclayscounselsentalettertotheSIPATrustee
indicating that under Section 1(a)(ii)(B) of the Clarification Letter, Barclays was
expecting delivery in connection with the sale of not only the securities listed on
ScheduleB,butalsosuchsecuritiesandotherassetsheldinLBIsclearanceboxesas
ofthetimeofClosing,whicharestillinLBIsclearanceboxes.7467Barclayscounsel
stated that Barclays only was seeking such securities to the extent that there were no
customerlongpositionsassociatedwiththeCUSIPs,ortotheextentthatthesecurity
quantitiesintheclearanceboxesexceededthequantitiesofcustomerlongpositions.7468
Barclays confirmed to the Examiner shortly before the delivery of this Report
that,asofJanuary22,2010,theonlyScheduleBsecuritieswhichhadbeendeliveredto
BarclayswerethesecuritiesdeliveredpriortoandincludingSeptember30,2008($1.035
billiononSeptember19,$269milliononSeptember29,and$161milliononSeptember
30,allvaluedperLehmansmarks);thatBarclayspositionisthat814CUSIPslistedon
ScheduleBeitherhavenotyetbeendeliveredorweredeliveredinincorrectquantities;
andthatadditionalsecuritiesintheclearanceboxesmuststillbedeliveredtoBarclays

7467LetterfromLindseeP.Granfield,ClearyGottlieb,toJamesB.Kobak,Jr.,HughesHubbard(Dec.29,

2008),atp.1[LBEXAM5641781].
7468Id.

2002

inconnectionwiththesale.7469BecausetheywerespecificallyidentifiedinScheduleB,
theExaminersanalysisofsecuritiesdelivered(ortobedelivered)toBarclaysincluded
the814CUSIPsonScheduleBwhichBarclaysassertseitherwerenotdeliveredorwere
delivered in incorrect quantities. The Examiner has not included in this analysis any
additionalsecuritiesthatmaybeinLBIclearanceboxes.7470
In December 2008, additional securities were transferred to Barclays in
settlementofcertainclaimsarisingfromthesale,pursuanttothesettlementagreement
among JPMorgan, Barclays and the SIPA Trustee approved by Court Order dated
December 22, 2008.7471 Those additional securities are identified in an attachment
(AnnexAtoSettlementAgreement)toaDecember5,2008letterfromBarclayscounsel
deliveredtotheCourtinconnectionwiththehearingonapprovalofthesettlement.7472
AnnexA identified by CUSIP, class of security, type of security and face value of
remaining par amount of the debt securities and the number of shares of the equity
securities the securities transferred to Barclays under the settlement.7473 In total,
AnnexAincluded1,192CUSIPswithatotalparvalueof$19.9billion.7474Ofthe1,192

7469ScheduleBSecuritiesList[LBEXBAR000421],attachedtoemailfromJackG.Stern,BoiesSchiller,to

VincentE.Lazar,ExaminersCounsel(Jan.22,2010).
7470WhetheranyadditionalsecuritiesintheLBIclearanceboxeswillbedeliveredisthesubjectofdispute
betweenBarclaysandtheSIPATrustee.
7471SeeSectionIII.D.8.c.
7472See Annex A to Settlement Agreement (Dec. 5, 2008) [BCIEX00077246], attached to letter from
Lindsee P. Granfield, Cleary Gottlieb, to Honorable James M. Peck, S.D.N.Y. Bankr., In re Lehman Bros.
Inc.,No.0801420(Dec.5.2008)[BCIEX00077244].
7473SeeAnnexAtoSettlementAgreement(Dec.5,2008)[BCIEX00077246].
7474Id.

2003

CUSIPsappearingonAnnexA,53arenotuniqueandalsoappearedoneitherSchedule
AorB.
Schedule A, Schedule B and Annex A (together, the Securities Lists) did not
specify the owner of the securities transferred to Barclays. Multiple Lehman entities
heldinterestsinsecuritiesbearingthesameCUSIPidentifiers,andthusinmanycases
ownership of the securities transferred to Barclays could not be determined (or
excluded)simplybyreferencetodataintheGlobalFundingSystem(GFS)described
below.Asanexample,atotalof$9.2millionparvalueofSiriusXMRadioInc.CUSIP
No.82967N108appearedinGFSinthesecuritiesinventoriesofLBIandLBHIAffiliates.
$7.6 million (par value) of this CUSIP was transferred to Barclays as part of the sale.
GFS indicates $8,612,319 (par value) in securities bearing this CUSIP identifier were
held in LBIs securities inventory, $586,665 (par value) were held by LBSF and $3,788
(par value) were held by LOTC. There is no way to determine simply by examining
CUSIPidentifierswhetherthe$7.6million(parvalue)insecuritiesbearingthisCUSIP
identifier transferred to Barclays were LBI, LBSF or LOTC securities, or even some
combinationthereof.
BecausetherewerenumerouscircumstanceslikethisinwhichCUSIPidentifiers
werenotuniquetoonlyoneLehmanentity,theExaminerperformedseveraldifferent
factual and legal analyses to determine whether any LBHI Affiliate Entity securities
weretransferredtoBarclays.

2004

(a) LehmansSecuritiesTradingRecordsandSystems
(i) General
GFS is a robust Lehmandeveloped data warehouse that served as the primary
system Lehman used (and Barclays still uses) to track financing requirements and
capabilities, to track securities in Lehmans custody by legal entity and to feed legal
entitybalancesheetdataforLehmansfinancialassetsintoLehmanscorporategeneral
ledger (DBS).7475 While GFS was the system used to track Lehmans securities,
multiple source systems fed relevant data into GFS. As such, GFS reflected
consolidated positions and balances for Lehman legal entities as aggregated from
multipleLehmansourcesystems.
Generally speaking, trades were recorded in one of the following Lehman
systems: MTS (Mainframe Trading System), the system Lehman used to support the
tradecaptureandsettlementofU.S.dollardenominatedfixedincomeproducts;7476ITS,
Lehmans multicurrency trade processingsystem;7477 TMS, a system Lehman used to
process domestic LBI activity in listed and OTC equities, municipal bonds, corporate
bonds and money market instruments7478 and RISC, a commodity trade reporting
system used to process (among other transactions) foreign exchange transactions, as
well as futures and forward transactions related to fixed income products such as US

7475Global

Funding System (GFS) New User Training [LBEXLL 3396270]; GFS System Description
foundonLehmanLiveintranet.
7476MTSdescriptioninLehmanLiveintranet.
7477ITSdescriptioninLehmanLiveintranet.
7478TMSdescriptioninLehmanLiveintranet.

2005

treasuries or corporate bonds.7479 Data from these systems was aggregated in the
Activity, Positions and Balances (APB) system. APB was primarily a central
repository for data relating to several Lehman trading systems and contained endof
dayactivities,trades,failedtradesandpositionsforalllistedproducts,includinglisted
derivatives.7480TheAPBsystemdiffersfromGFSinthattheAPBsystemaccumulated
allofthedailytradehistoryfromvarioustradingsystems,whileGFSprovidedbalance
sheetandfinancingpositions,typicallyatmonthend.
The Examiners financial advisors used GFS as their primary source for
informationabouttheLBHIAffiliateEntitiessecuritiesinventoriesandpositions.The
GFS information accessed by the Examiners financial advisors not only included
monthend data, but also data for two midmonth dates relevant to the Examiners
investigation September12, 2008 (the last trading day immediately preceding the
LBHI petition date) and September19, 2008 (which was the LBI petition date and the
last trading date prior to the Barclays sale transaction). The Examiner used the
September12, 2008 dataset to perform the securities analyses presented herein. The
ExaminerselectedtheSeptember12,2008dataset(asopposedtotheSeptember19,2008
dataset) after consultation with Lehman employees, Barclays personnel and A&M
professionals,allofwhomsharedacommonconcernthatstandarddailyprotocolswere

7479Examiners Interview of Kleber Rodriguez, Dec.18, 2009, at p. 2; Examiners Interview of Rob Eby,

Jan.6,2010,atpp.26.
7480APBdescriptioninLehmanLiveintranet.

2006

notconsistentlyfollowedduringtheweekendingSeptember19,2008asaconsequence
of the atypical market conditions and the extraordinary business disruption that
occurred during that week. There was sufficient concern about the quality of the
September19,2008datasettojustifytheselectionoftheSeptember12,2008datasetas
thebasisfortheExaminersanalysis.
BecausetheExaminer usedtheSeptember12, 2008dataset,it was possible that
some transfers of securities from LBHI Affiliate Entities to LBI took place between
September15 and September19, 2008. Although several sources indicated that no
securities had been transferred from LBHI Affiliate Entities to LBI following LBHIs
bankruptcy (other than transfers relating to public customer transactions), the
Examiners financial advisors reviewed trading activity during the week beginning
September15 and determined that two of the LBHI Affiliate Entities, LBSF and LCPI,
continuedtoengageinamaterialamountoftradingwithLBIduringthatweek.7481The
Examiner evaluated the LBSF and LCPI trading activity which occurred during the
week of September15, and, as described below, determined that the trading activity
was not improper and did not improve LBIs position visvis these LBHI Affiliate
Entities.

7481The

Examiners financial advisors review did not indicate that other LBHI Affiliates engaged in
significantsecuritiestradingactivitywithLBIafterSeptember12,2008.

2007

(ii) GFSSystemAssessment
The Examiner conducted several interviews to assess the capabilities and
reliability of GFS. Criticisms of GFS included concerns regarding the reliability of
valuationdataandotherdataqualityissues.7482GFSreports,however,wereprepared
daily and identified the financial assets each Lehman entity was holding on its
respectivebalancesheet.TheLegalEntityControllergroupreliedonthesereports,in
part, to monitor each legal entitys daily inventory positions.7483 In addition, GFS
provided the inventory subledger that was used as the basis for creating quarterly
consolidated financial statements7484 and was consistently referred to as the primary
systemusedtotracksecurityinventorydata.7485
BecausetheExaminersfinancialadvisorsreliedheavilyonelectronicdata(and
inparticulartheGFSinformation)todetermineownershipofsecurities,theyperformed
two distinct tests in order to gain sufficient confidence that GFS contained reliable
informationforthepurposeofthisanalysis.Thefirsttestinvolvedacomparisonofthe
data reported by GFS to Lehmans 10Q filings. The second test, which provided an
additionalcheck,comparedtheGFSdatatoLehmansgeneralledger.

7482ExaminersInterviewofKristieY.Wong,Dec.2,2009,atp.4;emailfromJamesGuarino,Barclays,to

AkshayBhargava,Duff&Phelps(Jan.21,2010).
7483ExaminersInterviewofKristieY.Wong,Dec.2,2009,atp.4.
7484Id.
7485Global Funding System (GFS) New User Training [LBEXLL 3396270]; GFS System Description
foundonLehmanLiveintranet.

2008

a.

ComparisonofGFSDatatoLehmans10QFilings

TheExaminersfinancialadvisorsobtainedacopyofthereconciliationbetween
the general ledger and GFS data that had been prepared by Lehman employees in
connection with the Lehman financial statement consolidation for the first three
quarters of 2008. This reconciliation was created for the purpose of supporting
Lehmans FAS 157 Fair Value Balance Sheet footnote. The Examiners ability to
leverage the work performed by Lehman estate employees minimized the time and
expenserequiredtovetthedata.
TheExaminersfinancialadvisorspreparedacomparisonofthebalancesonthe
reconciliation worksheet with the balances reported on the 10Qs. Only de minimis
differences, which were determined to be immaterial relative to the overall balance
sheetforthoseperiods,werenoted.
b. ComparisonofGFSDatatoLehmansGeneral
Ledger
The Examiners financial advisors also obtained GFS data for the first quarter
(quarterendedFebruary29,2008)andthesecondquarter(quarterendedMay31,2008)
of2008forasampleoftwoLBHIAffiliates,namelyLBCCandLBCS.TheExaminers
financialadvisorssummarizedtheGFSdataforthoseperiodsbyGAAPAssetClass.7486
The Examiners financial advisors then compared each of those GFS asset amounts to

7486Lehman categorized inventory in one of three Asset Classes based upon the apparent quality of

inputs involved in determining valuation. Lehmans Asset Classes 1, 2 and 3 corresponded to the
accountingliteraturesHierarchyLevels1,2and3.Thisdesignationisrequiredforreportingpurposes
accordingtotheStatementofFin.AccountingStandardsNo.157,22.

2009

the corresponding accounts within the general ledger for each sample entity. The
generalledgerdatawasobtainedusingEssbase,whichisaLehmansoftwareprogram
designed to extract general ledger data. The Examiners financial advisors identified
some differences for each entity, but determined that the differences were immaterial
relative to the account balances in the general ledger. They further noted that the
differences likely were attributable to closing adjustments subsequently made by
Lehmanpersonnel.
c.

ReliabilityofSeptember12Data

Basedontheresultsofthesesampletests(andthe10Qfilingsreconciliationin
particular)aswellasseveralinterviews,theExaminersfinancialadvisorsmaintaineda
sufficientlevelofconfidenceintheSeptember12,2008andearlierGFSdatausedforthe
purposeofthisanalysis.
(iii) GFSDataExtractedbyExaminer
The Examiners financial advisors used GFSs search capabilities to extract
informationforeachCUSIPappearingontheSecuritiesLists.TheyreliedupontheGFS
PositionsGroup(alsoreferredtoastheBalanceSheetModule)reportingfunctions
toextractthatdata.
The Examiners financial advisors extracted all relevant data fields from the
Balance Sheet Module. Because the Balance Sheet Module does not take into account
the impact of repurchase agreements, reverse repurchase agreements, stock loans, or

2010

stock borrowing trades (collectively, Financing Positions), the Examiners financial

advisorsalsoextractedrelevantfieldsfromtheGFSTradesGroup(alsoreferredtoas
the Financing Module), which does incorporate the impact of Financing Positions.
Data from the Financing Module served as a quality control check for certain fields
extracted from the Balance Sheet Module.7487 As explained in more detail below, data
fromtheFinancingModulewasrelevanttotheExaminersanalysisbecauseasecurity
reflected in the securities inventory of an entity for balance sheet reporting purposes
(and therefore appearing in the Balance Sheet Module) may have been traded to an
affiliateinconnectionwithafinancingarrangement(forexample,arepo).
A significant GFS limitation was that GFS did not capture certain Financing
Positions for securities traded on Lehmans TMS trading system.7488 As of September
2008, TMS had not yet been fully integrated into GFS, and therefore for any CUSIP
where the source system that captured positions at September12, 2008 was TMS, the
FinancingPositionsforthatCUSIPwouldnotbereflectedintheGFSFinancingModule
data.7489 The Financing Positions for certain securities traded on Lehmans TMS are
discussedinmoredetailbelow.

7487Asexplainedbelow,theExaminersfinancialadvisorssampled35CUSIPsfromtheSecuritiesListand

examined the GFS data for these 35 CUSIPs in both the Balance Sheet Module and Financing Module.
The data consistently demonstrated that GFS properly reflected open Financing Positions on
September12,2008betweenLBIanditsaffiliates.
7488SeeDuff&PhelpsInterviewofSvenFarup,Sept.24,2009.
7489Id.

2011

(2) AnalysisofGFSData
LBI was the primary broker/dealer through which Lehman entities conducted
domesticsecuritiestradingactivities.Assuch,LBIservedasarepositoryandthrough
wayformuchofLehmanssecuritiesinventory,andsecuritiesunderitscontrolwould
haveincludedsecuritiesbelongingtoanaffiliatethatLBImaynothavehadtherightto
transfertothirdparties,suchassecuritiesLBIheldincustodyforanaffiliateorwhich
theaffiliatehaddeliveredtoLBIinconnectionwithathirdpartytransaction.TheLBHI
Affiliate Entities relied on LBI to provide a full range of broker/dealer services,
includingbuyingandsellingsecurities,custodialservicesandfinancingusingsecurities
ascollateral,andthereforesecuritieswereheldbyLBIinnumerousdifferentcapacities.
The Examiners financial advisors analyzed the data for the 11,257 unique
CUSIPspresentedinSchedulesAandB,andthe1,192CUSIPspresentedinAnnexA.7490
The Examiners financial advisors used GFSs search capabilities to extract, for each
CUSIPappearingontheSecuritiesLists,boththeBalanceSheetModulepositionsand
Financing Module positions (consolidated by legal entity). Using the data extracted
from GFS, the Examiners financial advisors were able to identify the balance sheet
positionsandvalue,parormarket,formany(butnotall)ofthesecuritiestransferredto
Barclays.

7490Asnotedabove,noCUSIPswererepeatedinthe1,192securitieslistedinAnnexA(eachCUSIPwas

uniquetothatlist);however,53oftheCUSIPslistedinAnnexAalsowerereflectedinSchedulesAand
B.

2012

Of the 11,257 unique CUSIPs presented in SchedulesA and B, and the 1,192
CUSIPs presented in AnnexA, the Examiners financial advisors identified 9,472
CUSIPs that did not appear in the balance sheet inventories of the LBHI Affiliate
EntitiesasofSeptember12,2008.BecausethebalancesheetinventoriesoftheseLBHI
AffiliateEntitiesincludednorecordofownershipofanysecuritiesbearingthose9,472
CUSIPs, the Examiners financial advisors concluded that there was a very low
probabilitythatsecuritiesbearingthose9,472CUSIPswereownedbyanLBHIAffiliate
Entity.OftheremainingsecuritiestransferredtoBarclays,securitiesbearing14CUSIPs
sold to Barclays with a par value of $0.6 million were associated in GFS with only an
LBHIAffiliateEntityasofSeptember12,2008;securitiesbearing2,136CUSIPswith$6.1
billioninparvaluewereassociatedinGFSwithbothLBIandatleastoneLBHIAffiliate
EntityasofSeptember12,2008;7491andsecuritiesbearing817oftheCUSIPstransferred
to Barclays (795 from Schedules A and B and 22 from Annex A) with a par value of
$695.8 million were not reflected at all in the Positions Group within GFS as of
September12, 2008. Ten additional CUSIPs with $13.5 million in par value were
associatedinGFSwithblanklegalentityfields.7492

7491TheExaminerdidnotconsiderfurtheranalysisofthosesecuritiesbecause,basedupontheaggregate

parvalueofthesesecuritiesandthevariouspotentialdefensestoanyclaimsdescribedherein,theywere
deemed immaterial for purposes of the ownership analysis and unlikely to give rise to any colorable
claims.AlistofthesesecuritiesisattachedasAppendix29,CUSIPsassociatedwithbothLBIandLBHI
AffiliateEntitiespreparedbyDuff&Phelps.
7492ForalistoftheseCUSIPs,seeAppendix26.

2013

(a) CUSIPsNotAssociatedWithLBHIAffiliateEntities
Todeterminewhetheranysecuritiesreflectedonthebalancesheetinventoriesof
LBHIAffiliateEntitiesmighthavebeentransferredtoBarclays,theExaminersfinancial
advisorsreliedupon andused dataextractedfromLehmansGFSapplication to trace
CUSIPstotherespectivebalancesheetsoftheLehmanlegalentitiesasofSeptember12,
2008, the last date for which reasonably accurate balance sheet and other financial
information was available, and used that data to reduce the aggregate number of
securitiestheExaminersfinancialadvisorswouldneedtoexamine.
The Examiners financial advisors reviewed the data extracted from GFS and
identified (i)CUSIPs which had some association with an LBHI Affiliate Entity, and
(ii)CUSIPs for which there was no data found in GFS. The remaining CUSIPs were
associated only with nonLBHI Affiliates (i.e., CUSIPs that the LBHI Affiliate Entities
did not reflect in their Balance Sheet inventories as of September12, 2008).
UnderstandingthatGFSwastheprimarysystemusedbyLehmantotrackbalancesheet
positions related to securities, the Examiners financial advisors determined that this
population of 9,472 CUSIPs presented a low probability that securities bearing such a
CUSIPmighthavebeenownedbyanLBHIAffiliateEntityatthetimeoftheBarclays

2014

saletransaction.Asaresult,thesecuritiesbearingthose9,472CUSIPsassociatedonly
withnonLBHIAffiliateEntitieswereexcludedfromfurtheranalysis.7493
(b) CUSIPsAssociatedSolelyWithanLBHIAffiliateEntity
Securities bearing 14 CUSIPs sold to Barclays with a par value of $0.6 million
wereassociatedintheGFSBalanceSheetModulewithonlyanLBHIAffiliateEntityas
of September12, 2008. All 14 CUSIPs were associated solely with LBSF. The
Examiners financial advisors found that trading information for all 14 CUSIPs was
captured by the TMS trading system which, as previously noted, was not fully
integrated into GFS as of September 2008. As a result, GFS did not include complete
dataregardingpotentialfinancingtradesinvolvingtheseCUSIPs.
It is quite possible that the securities bearing these 14 CUSIPs transferred to
BarclayswereheldbyLBIincustodyforLBSF,orwereintendedfordeliverytoathird
party; however, it is also possible that these securities had been delivered by LBSF to
LBI aspartof afinancingtransaction.Regardlessof thereason,giventhe Examiners
conclusions about Barclays likely protected purchaser and securities intermediary
defenses(seeSectionIII.5.b.1)andLBSFssubordinationagreementwithLBIdescribed
below, as well as the immateriality ($0.6 million par value) of these securities to the
Debtors estates, the Examiner determined that it would not be a prudent use of the

7493Asummaryofthe9,472CUSIPsexcludedonthebasisoflackofabalancesheetorFinancingPosition

connectioninGFStoanLBHIAffiliateEntityisattachedasAppendix27,CUSIPsnotassociatedwithan
LBHIAffiliatedpreparedbyDuff&Phelps.

2015

Estates resources to further investigate whether these securities should have been
availableforLBItotransfertoBarclays.7494
(c) CUSIPsAssociatedWithBothLBIandLBHIAffiliate
Entities
Securitiesbearing2,136CUSIPswith$6.1billioninparvaluewereassociatedin
GFSwithbothatleastoneLBHIAffiliateEntityandanotherLehmanentity(primarily
LBI) as of September 12, 2008. A list of these securities is included in Appendix 29
hereto. These securities formed the basis for further review and investigation on the
partoftheExaminer.
(i) CUSIPsAssociatedWithSubordinatedEntities
SeveralLBHIAffiliateEntitiesincludingLBSF,LBCCandLBFwerepartiesto
subordinationagreementswithLBIthatgenerallyconformedtotheformatspecifiedin
federalregulations.7495Undertheseregulations,subordinationagreementsareintended
toeffectivelysubordinateanyrightofthelendertoreceiveanyPaymentwithrespect
thereto, together with accrued interest or compensation, to the prior payment or
provision for payment in full of all claims of all present and future creditors of the

7494A

list of these 14 securities is attached as Appendix 28, CUSIPs associated solely with an LBHI
AffiliateproposedbyDuff&Phelps.
7495See 17 C.F.R. 240.15c31d; see also Subordination Agreement between Lehman Brothers Inc. and
Lehman Brothers Special Financing, Inc. (Feb. 21, 1995), at p. 1 [LBEXSIPA 007456]; Subordination
AgreementbetweenLehmanBrothersInc.andLehmanBrothersCommercialCorporation(Feb.21,1995),
at p. 1 [LBEXSIPA 007450]; Subordination Agreement between Lehman Brothers Inc. and Lehman
BrothersFinanceS.A.(Oct.13,1995)[LBEXSIPA007471].

2016

brokerordealer.7496Inconformitywiththisrule,LBHIAffiliateEntitysubordination
agreementsbroadlyprovidedthattheaffiliatesrightswithrespecttoallsecuritiesthe
affiliateslenttoLBIandallcashbalancesinsecuritiesorcommoditiesaccountsofthe
affiliates maintained at LBI were subordinate in right of payment and subject to the
prior payment or provision for payment in full of any indebtedness of any nature
whatsoever which may now or hereafter be due to any present or future LBI
creditor.7497Inaddition,thesubordinationagreementsspecificallyprovidedthat,inthe
event of LBIs liquidation under SIPA or any other proceeding for the benefit of
creditors,theapplicableLBHIAffiliateEntitieswillnotbeentitledtoparticipateor
shareratablyorotherwiseinthedistributionofLBIsassetsuntilallotherdebtshave
been fully satisfied.7498 In other words, LBI essentially had the right to pledge and
dispose of securities in its custody belonging to affiliates that were parties to
subordinationagreements.7499Althoughlegalandregulatorypersonnelassociatedwith
the LBHI Affiliate Entities at issue typically would have been aware of these

749617C.F.R.240.15c31d(b)(3)(2007).
7497Subordination Agreement between Lehman Brothers Inc. and Lehman Brothers Special Financing,

Inc.(Feb.21,1995),atp.3[LBEXSIPA007456];SubordinationAgreementbetweenLehmanBrothersInc.
andLehmanBrothersCommercialCorporation(Feb.21,1995),atp.1[LBEXSIPA007450];Subordination
AgreementbetweenLehmanBrothersInc.andLehmanBrothersFinanceS.A.(Oct.13,1995)[LBEXSIPA
007471].
7498See, e.g., Subordination Agreement between Lehman Brothers Inc. and Lehman Brothers Special
Financing,Inc.(Feb.21,1995),at3[LBEXSIPA007456].
7499Duff&PhelpsInterviewofWilliamBurke,Oct.28,2009,atp.2;seealso17C.F.R.240.15c31d(b)(4)
(Thesubordinatedloanagreementshallprovidethatthecashproceedsthereofshallbeusedanddealt
with by the broker or dealer as part of its capital and shall be subject to the risks of the business.);
AttachmentA to NASD Notice to Members 0232 (June 2002) (The funds or securities lent to a
broker/dealerunderasubordinationagreementcanbeusedbythebroker/dealeralmostentirelywithout
restriction.).

2017

subordination agreements and their provisions, many other personnel may not even
havebeenawareoftheirexistence.7500
LOTCalsomaintainedadefactosubordinatedpositionvisvisLBI.LOTCwas
a registered broker/dealer.7501 It was a subsidiary of LBHI whose trades were fully
guaranteed by LBHI,7502 and engaged in business as an overthecounter derivatives
dealer.7503 Because LOTCs trading was limited to certain equity and fixed income
derivatives products, including options on emerging market bonds,7504 LOTC was
authorized to apply to the SEC for permission to compute capital charges for market
andcreditriskpursuanttoSECRule15c31,AppendixF(valueatrisk)insteadofSEC
Rule 15c31(c)(2)(vi) (securities haircuts). This arrangement allowed Lehman to
maintainlowernetregulatorycapitallevelsforthetypesoftradingconductedthrough
LOTC.7505
LOTCmaintainedanintroducingbrokerrelationshipwithLBI,withLBIserving
asitsclearingbroker.7506Asanintroducingbroker,LOTCsassets(includingcashand
securities)couldbeheldinProprietaryAccountsofIntroducingBrokersandDealers(or

7500Duff&PhelpsInterviewofWilliamBurke,Oct.28,2009,atp.2.
7501See

Lehman Brothers OTC Derivatives, Inc., Financial Statements and Supplemental Information,
NotestoFinancialStatements,Note7(yearendedNov.30,2007)[LBEXDOCID4512677].
7502Lehman,UnanimousConsentofExecutiveCommitteeoftheBoardofDirectorsofLehmanBrothers
HoldingsInc.(June9,2005)[LBEXAM003415].
7503See Lehman Brothers OTC Derivatives, Inc., Financial Statements and Supplemental Information,
NotestoFinancialStatements,Note1(yearendedNov.30,2007)[LBEXDOCID4512677].
7504Id.
750517C.F.R.240.15c31f.(2007).
7506LehmanBrothersInc.IntroducingBrokerAgreement[LBEXAM5643193];Duff&PhelpsInterview
ofWilliamBurke,Oct.28,2009,atp.2.

2018

PAIB)atLBI.7507Inthecontextofthisrelationship,LOTCsproprietaryaccountwas
anaccountcarriedbyabroker/dealerforabusinessaffiliatethat,directlyorindirectly,
iscontrolledbyorisundercommoncontrolwithsuchbroker/dealer.7508Theassetsin
proprietaryaccountsofsuchanintroducingbroker(inthiscase,LOTC)arenotsubject
to the same protections as the assets of public customers (i.e. nonbroker affiliates).7509
Therefore,LBI,asaclearingbroker,wasnotrequiredtomaintainphysicalpossessionor
control over LOTCs PAIB assets, nor was it restricted in its use of LOTCs PAIB
assets.7510 Moreover, so long as LOTC provided a written notice to its customers, their
deposits could be repledged or used in the course of LOTCs business.7511 LOTCs
FinancialStatementforyearendedNovember30,2007,recognizedthat[t]heCompany
istypicallypermittedtosellorrepledgesecuritiesreceivedascollateral.7512

7507Lehman

Brothers Inc. Introducing Broker Agreement, 3(g) [LBEXAM 5643193]; Duff & Phelps
Interview of William Burke, Oct.28, 2009, at p. 2; email from William Burke, Barclays, to TC Fleming,
Duff&Phelps,Dec.23,2009;seealso17C.F.R.240.15c33(2007).
750817C.F.R.1.3(y)(viii)(incorporatedby17C.F.R.240.15c33(a)(1)).
7509See17C.F.R.240.15c33(a)(l)([t]heterm[customer]shallnotincludeabrokerordealer);TheNew
YorkStockExchange,Inc.,SECNoActionLetter,1998WL879557,at*2(Nov.10,1998)(aclearingbroker
isnotsubjecttotherestrictionsofRule15c33withregardtoPAIBassets.);Duff&PhelpsInterviewof
WilliamBurke,Oct.28,2009,atp.2.
7510Id.; see also NASD Notice To Members 9899 (Dec. 1998) (since clearing broker/dealers are free of
thesecustomerprotectionrestrictions,itispossibleforthemtotreatPAIBassetsastheirown.)
751117C.F.R.240.15c33(a)(l)(providingthatthetermcustomershallnotincludeacounterpartywho
has delivered collateral to an OTC derivatives dealer pursuant to a transaction in an eligible OTC
derivative instrument as long as the counterparty received a written notice that the dealer may
repledge or otherwise use the collateral in its business, that the counterparty will be considered an
unsecuredcreditor,andthatitdoesnotreceiveSIPAprotections).
7512LehmanBrothersOTCDerivatives,Inc.FinancialStatementsandSupplementalInformation,Notesto
FinancialStatements,(yearendedNov.30,2007)atNote4[LBEXDOCID4512677].

2019

The Examiners financial advisors analyzed the 2,136 CUSIPs (2,128 from
SchedulesA and B and 8 from Annex A) associated with both LBHI Affiliate Entities
and other Lehman entities to assess how many of the CUSIPs were reflected on the
September12, 2008 balance sheet inventories as net asset positions of LBHI Affiliates
thatwerepartiestosubordinationagreementsorsimilararrangementswithLBI.7513As
setforthinmoredetailinAppendices29and30hereto,ofthe2,136CUSIPsassociated
withbothLBHIAffiliateEntitiesandotherLehmanentities,1,141CUSIPsforsecurities
with a par value of roughly $2.4 billion were associated with LBSF, and 778 of the
CUSIPs for securities with a par value of $125.9 million were associated with LOTC.
316oftheCUSIPslinkedtoLBSFwerealsolinkedtoLOTC(withaparvalueof$74.1
million). Both LBSF and LOTC were parties to subordination agreements or similar
arrangements with LBI. Thus, based upon GFS data, 1,603 (or roughly 75 percent) of
the2,136CUSIPsassociatedwithbothLBHIAffiliateEntitiesandotherLehmanentities
were associated with LBHI Affiliate Entities that were parties to subordination
agreements or similar arrangements with LBI. As a result, their securities likely were
availableforusebyLBIirrespectiveofwhethertheywereheldincustodybyLBIorhad
beendeliveredtoLBIpursuanttoafinancingarrangement.

7513NetassetpositionsforthepurposeofthisanalysisreflectpositivenetparvaluesfoundinGFSfora

givenCUSIPonaselectedLBHIAffiliatesbalancesheet,pertheBalanceSheetModule.

2020

(ii) SecuritiesFinancingTransactions
WhensecuritiesweretransferredbyanLBHIAffiliateEntitytoLBIaspartofan
intercompanyfinancingtransaction,thatfinancingarrangementalmostinvariablytook
theformofarepurchasetransaction.7514Betweentheparties,arepurchasetransaction
typicallyisregardedasanoutrighttransferofownershipofthesecurity,suchthatthe
transferee (in this example LBI) obtains good title to the security.7515 A failure on the
partofthetransfereetoperformitsobligationsundertherepurchaseagreement(i.e.its
promisetoredeliverthesecurityoritsequivalent)isabreachofcontract,butdoesnot
legallyimpairthetransfereesrighttosellorrepledgethesecuritythatthetransferee
promised to redeliver.7516 For accounting purposes, however, prior to a default,
repurchase transactions usually are treated as financing (loan) transactions; absent a

7514TheExaminersfinancialadvisorsreviewedthetradingactivityfortheweekofSept.1219,2008,and

notedthatapproximately95percentofthetradesinvolvingLBIwererepoorreverserepotrades.
7515See, e.g., Master Repurchase Agreement between Lehman Brothers, Inc., Lehman Commercial Paper
Inc.andLehmanBrothersOTCDerivatives,Inc.(Feb.13,2004),atp.6[LBEXAM060025](nothingin
this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased
Securitiesorotherwiseselling,transferring,pledgingorhypothecatingthePurchasedSecurities.).
7516Forinstance,inSECv.DrysdaleSecuritiesCorp.,785F.2d38,41(2dCir.1986),theSecondCircuitheld
that a most significant difference between repos and standard collateralized loans is that repo
lenderstaketitletothesecuritiesreceivedandcantrade,sellorpledgethem.Therepomerelyimposesa
contractualobligationtodeliveridenticalsecuritiesonthesettlementdatesetbytherepocontract.Id.
Likewise,inGranitePartners,L.P.v.Bear,Stearns&Co.,Inc.,17F.Supp.2d275,302(S.D.N.Y.1998),aNew
Yorkfederaldistrictcourtruledthattransactionsgovernedbyindustrystandardrepurchaseagreements
were purchase and sale agreements, not secured loans: Critical to the usefulness, flexibility, and
liquidityoftherepomarketisthetransferofownershipofthereposecuritiestotherepobuyerandthe
repo buyers ability to sell, transfer, or pledge the securities purchased in a repo transaction during its
term.Id.SeealsoBevill,Bresler&SchulanAssetMgmt.Corp.v.ArmyMoralSupportFund,67B.R.557,595
97 (D.N.J. 1986) (holding that repo transactions at issue were purchases and sales of securities,
emphasizing the repo buyers unrestricted right to trade the securities during the term of the
[repurchase]agreement).

2021

default,thesecuritythatisthesubjectoftherepurchasetransactionusuallyremainson
thebalancesheetofthetransferorasanasset.7517
TheExaminersfinancialadvisorsuseddatathathadbeenextractedfromGFSto
determinehowmanyofthe2,136securitiesselectedforfurtheranalysiswereinvolved
infinancingtransactions.Ofthe2,136CUSIPsthatwereincludedintheGFSdataseton
September12,2008,2,043(orallbut93oftheCUSIPs)werereflectedintheFinancing
Module data set. Thus, per GFS information, the vast majority of the 2,136 CUSIPs
associated with both LBHI Affiliate Entities and other Lehman entities had been
deliveredtoLBIpursuanttoarepoorothertypeoffinancingtradeasofSeptember12,
2008.
Of the 93 CUSIPs that were not found in the Financing Module data set, 92
CUSIPs (all but one) were linked to an LBHI Affiliate Entity that was a party to a
subordinationagreementwithLBI.TheoneremainingCUSIPwaslinkedtoLBCS,an
entity that was not a party to a subordination agreement with LBI, but had an
insignificantparvalueofonly$388.7518
The Examiners financial advisors also conducted further analysis beyond GFS,
onasamplebasis,ofCUSIPsthathadbeenidentifiedinGFSasdeliveredpursuanttoa
financing transaction to determine (1)whether the securities actually had been

7517StatementofFin.AccountingStandardsNo.140,15.SeealsoNebraskaDeptRevenuev.Loewenstein,

513U.S.123,13234(1994)(fortaxlawpurposes,repotransactionsaresecuredloansratherthansales).
7518Achartdetailingthese93CUSIPsisattachedasAppendix31.

2022

deliveredtoLBIpursuanttointercompanyfinancingtransactions,and(2)whetherthe
financing transactions were cashsettled, in which case LBI likely had the right to sell
thosesecurities.TheExaminersfinancialadvisorsfoundforasampleoftheseCUSIPs
evidenceconsistentlydemonstratingthatLBIhadtherighttosellthesecurities.
Specifically, the Examiners financial advisors were informed by several
witnesses that irrespective of whether LBI conducted a financing transaction with a
subordinated entity (such as LBSF and LOTC) or a nonsubordinated entity, all
financingtransactionsinvolvingLBIweresettledincash.7519Totesttheseassertions,the
Examiners financial advisors examined a sample set of 35 open financing trades7520
duringtheweekofSeptember15,2008,andfoundsufficientevidencethat100percent
ofthetradesinvolvingLBIwerenettedandacorrespondingwiretransferrequestwas
created for the net settlement amount. For these trades, the Examiner reviewed
Lehmanrecordsdetailingthecalculationofthenetsettlementamount,andalsorecords
showing that wire transfer requests for the net settlement amount were submitted for

7519SeeDuff&PhelpsInterviewofWilliamBurke,Oct.28,2009(tradesbetweenLBIandaffiliateswere

alwayssettled,thesettlementamountwouldbenetofmargin,andduetoLBIscapitalrequirements,
there would be no benefit to not settling trades). Essentially, LBI would need to keep an equivalent
amount of assets on reserve for any unsettled trades, thus making it economically impractical. Duff &
Phelps Interview of DanielJ. Fleming, Oct.21, 2009 (trades between LBSF and LBI were at arms
length,aswasthecasewithotherintercompanytradingactivitywithandamongLBI,LBHIandLBHI
Affiliates).
7520Open financing trades represent trades as to which GFS indicated that the security involved in a
FinancingPositionremainedopenasofbothSeptember12andSeptember19,2008.

2023

payment in FPS (the cash settlement system). These findings support assertions by
formerLehmanpersonnelthattradesinvolvingLBIalwaysnetsettledincash.7521
As noted above, LBSF and LCPI continued to engage in a material amount of
tradingwithLBIduringtheweekofSeptember15,andthattradingactivitywouldnot
have been reflected in the September12, 2008 GFS data set used by the Examiners
financialadvisorstoconducttheiranalysis.TheExaminersfinancialadvisorsdidnot
observe any instances where LCPI traded any of the CUSIPs transferred to Barclays
during the week of September12, 2008. They did, however, observe that LBSF trade
activitywithLBIinvolved32CUSIPstransferredtoBarclays.TheExaminersfinancial
advisorsthereforeexaminedthetradeactivityinvolvingthese32CUSIPs,andLehman
records showed that wire transfer requests for the net settlement amount were
submittedforalloftheexaminedtrades.Thus,theintercompanysecuritiesmovements
thatoccurredduringtheweekofSeptember15,2008likelywerenotimproperanddid
notimproveLBIspositionvisvisanyLBHIAffiliateEntity.
(iii) AlternativeAnalyses
The Examiners financial advisors also analyzed the 2,136 CUSIPs associated
with both LBHI Affiliate Entities and other Lehman entities from a different
perspective,namelytoassesswhetherthesourceoftheCUSIPstransferredtoBarclays
could have been solely nonLBHI Affiliate Entities. Toward this end, the Examiners

7521SeeDuff&PhelpsInterviewofWilliamBurke,Oct.28,2009;emailfromWilliamBurke,Barclays,to

TCFleming,Duff&Phelps(Dec.23,2009);Duff&PhelpsInterviewofDanielJ.Fleming,Oct.21,2009.

2024

financialadvisorsanalyzedwhethertherewasasufficientquantityofeachofthe2,136
CUSIPs at LBI to account for 100 percent of the balances transferred to Barclays.7522
Whilethisapproachwouldnothaveabsolutelyexcludedthepossibilitythatsecurities
ofanLBHIAffiliateEntityhadbeentransferredtoBarclays,itwouldhavecorroborated
thatLBHIAffiliateEntityownedsecuritieswerenotincludedinthegroupofsecurities
transferred to Barclays. However, this alternative methodology did not provide
meaningfulresultsthatcouldbeappliedtoalargepopulationofthesecurities.
(d) 817CUSIPsWithNoGFSData
AsofSeptember12,2008,795oftheCUSIPslistedonSchedulesAandBand22
of the CUSIPs listed on Annex A (817 total CUSIPs) did not exist in GFS.7523 The
Examiners financial advisors work included (but was not limited to) the following
investigationinanattempttodetermineownershipofthosesecurities.

7522To determine the quantity of relevant CUSIPs in the securities inventory of each legal entity, the

ExaminersfinancialadvisorsusedthePositionsGroupdatainGFStocalculateNetInventoryforeach
CUSIPbylegalentity.Asexplainedabove,thePositionsGroupdatadonotpresentacompletepictureof
the securities in LBIs custody because it does not incorporate the value of Financing Positions, so the
ExaminersfinancialadvisorscalculatedaNetCustodyValueforeachCUSIPasofSeptember12,2008
bycombiningthreevariables,asfollows:NetCustodyValue=MarketValue(NetofLongandShortInventory
Positions)+[NetofStockBorrowsandStockLoans]+[NetofRepos&ReverseRepos].Iftheparvaluefora
given CUSIP on the Securities List was less than the Net Custody Value for that CUSIP, that indicated
that as of September 12, 2008 there were sufficient securities to accomplish the securities transfer to
BarclayswithoutresortingtotheuseofsecuritiesthatmighthavebeenheldforthebenefitofanLBHI
Affiliate.
7523Becauseofthesimilarityinquantities,theExaminercomparedthelistof814ScheduleBsecuritiesnot
deliveredtoBarclaysagainstthe817CUSIPswithnoGFSdatainordertodeterminewhethertherewas
any connection between the two lists. Only five of the securities overlapped, so there was no strong
correlationbetweenthetwolists.

2025

(i) September19,2008GFSDataset
As an additional approach to gathering relevant information regarding the 817
CUSIPs,theExaminersfinancialadvisorssearchedtheSeptember19,2008GFSdataset,
which(assetforthabove)duetosomereliabilityconcernswasnottheprimarydataset
used by the Examiners financial advisors to conduct their analysis. Of these 817
CUSIPs,52werepresentintheSeptember19,2008dataset.Ofthe52CUSIPs,onlyone
CUSIPwaslinkedtoLBHIAffiliateEntities,specificallyLBSFandLOTC(bothofwhich
are subordinated entities). The par amount for the securities bearing this one CUSIP
was insignificant $95,554. The remaining 51 CUSIPs were not linked to an LBHI
AffiliateEntity.
The total par amount of the securities associated with this group of 52 CUSIPs
was $284.1 million, representing 41 percent of the total par amount of securities
associatedwiththe817CUSIPsforwhichtherewasnoGFSdata.Asaresult,thepar
amountofsecuritiesassociatedwithCUSIPsnotrepresentedineithertheSeptember12
or September 19, 2008 GFS datasets (765 CUSIPs) comprises approximately only 0.5
percentofthetotalparvaluetransferredtoBarclays.7524

7524ForalistoftheseCUSIPs,seeAppendix32.

2026

(ii) SearchbyISINNumberandProductID
Based upon suggestions from Barclays personnel, the Examiners financial
advisorsalsoanalyzedthedataassociatedwiththe817CUSIPSusingISINnumbers7525
andLehmanspecificProductIdentifiers.7526
Initial results using ISIN numbers showed only 42 unique CUSIPs in GFSs
BalanceSheetModuleatSeptember12,2008,andnoneintheFinancingModule.Initial
resultsusingtheLehmanspecificProductIdentifiersshowedonlyoneuniqueCUSIP
in GFSs Balance Sheet Module and only 14 CUSIPs in the Financing Module.
Moreover, data from the initial results was insufficient to allocate the CUSIPs to
Lehmanlegalentities.Thus,thisanalysisprovidedlittleinsightintotheownershipof
the817CUSIPs.
(iii) TMSSourceSystem
TMS is the Lehman trading system that captured certain domestic LBI trading
activity. The system accepted listed and OTC equities, municipal bonds, corporate
bonds and money market instruments. Based on initial data provided as of

7525ISIN Numbers are the unique 12digit numbers that are recognized by the International Standards

Organization located in Geneva, Switzerland as security identifiers for crossborder securities

transactions.SeeCUSIPGlobalServices,http://www.isin.cusip.com(lastvisitedFeb.2,2010).
7526ISINslinkedtotheseCUSIPsweresourcedfromA&MandBloomberg,asavailable.TheExaminer
locatedISINsfor779ofthe817CUSIPs.TheISINswerethenusedtolocateLehmanspecificProduct
IdentifiersthatcouldbeusedtoqueryGFS.ThecorrespondingProductIdentifiersweresourcedfrom
BarclaysandA&M.SeeemailfromLaurenSheridan,A&M,toHeatherD.McArn,ExaminersCounsel
(Oct.2, 2009); Product Identifiers [LBEXBARGFS 0000001], attached to email from Uma Krishna,
Barclays,toAshkayBhargava,Duff&Phelps(Sept.28,2009).

2027

September19, 2008, 755 of the missing 795 CUSIPs from the Schedules A and B were
sourcedfromtheTMSsystem.
Barclays personnel provided stock reports related to these 755 CUSIPs.7527
However, the data did not include fields identifying the corresponding legal entities
associatedwithanyofthesecurities.Moreover,thedataprovidedwasinsufficientto
allocatethecorrespondingmarketvaluesorparamountsforthesesecurities.Thus,the
information provided was inconclusive for determining the ownership of the 817
CUSIPs.
(iv) AdditionalDataSources
The Examiners financial advisors did not have access to the LoanNet source
system.7528 Reports provided in response to requests for support for the missing 817
CUSIPs with missing information also did not provide sufficient information to
determinethelegalownershipofthesecurities.
TheExamineralsosoughtassistancefromA&M,aswellastheSIPATrustee,to
identify the sources of these 817 CUSIPs transferred by LBI to Barclays as to which
ownership data was inconclusive, but they were unable to provide sufficient
information concerning these securities, prior to the delivery of this Report, to enable
the Examiner to definitively link these securities to specific Lehman legal entities.

7527TMSstockrecordswereobtainedbyBarclaysviaaseparateLehmansystem,ADP.
7528LoanNet was the Lehman system used to capture certain stock borrow/loan positions. LoanNet is

currentlyownedbyNomura,andnotdirectlyaccessiblethroughBarclaysortheestate.

2028

ShortlybeforethefilingofthisReport,however,theSIPATrusteeconductedareview
ofthe817CUSIPs,andwasabletoconfirmthatmostofthe817CUSIPsappearedtobe
FinancingPositionsorLBIinventory.7529AttheExaminersrequest,theSIPATrustees
financialadvisorsexaminedasampleofthe20largestCUSIPs,andwereabletoidentify
theaccountswithwhichtheCUSIPpositionswereassociated.All20CUSIPsreflected
securitiesoriginatingfromLBI,LBIEorLBIcustomeraccounts,andnoneoftheCUSIPs
wereassociatedwithaccountsownedbyanLBHIAffiliateEntity.7530Thus,basedupon
this sample, it is unlikely that a material number of securities associated with the 817
CUSIPswerelinkedtoanLBHIAffiliateEntity.
Intheabsenceofrecordsdemonstratingthesourceofthesecurities,itispossible
that some of the securities had been received by LBI but not yet allocated to a
customersaccount(thatofeitheraLehmanaffiliateorathirdparty).Thiscouldoccur,
for example, in circumstances involving failed trades or when counterparty data is
missing.7531 However, the Examiner was unable to conclusively determine whether
eitherscenariowasindeedthecase.
The securities bearing these 817 CUSIPs that are not included in the
September12, 2009 GFS data set comprise a relatively small subset of the securities

7529EmailfromSarahCave,Hughes,Hubbard&ReedLLP,toVincentLazar,ExaminersCounsel(Jan.

28,2010).
7530 Id.; email from Jordan Pace, Hughes, Hubbard & Reed LLP, to Vincent Lazar, Examiners Counsel
(Feb.3,2010).
7531Duff&PhelpsInterviewofJamesGuarino,Oct.28,2009;Duff&PhelpsInterviewofWilliamBurke,
Dec.9,2009.

2029

transferredtoBarclays($695.8millioninparvalue,whichrepresentslessthan2percent
of the par value of all CUSIPs transferred to Barclays). After taking into account the
September 19, 2008 GFS dataset, the number of CUSIPs not captured in GFS (765
CUSIPs)hadacorrespondingparvalueof$411.7million,orapproximately0.5percent
oftheparvalueofallCUSIPstransferredtoBarclays.Inlightof:(1)theconclusions
the Examiner has reached with respect to likely ownership of the remainder of the
securities; (2) the various defenses (including formidable securities intermediary and
securities settlement defenses) to the avoidance of any securities transfers to Barclays;
and(3)theinvolvementofvariousestateandother professionals who wereunable to
secure the data necessary to conduct an analysis of these remaining CUSIPs, the
Examiner concludes that further investigation into ownership of these remaining
CUSIPsisnotcostjustified.
b) AnalysisofTangibleAssetTransfers
TheExaminersfinancialadvisorsdeterminedthattangibleassets7532offourLBHI
AffiliatesLB745,LBCS,LCPIandLBSFweretransferredtoBarclaysinconnection
withthesaletransaction.ThetransferofLB745sassetswasexpresslyprovidedforin
theAPA,andwasapprovedbytheCourt.Asdescribedbelow,theExaminerconcludes
that the LBCS, LCPI and LBSF tangible assets that were transferred to Barclays

7532TheExaminerandhisfinancialadvisorsfocusedonfixedassets,whichincludevarioustypesofreal

andpersonalproperty.Tangibleassetsalsocouldincludecertaintypesoffinancialassets,suchasnotes
and loans. The Examiner and his financial advisors uncovered no facts indicating that such financial
assetsofLBHIAffiliatesweretransferredtoBarclays.

2030

consistedofcommunicationsequipment,computerequipmentandfurniturewithanet
bookvalueoflessthan$10million,andanactualvaluelikelymateriallyless.
To evaluate whether tangible assets of LBHI Affiliates were transferred to
Barclays in connection with the sale transaction, the Examiner investigated whether it
was possibleto identifyandtracethespecifictangibleassetsthatBarclaysreceived in
connectionwiththesaletoidentifythosethatwereownedbyLBHIAffiliates.
Lehman did not operate its businesses in a way that would facilitate the
identification of specific tangible assets owned by LBHI Affiliates. At the time of the
transfer, operations of many of the LBHI Affiliates were conducted out of the 745
Seventh Avenue headquarters. Lehmans operations at this facility generally were
organized by product line, rather than legal entity, so that fixed assets owned by a
particularentitywouldhavebeenintermingledwiththoseofotherentities.Asaresult,
it would have been very costly and timeconsuming to physically trace specific fixed
assetstodeterminewhatbelongedtotheLBHIAffiliates.
The Examiners financial advisors identified a Lehman asset database (ADb),
but determined that this database did not contain sufficient reliable and pertinent
information for this analysis. Among other things, that database was not regularly

2031

updatedtoreflectassetacquisitionsandtransfersorofficemoves,andassetswerenot
necessarilyallocatedtotheentitythathadtitletothem.7533
The Examiners professionals determined that the only reliable way to identify
specific assets that were transferred to Barclays would be to conduct an extensive
physicalinventoryoffixedassets,basedonareviewofserialnumbersorotherunique
identifiers. That analysis, however, would have been timeconsuming and expensive.
Giventhelimitedvalueofthetransferredassets,theExaminerconcludedthatsuchan
approachwouldnotbeaprudentuseoftheestatesassets.
Because the Examiners financial advisors concluded that the fixed asset
information in the balance sheets appeared to be relatively accurate, the Examiner
concluded that using the asset values identified in the balance sheet was the most
efficient method to identify tangible assets of LBHI Affiliates that potentially were
transferredtoBarclays.
Accordingly, the Examiners financial advisors obtained and analyzed balance
sheetinformation7534foreachLBHIAffiliateasofSeptember12,2008(i.e.,beforethesale
transaction),andasofSeptember30,2008(afterthesaletransactionclosed),toidentify

7533TheExaminerconfirmedthattheDebtorsandtheirfinancialadvisors,A&M,alsohadevaluatedthe

useoftheADbdatabasetoidentifyownershipofassets,buthadconcludedthatitwasnotsufficiently
reliable for that purpose. Examiners Interview of ThomasE. Hommel, KellyL. Gargiulo, Lauren
Sheridan,WilliamB.GordonandJeffreyDonaldson,Jan.22,2010.
7534ThebalancesheetinformationthattheExaminersfinancialadvisorsreviewedwasobtainedusingthe
DebtorsEssbasesystem.BalancesheetsforeachoftheindividualLBHIAffiliates(exceptPAMIStatler,
which was rolled up into the umbrella PAMI financial statements and did not have its own financial
information)areavailableinAppendix33.

2032

whether the gross book value of any LBHI Affiliates tangible assets declined during
thatperiod.AreductioninthevalueoftangibleassetsonthebalancesheetsofanLBHI
Affiliateduringthatperiodmightbeattributabletotransfersofassets,thuswarranting
further investigation to determine whether assets were transferred to Barclays in
connectionwiththesaletransaction.TheExamineralsointerviewedwitnessestogain
anunderstandingofwhichtangibleassetsweretransferredtoBarclays,toconfirmthe
accuracy of the balance sheet information and to confirm that the balance sheets had
beenadjustedtoreflectallassettransfers.
The Examiners financial advisors determined that the balance sheets of only
seven LBHI Affiliates (LB 745, LBCS, LCPI, LBSF and the three CES Aviation asset
holding companies) reflected tangible assets before the Barclays transaction. The
balancesheetsoftheremainingLBHIAffiliatesdidnotreflectanytangibleassetsasof
Friday, September12, 2008, and thus those entities likely did not own any tangible
assets that might have been transferred to Barclays in connection with the sale
transaction. Therefore, the Examiner and his financial advisors focused their analysis
on the LBHI Affiliates that held tangible assets on their balance sheets as of
September12,2008,thatpotentiallycouldhavebeentransferredtoBarclays.
(1) LB745
LB 745s balance sheet reflected several categories of tangible assets, including
buildings, building and leasehold improvements, furniture, fine arts and antiques,

2033

communications equipment (recorded as equipcomm on the balance sheet) and

computerequipment(recordedasEDP&PC).7535Asexpected,thereweresubstantial
decreasesinallbutoneofthoseassetcategoriesatoraboutthetimeoftheBarclayssale
transaction:
LB745
12Sep08

30Sep08

BA

%Change

14010SUMF/ACOSTLAND

0.0%
14015SUMF/ACOSTBLDGS
522,920,456

(522,920,456)
100.0%
104020SUMF/ACOSTFURNITURE
30,079,193
19,893
(30,059,300)
99.9%
14025SUMF/ACOSTEQUIPCOMM.
28,990,441
0
(28,990,441)
100.0%
14030SUMF/ACOSTEQUIPEDP&PC
1,849,810
458,953
(1,390,858)
75.2%
14040SUMF/ACOSTBLDNGS&L/H
183,523,963
33,483
(183,490,480)
100.0%
14045SUMF/ACOSTCONSTR.INPROGRESS

0.0%
14050SUMF/ACOSTTRANS.&CAR

0.0%
14055SUMF/ACSTFINEARTS&ANTIQUES
1,420,374
1,420,374

0.0%
14060SUMCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71600SUMTOTALF/ACOST
768,784,237
1,932,703
(766,851,534)
99.7%
14515SUMF/AA/DBUILDINGS
(85,821,463)
(435,853)
85,385,610
99.5%
14520SUMF/AA/DFURNITURE
(17,825,330)
(108,911)
17,716,419
99.4%
14525SUMF/AA/DEQUIP.COMM.
(23,381,422)
(144,411)
23,237,011
99.4%
14530SUMF/AA/DEQUIP.EDP&PC
(1,841,107)
(453,080)
1,388,026
75.4%
14540SUMF/AA/DBLDGS.&L/H
(72,685,815)
(414,044)
72,271,772
99.4%
14550SUMF/AA/DTRANS.&CARCOSTS

0.0%
14560SUMF/AA/DCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
(201,555,137)
(1,556,299)
199,998,838
99.2%
71700SUMTOTALF/AA/D7536
71750SUMPROPERTY,EQUIP.&LEASE.IM

567,229,100

376,404

(566,852,696)

99.9%

Forexample,thegrossbookvalueofbuildingsonLB745sbalancesheetwas
$522,920,456 on September12, 2008, and zero on September30, 2008.7537 Similarly, the
value of furniture was $30,079,193 as of September12, 2008, and $19,893 as of
September30,2008adeclineof99.9percent.Thosedeclinesingrossbookvalueare

7535Appendix34,Duff&Phelps,TangibleAssetBalanceSheetVariations,atp.4.
7536The Examiners financial advisors concluded that the changes in accumulated depreciation that are

reflectedforLB745andtheotherLBHIAffiliatesappeartorepresenttheestimatedmonthlydepreciation
ofthelistedassetstakenovertheirusefullives.
7537Appendix34,Duff&Phelps,TangibleAssetBalanceSheetVariations,atp.4.

2034

consistent with transfer of LB 745s real property and related assets pursuant to the
expressprovisionsoftheAPAandapprovedbytheCourt.7538
(2) LBCS
LBCSs balance sheet reflected several categories of tangible assets, including
furniture, communications equipment, computer equipment and building and
leaseholdimprovements:
LBCS
12Sep08

30Sep08

BA

%Change

14010SUMF/ACOSTLAND

0.0%
14015SUMF/ACOSTBLDGS

0.0%
104020SUMF/ACOSTFURNITURE
1,489,679
1,400,471
(89,208)
6.0%
14025SUMF/ACOSTEQUIPCOMM.
1,079,384
754,359
(325,025)
30.1%
14030SUMF/ACOSTEQUIPEDP&PC
849,253
211,856
(637,397)
75.1%
14040SUMF/ACOSTBLDNGS&L/H
3,062,460
3,037,036
(25,424)
0.8%
14045SUMF/ACOSTCONSTR.INPROGRESS

0.0%
14050SUMF/ACOSTTRANS.&CAR

0.0%
14055SUMF/ACSTFINEARTS&ANTIQUES

0.0%
14060SUMCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71600SUMTOTALF/ACOST
6,480,774
5,403,721
(1,077,053)
16.6%
14515SUMF/AA/DBUILDINGS

0.0%
14520SUMF/AA/DFURNITURE
(92,913)
(85,416)
7,497
8.1%
14525SUMF/AA/DEQUIP.COMM.
(362,579)
(169,238)
193,342
53.3%
14530SUMF/AA/DEQUIP.EDP&PC
(538,076)
(88,627)
449,449
83.5%
14540SUMF/AA/DBLDGS.&L/H
(232,360)
(245,805)
(13,445)
5.8%
14550SUMF/AA/DTRANS.&CARCOSTS

0.0%
14560SUMF/AA/DCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71700SUMTOTALF/AA/D
(1,225,929)
(589,085)
636,843
51.9%
71750SUMPROPERTY,EQUIP.&LEASE.IM
5,254,846
4,814,636
(440,210)
8.4%

The gross book values in several of those asset categories decreased over the
period that the sale transaction closed. For example, the gross book value of
communications equipment decreased by $325,025 between September12, 2008, and

7538SeeAPA,atp.1.

2035

September30, 2008,7539 and the gross book value of computer equipment decreased by
$637,397 between September12, 2008, and September30, 2008.7540 The Examiners
financial advisors confirmed that these reductions were the result of the transfer of
assetsinthosecategoriestoBarclays.7541Inaddition,theExaminerdetermined(andthe
Debtorsconfirmed)that,followingpublicationoftheSeptember30,2008balancesheet,
theDebtorscontinuedtomakeadjustmentstothebookvaluesreflectedonthebalance
sheet to reflect, among other things, transfers of assets to Barclays.7542 Basedupon his
investigation,theExaminerhasconcludedthattangibleassetsofLBCSreflectedonthe
September30,2008balancesheetalsoweretransferredtoBarclays.
(3) LCPI
LCPIs balance sheet reflected several categories of tangible assets, including
furniture,communicationsequipmentandcomputerequipment:

7539Appendix34,Duff&Phelps,TangibleAssetBalanceSheetVariations,atp.2.
7540Id.
7541Email from Lauren Sheridan, A&M, to David C. Layden, Examiners Counsel, et al. (Jan.22, 2010).

TheExaminersfinancialadvisorsalsoidentifiedademinimis($89,208)decreaseinthegrossbookvalue
offurnitureduringtherelevanttimeframe.ThatdeclinelikelywasduetothetransferofLBCSfurniture
assetstoBarclays,particularlygiventhatasubstantialportionofLBCSoperationswereconductedinthe
745SeventhAvenueheadquartersbuilding.
7542EmailfromLaurenSheridan,A&M,toDavidC.Layden,ExaminersCounsel,etal.(Jan.22,2010).In
addition,byOrderdatedJune25,2009,theCourtauthorizedLBHItorepurchasefromBarclayscertain
tangibleassetsthathadbeentransferredtoBarclaysinconnectionwiththesale.SeeOrderPursuantto
Sections105(a)and363oftheBankruptcyCodeAuthorizingLehmanBrothersHoldingsInc.toPurchase
CertainFurniture,FixturesandEquipmentfromBarclaysCapitalInc.,DocketNo.4171,InreLehmanBros.
Holdings Inc., No. 0813555 (Bankr. S.D.N.Y. June 25, 2009). Those assets may have included tangible
assetsownedbyLBCS.

2036

LCPI
12Sep08

30Sep08

BA

%Change

14010SUMF/ACOSTLAND

0.0%
14015SUMF/ACOSTBLDGS

0.0%
104020SUMF/ACOSTFURNITURE
70,905
70,905

0.0%
14025SUMF/ACOSTEQUIPCOMM.
766,909
766,636
(273)
0.0%
14030SUMF/ACOSTEQUIPEDP&PC
4,903,172
4,524,941
(378,231)
7.7%
14040SUMF/ACOSTBLDNGS&L/H
2,634
1,050
(1,584)
60.1%
14045SUMF/ACOSTCONSTR.INPROGRESS

0.0%
14050SUMF/ACOSTTRANS.&CAR

0.0%
14055SUMF/ACSTFINEARTS&ANTIQUES

0.0%
14060SUMCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71600SUMTOTALF/ACOST
5,743,621
5,363,533
(380,087)
6.6%
14515SUMF/AA/DBUILDINGS

0.0%
14520SUMF/AA/DFURNITURE
(42,455)
(42,724)
(269)
0.6%
14525SUMF/AA/DEQUIP.COMM.
(443,871)
(397,841)
46,030
10.4%
14530SUMF/AA/DEQUIP.EDP&PC
(3,576,653)
(3,234,363)
342,290
9.6%
14540SUMF/AA/DBLDGS.&L/H
(102)
(106)
(4)
4.3%
14550SUMF/AA/DTRANS.&CARCOSTS

0.0%
14560SUMF/AA/DCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71700SUMTOTALF/AA/D
(4,063,080)
(3,675,033)
388,047
9.6%
71750SUMPROPERTY,EQUIP.&LEASE.IM
1,680,541
1,688,500
7,959
0.5%

The gross book values in certain of those asset categories decreased over the
periodthatthesaletransactionclosed.Forexample,thegrossbookvalueofcomputer
equipment declined by $378,231 between September12, 2008, and September30,
2008.7543 The Examiner determined that reduction, however, was not related to the
transferofcomputerequipmenttoBarclays.7544TheExamineralsodetermined(andthe
Debtorsconfirmed)that,followingpublicationoftheSeptember30,2008balancesheet,
theDebtorscontinuedtomakeadjustmentstothebookvaluesreflectedonthebalance
sheet to reflect, among other things, transfers of assets to Barclays.7545 Basedupon his

7543Appendix34,TangibleAssetBalanceSheetVariationsPreparedByDuff&Phelps,atp.1.
7544EmailfromLaurenSheridan,A&M,toDavidC.Layden,ExaminersCounsel,etal.(Jan.22,2010).
7545EmailfromLaurenSheridan,A&M,toDavidC.Layden,ExaminersCounsel,etal.(Jan.22,2010).In

addition,byOrderdatedJune25,2009,theCourtauthorizedLBHItorepurchasefromBarclayscertain

2037

investigation,theExaminerhasconcludedthattangibleassetsofLCPIreflectedonthe
September30,2008balancesheetalsoweretransferredtoBarclays.
(4) LBSF
LBSFs balance sheet reflected several categories of tangible assets, including
furniture, communications equipment, computer equipment and building and
leaseholdimprovements:
LBSF

12Sep08

30Sep08

BA

%Change

14010SUMF/ACOSTLAND

0.0%
14015SUMF/ACOSTBLDGS

0.0%
104020SUMF/ACOSTFURNITURE
50,919
50,919

0.0%
14025SUMF/ACOSTEQUIPCOMM.
57,345
36,993
(20,353)
35.5%
14030SUMF/ACOSTEQUIPEDP&PC
9,350,025
8,819,693
(530,332)
5.7%
14040SUMF/ACOSTBLDNGS&L/H
28,351
22,948
(5,403)
19.1%
14045SUMF/ACOSTCONSTR.INPROGRESS

0.0%
14050SUMF/ACOSTTRANS.&CAR

0.0%
14055SUMF/ACSTFINEARTS&ANTIQUES

0.0%
14060SUMCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71600SUMTOTALF/ACOST
9,486,641
8,930,553
(556,088)
5.9%
14515SUMF/AA/DBUILDINGS

0.0%
14520SUMF/AA/DFURNITURE
(12,511)
(12,766)
(255)
2.0%
14525SUMF/AA/DEQUIP.COMM.
(20,716)
(11,128)
9,587
46.3%
14530SUMF/AA/DEQUIP.EDP&PC
(6,432,240)
(6,082,223)
350,017
5.4%
14540SUMF/AA/DBLDGS.&L/H
(12,602)
(12,836)
(234)
1.9%
14550SUMF/AA/DTRANS.&CARCOSTS

0.0%
14560SUMF/AA/DCAPITALIZEDSOFTWARE

0
0
0.0%
_____________________________________________________________________________________________
71700SUMTOTALF/AA/D
(6,478,069)
(6,118,953)
359,116
5.5%
71750SUMPROPERTY,EQUIP.&LEASE.IM
3,008,572
2,811,600
(196,973)
6.5%

The gross book values in certain of those asset categories decreased over the
periodthatthesaletransactionclosed.Forexample,thegrossbookvalueofcomputer

tangibleassetsthathadbeentransferredtoBarclaysinconnectionwiththesale.SeeOrderPursuantto
Sections105(a)and363oftheBankruptcyCodeAuthorizingLehmanBrothersHoldingsInc.toPurchase
CertainFurniture,FixturesandEquipmentfromBarclaysCapitalInc.,DocketNo.4171,InreLehmanBros.
Holdings Inc., No. 0813555 (Bankr. S.D.N.Y. June 25, 2009). Those assets may have included tangible
assetsownedbyLCPI.

2038

equipmentdeclinedby$530,332betweenSeptember12,2008andSeptember30,2008.7546
TheExaminerdeterminedthatthesereductions,however,werenotrelatedtotransfers
of computer equipment to Barclays at the time of the sale.7547 The Examiner also
determined (and the Debtors confirmed) that, following publication of the
September30, 2008 balance sheet, the Debtors continued to make adjustments to the
book values reflected on the balance sheet to reflect, among other things, transfers of
assets to Barclays.7548 Based upon his investigation, the Examiner has concluded that
tangible assets of LBSF reflected on the September 30, 2008 balance sheet also were
transferredtoBarclays.
(5) CES
CESs balance sheet reflected one tangible asset a Gulfstream GIV corporate
jet:

7546Appendix34,Duff&Phelps,TangibleAssetBalanceSheetVariations,atp.1.
7547EmailfromLaurenSheridan,A&M,toDavidC.Layden,ExaminersCounsel,etal.(Jan.22,2010).
7548EmailfromLaurenSheridan,A&M,toDavidC.Layden,ExaminersCounsel,etal.(Jan.22,2010).In

addition,byOrderdatedJune25,2009,theCourtauthorizedLBHItorepurchasefromBarclayscertain
tangibleassetsthathadbeentransferredtoBarclaysinconnectionwiththesale.SeeOrderPursuantto
Sections105(a)and363oftheBankruptcyCodeAuthorizingLehmanBrothersHoldingsInc.toPurchase
CertainFurniture,FixturesandEquipmentfromBarclaysCapitalInc.,DocketNo.4171,InreLehmanBros.
Holdings Inc., No. 0813555 (Bankr. S.D.N.Y. June 25, 2009). Those assets may have included tangible
assetsownedbyLBSF.

2039

CES
12Sep08

30Sep08

BA

%Change

14010SUMF/ACOSTLAND

0.0%
14015SUMF/ACOSTBLDGS

0.0%
104020SUMF/ACOSTFURNITURE

0.0%
14025SUMF/ACOSTEQUIPCOMM.

0.0%
14030SUMF/ACOSTEQUIPEDP&PC

0.0%
14040SUMF/ACOSTBLDNGS&L/H

0.0%
14045SUMF/ACOSTCONSTR.INPROGRESS

0.0%
14050SUMF/ACOSTTRANS.&CAR
32,169,194
32,169,194

0.0%
14055SUMF/ACSTFINEARTS&ANTIQUES

0.0%
14060SUMCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71600SUMTOTALF/ACOST
32,169,194
32,169,194

0.0%
14515SUMF/AA/DBUILDINGS

0.0%
14520SUMF/AA/DFURNITURE

0.0%
14525SUMF/AA/DEQUIP.COMM.

0.0%
14530SUMF/AA/DEQUIP.EDP&PC

0.0%
14540SUMF/AA/DBLDGS.&L/H

0.0%
14550SUMF/AA/DTRANS.&CARCOSTS
(10,756,037)
(10,769,573)
(13,535)
0.1%
14560SUMF/AA/DCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71700SUMTOTALF/AA/D
(10,756,037)
(10,769,573)
(13,535)
0.1%
71750SUMPROPERTY,EQUIP.&LEASE.IM
21,413,157
21,399,621
(13,535)
0.1%

TheGIVwasnottransferredtoBarclaysinconnectionwiththesaletransaction;
rather, CES sold the jet to a third party in a transaction approved by the Court in
December2008.7549Consistentwiththosefacts,thegrossbookvalueoftrans.andcar

7549SupplementtoDebtorsMotionforEntryofanOrderPursuanttoSection363oftheBankruptcyCode

andFederalRuleofBankruptcyProcedure6004AuthorizingLehmanBrothersHoldingsInc.toEnterinto
aSaleandPurchaseAgreement,atpp.23,DocketNo.1257,InreLehmanBros.HoldingsInc.,No.0813555
(Bankr.S.D.N.Y.Oct.29,2008);OrderPursuanttoSection363oftheBankruptcyCodeandFederalRule
of Bankruptcy Procedure 6004 Authorizing Lehman Brothers Holdings Inc. to Enter into an Amended
Sale and Purchase Agreement, at p.2, Docket No. 1399, In re Lehman Bros. Holdings Inc., No. 0813555
(Bankr.S.D.N.Y.Nov.5,2008);DebtorsMotiontoAmend(I)OrderAuthorizingSaleofGIVSPAircraft
and (II) Order Authorizing Sale of Falcon 50 Aircraft, at pp. 78, Docket No. 2318, In re Lehman Bros.
HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Dec.19,2008);AmendedOrderPursuanttoSection363ofthe
Bankruptcy Code and Federal Rule of Bankruptcy Procedure 6004 Authorizing Lehman Brothers
Holdings Inc. to Enter into an Amended Sale and Purchase Agreement, Docket No. 2359, In re Lehman
Bros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Dec.23,2008).

2040

assets on the CES balance sheet did not decline over the period when the Barclays
transactionoccurred.7550
(6) CESV
The only material tangible asset reflected on CES Vs balance sheet was a
SikorskyS76C+helicopter:
CESV
12Sep08

30Sep08

BA

%Change

14010SUMF/ACOSTLAND

0.0%
14015SUMF/ACOSTBLDGS

0.0%
104020SUMF/ACOSTFURNITURE

0.0%
14025SUMF/ACOSTEQUIPCOMM.

0.0%
14030SUMF/ACOSTEQUIPEDP&PC

0.0%
14040SUMF/ACOSTBLDNGS&L/H

0.0%
14045SUMF/ACOSTCONSTR.INPROGRESS

0.0%
14050SUMF/ACOSTTRANS.&CAR
6,043,710
4,518,502
(1,525,208)
25.2%
14055SUMF/ACSTFINEARTS&ANTIQUES

0.0%
14060SUMCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71600SUMTOTALF/ACOST
6,043,710
4,518,502
(1,525,208)
25.2%
14515SUMF/AA/DBUILDINGS

0.0%
14520SUMF/AA/DFURNITURE

0.0%
14525SUMF/AA/DEQUIP.COMM.

0.0%
14530SUMF/AA/DEQUIP.EDP&PC

0.0%
14540SUMF/AA/DBLDGS.&L/H

0.0%
14550SUMF/AA/DTRANS.&CARCOSTS
(1,815,135)
(1,818,502)
(3,367)
0.2%
14560SUMF/AA/DCAPITALIZEDSOFTWARE

0.0%

_____________________________________________________________________________________________
71700SUMTOTALF/AA/D
(1,815,135)
(1,818,502)
(3,367)
0.2%
71750SUMPROPERTY,EQUIP.&LEASE.IM
4,228,575
2,700,000
(1,528,575)
36.1%

The helicopter was not transferred to Barclays in the sale transaction that the
CourtapprovedonSeptember20,2008;ratherCESVsoldthehelicopterinatransaction
approvedbytheCourtinMarch2009.7551Thoughthegrossbookvalueoftrans.and

7550Appendix34,Duff&Phelps,TangibleAssetBalanceSheetVariations,atp.2.
7551Lehman,CESVWorldRecordsReport(Sept.15,2008)[LBEXLL027775];DebtorsMotionPursuant

toSections105and363oftheBankruptcyCode,FederalRulesofBankruptcyProcedure2002,6004,and
9014, and Rules 60041, 90061 and 90141 of the Local Bankruptcy Rules for Approval of the Sale of

2041

car asset on the CES V balance sheet did decline during the period that the Barclays
transactionoccurred,7552theExaminerconfirmedthatthisreductionwastheresultofan
accounting adjustment (asset held for sale) to reflect the fair market value of the
helicopterbasedonitsliquidationvalue,notatransferofassetstoBarclaysoranyother
entity.7553
(7) CESIX
The only material tangible asset reflected on the balance sheet of CES IX was a
Falcon50corporatejet:

DebtorsAircraftPursuanttoanAircraftSaleandPurchaseAgreementandPaymentofRelatedFees,at
pp. 34, Docket No. 3003, In re Lehman Bros. Holdings Inc., No. 0813555 (Bankr. S.D.N.Y. Mar.5, 2009);
OrderPursuanttoSections105and363oftheBankruptcyCode,FederalRulesofBankruptcyProcedure
2002,6004,and9014,andRules60041,90061and90141oftheLocalBankruptcyRulesApprovingthe
SaleofDebtorsAircraftPursuanttoanAircraftSaleandPurchaseAgreementandPaymentofRelated
Fees,DocketNo.3219,InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Mar.25,2009).
7552Appendix34,Duff&Phelps,TangibleAssetBalanceSheetVariations,atp.3.
7553EmailfromLaurenSheridan,A&M,toDavidC.Layden,ExaminersCounsel,etal.(Jan.22,2010).

2042

CESIX
30Sep08

12Sep08

BA

%Change

14010SUMF/ACOSTLAND

0.0%
14015SUMF/ACOSTBLDGS

0.0%
104020SUMF/ACOSTFURNITURE

0.0%
14025SUMF/ACOSTEQUIPCOMM.

0.0%
14030SUMF/ACOSTEQUIPEDP&PC

0.0%
14040SUMF/ACOSTBLDNGS&L/H

0.0%
14045SUMF/ACOSTCONSTR.INPROGRESS

0.0%
14050SUMF/ACOSTTRANS.&CAR
8,700,000
6,702,538
(1,997,462)
23.0%
14055SUMF/ACSTFINEARTS&ANTIQUES

0.0%
14060SUMCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71600SUMTOTALF/ACOST
8,700,000
8,702,538
(1,997,462)
23.0%
14515SUMF/AA/DBUILDINGS

0.0%
14520SUMF/AA/DFURNITURE

0.0%
14525SUMF/AA/DEQUIP.COMM.

0.0%
14530SUMF/AA/DEQUIP.EDP&PC

0.0%
14540SUMF/AA/DBLDGS.&L/H

0.0%
14550SUMF/AA/DTRANS.&CARCOSTS
(1,036,849)
(1,042,808)
(5,959)
0.6%
14560SUMF/AA/DCAPITALIZEDSOFTWARE

0.0%
_____________________________________________________________________________________________
71700SUMTOTALF/AA/D
(1,036,849)
(1,042,808)
(5,959)
0.6%
71750SUMPROPERTY,EQUIP.&LEASE.IM
7,663,151
5,659,730
(2,003,421)
26.1%

TheFalcon50wasnottransferredtoBarclaysinconnectionwiththetransaction;
rather,CESIXsoldthejetinatransactionapprovedbytheCourtinDecember2008.7554
Althoughthegrossbookvalueoftrans.andcarassetlineontheCESIXbalancesheet
did decline over the period that the Barclays transaction occurred,7555 the Examiner

7554Order

Pursuant to Sections 105 and 363 of the Bankruptcy Code, Federal Rules of Bankruptcy
Procedure 2002, 6004 and 9014, and Rules 60041, 90061 and 90141 of the Local Bankruptcy Rules
ApprovingtheSaleoftheDebtorsAircraftPursuanttoanAircraftSaleandPurchaseAgreement,Docket
No.2051,InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Dec.3,2008);DebtorsMotionto
Amend (I) Order Authorizing Sale of GIVSP Aircraft and (II) Order Authorizing Sale of Falcon 50
Aircraft, In re Lehman Bros. Holdings Inc., No. 0813555 (Bankr. S.D.N.Y. Dec.19, 2008); Amended Order
PursuanttoSections105and363oftheBankruptcyCode,FederalRulesofBankruptcyProcedure2002,
6004and9014,andRules60041,90061and90141oftheLocalBankruptcyRulesApprovingtheSaleof
theDebtorsAircraftPursuanttoanAircraftSaleandPurchaseAgreement,DocketNo.2362,InreLehman
Bros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Dec.23,2008).
7555Appendix34,Duff&Phelps,TangibleAssetBalanceSheetVariationsPreparedByDuff&Phelps,at
p.3.

2043

confirmedthatthisreductionwasduetoanaccountingadjustment(assetheldforsale)
to reflect the fair market value of the aircraft based on its liquidation value, not a
transferofassetstoBarclays.7556
c)

AnalysisofIntangibleAssetTransfers

The Examiner and his financial advisors concluded that one LBCS intangible
asset was transferred to Barclays in connection with the sale. That asset consisted of
information regarding the customers with whom LBCS traded that were not within
LBIscustomerbase,includingtheidentityofthosecustomers,theproductstheytraded
andthepricesofthoseproducts(theLBCSCustomerInformation).LBCSalsohadan
assembledworkforcepriortoLBHIsbankruptcy,butthatassetwasnottransferredto
Barclaysinthesale.
The Examiners financial advisors focused on facts that might indicate whether
anyoftheLBHIAffiliatesownedintangibleassetsfallingintothreecategories:

customer information assets, including customer lists and product and

pricinginformation;

proprietarysoftware;and

atrained,experiencedassembledworkforce.7557

7556EmailfromLaurenSheridan,A&M,toDavidC.Layden,ExaminersCounsel,etal.(Jan.22,2010).
7557SeeROBERT F. REILLY & ROBERT P. SCHWEIHS, VALUING INTANGIBLE ASSETS1920(McGrawHill1999);

Statement Of Fin. Accounting Standards No. 142. Firms also can own other categories of intangible
assets, such as marketingrelated intangibles (e.g., trademarks, trade names and brand names), artistic
related intangibles, engineeringrelated intangibles, and contractrelated intangibles (e.g., favorable
suppliercontracts,licenseagreementsandfranchiseagreements).REILLY & SCHWEIHS, at 19.Giventhe
nature of their businesses, there is no reason to believe that the LBHI Affiliates owned artisticrelated,
engineeringrelated or contractrelated intangibles, and the Examiner did not discover any facts

2044

The Examiners financial advisors reviewed the balance sheets of the LBHI
AffiliatesasofAugust 29,2008,and September12,2008.Those balancesheets donot
reflectanyintangibleassets.7558However,theabsenceofintangibleassetsonthebalance
sheets of the LBHI Affiliates would not necessarily indicate that those entities did not
ownintangibleassets.Intangibleassetstypicallyarenotreflectedasassetsonafirms
balance sheet unless the firm obtained them in connection with the acquisition of a
businessorotherwise(asopposedtodevelopingtheassetsthroughitsownefforts).7559
Therefore, the Examiner and his financial advisors conducted a series of analyses to
determinewhetheranyLBHIAffiliatesownedthetypesofintangibleassetsidentified
above.
(1) CustomerInformationAssets
Abusinessthatexpendssubstantialefforttodevelopacompilationofcustomer
data and keeps that information confidential may have a protectable interest in that
dataintheformofatradesecret.7560
Thereisnodirectlyapplicablecaselawprovidingfirmguidancefordetermining,
withinagroupofaffiliatedlegalentities,whichentityownsanintangibleassetsuchas

suggesting otherwise. With respect to marketingrelated intangibles, the Lehman and Lehman
Brothers marks were conveyed to Barclays by LBHI and LBI (and licensed by Barclays back to the
Debtors estates for use in the winddown) in connection with the sale transaction. See APA, at pp. 8,
(1.1), 2930 (8.9). The Examiner did not discover any facts indicating that any LBHI Affiliates
independentlyownedmarksortradenames,andeveniftheyarguablydid,thereisnoreasontobelieve
thatanyLBHIAffiliatemarkortradenamewasconveyedtoBarclays.
7558SummaryBalanceSheetsofLBHIAffiliatesPreparedbyDuff&PhelpsareavailableinAppendix33.
7559See,e.g.,I.R.C.197(2006);StatementOfFin.AccountingStandardsNo.142.
7560E.g.,DefianceButtonMach.Co.v.C&CMetalProds.Corp.,759F.2d1053,1063(2dCir.1985).

2045

a customer list. However, the Examiners financial advisors used guidance from
analogous contexts in analyzing whether LBHI Affiliates owned protectable customer
information: the relationship between expenses incurred in the development of
information,andthefirmsownershipofthatasset.7561
The Examiners financial advisors determined that, although Lehman used LBI
asthecommonpaymasterforLehmansemployeesintheUnitedStates(including,as
describedbelow,LBIemployeeswhoperformedfunctionsexclusivelyforcertainLBHI
Affiliates), Lehman allocated the compensation expenses relating to various legal
entitieswithinLehman.Thus,certainLBHIAffiliatesincurredemployeeexpenses.7562
TheExamineralsodeterminedthat,priortotheSeptember22,2008closingofthe
sale transaction, Lehmans consolidated computer systems contained information that
could be used (and regularly was used) to generate lists of the counterparties with

7561See,

e.g., Kimball Laundry Co. v. United States, 338 U.S. 1, 18 (1949) (holding, in context of Fifth
Amendmenttakingsclaim,thatitislegitimatetodrawaninferencethatexpendituresforthepurposeof
solicitingbusinesshaveresultedinavaluewhichwillcontinuetocontributetotheearningcapacityof
the business in later years and which is therefore a value that a purchaser may recognize); Metal &
Salvage Assn, Inc. v. Siegel, 503 N.Y.S.2d 26, 28 (N.Y. App. Div. 1986) (noting that it is unlikely that a
business has a protectable customer list if there is no indication that it expended any sums on
advertisingorsuchefforts);seealsoWorldwideSportNutritionalSupplements,Inc.v.FiveStarBrands,LLC,
80 F. Supp. 2d 25, 32 (N.D.N.Y. 1999) (determining that a business may not claim a trade secret in a
productrecipeifitdoesnotactivelycontributetoitsdevelopmentorprovidefinancialcompensationto
otherpartieswhodid);LeoSilfen,Inc.v.Cream,278N.E.2d636,640(N.Y.1972)(notingthatcustomerlists
are likely to be protectable when the customers patronage had been secured by years of effort and
advertisingeffectedbytheexpenditureofsubstantialtimeandmoney);HairSay,Ltd.v.SalonOpus,Inc.,
No. 510601, 2005 WL 697538, at *5 (N.Y. Sup. Ct. Mar. 17, 2005) (noting that a hair salons alleged
customer list was not protectable in part because there was no evidence that the salon incurred any
expensesorengagedinanynetworking,advertisingormarketingincompilingormaintainingthelist).
7562See,e.g.,FASBStatementofFinancialAccountingConceptsNo.6:ElementsofFinancialStatements,at
24 (noting that elements, such as assets and expenses, that are reflected on financial statements are
definedinrelationtoaparticularentity).

2046

whichtheLBHIAffiliateoperatingentitiesLBCS,LBCC,LCPI,LBSF,LOTC,LBDP
andLBFP7563traded.7564Theinformationthatcouldbe,andwas,generatedusingthose
systems included more than simply the identity of the counterparties; it included
information such as the products traded (both currently and historically), historical
tradingprices,andtherevenuegeneratedbythosetrades.7565
Although this information included many counterparty names that are readily
available to competitors in the industry, such as wellknown investment banks,
financial services firms and hedge funds, some of the counterparty names were not
readily ascertainable from publiclyavailable sources of information,7566 and specific
product and pricing information was, by its nature, not readily determinable from
sourcesoutsideofLehman.
TheExamineralsodeterminedthat,priortotheclosingofthesaletransactionon
September22,2008,Lehmantookstepstoprotecttheconfidentialityoftheinformation,
including corporate policies that prohibited the disclosure of such information to

7563The

Examiner also determined that BNC did not have any valuable customerinformation assets.
Even if BNC might once have had these types of assets, their value would have been lost long before
September2008,giventhatBNChadstoppedoriginatingsubprimemortgagesinAugustof2007.
7564See,e.g.,Lehman,DerivativeBalanceSheetDetails(Aug.2008)[LBHI_SEC07940_2528640]and(Aug.
29, 2008) [LBHI_SEC07940_2531361], attached to email from Michael McGarvey, Lehman, to Jennifer
Fitzgibbon, Lehman (Sept.13, 2008) [LBHI_SEC07940_2528253]; Lehman, Fixed Income FID Client
RankingsSummary(July2008)[LBHI_SEC07940_2277547],attachedtoemailfromAlexMilner,Lehman,
toThomasP.Humphrey,Lehman,et.al.,(Aug.7,2008)[LBHI_SEC07940_2277546].
7565ExaminersInterviewofSatuS.Parikh,Jan.4,2010.
7566Id.

2047

anyoneoutsideofLehman,and byrequiringpasswordstoaccessLehmanscomputer
systems.7567
The fact that Lehmans computer systems held confidential customerrelated
information does not, without more, lead to the conclusion that an entity owned the
customerrelatedinformationassociatedwiththecounterpartieswithwhichittraded.
Specifically, the Examiners financial advisors determined that LBCS was the
onlyLBHIAffiliatethatincurredexpensesrelatingtothedevelopmentofadistinctand
notreadilyaccessiblecustomerbase.LBCSdevelopedacommoditytradingcustomer
basethatwas,atleastinpart,separateanddistinctfromLBIscustomerbase.7568LBCS
had been created by Lehman with the goal of developing a commodities and
commodities derivative trading platform.7569 As a result, while the trades booked in
mostLBHIAffiliatesoriginatedwiththesalesforcesthatservedtheumbrellabusiness
units,7570LBCShaditsowndedicatedsalesstaff.7571Thatsalesforceleveragedtosome
extent off of existing LBI customer relationships, but also was working to develop its
own business opportunity leads at the time LBHI filed for bankruptcy.7572 Therefore,
althoughmostofthecustomerinformationthatLBCSusedwasknowntocompetitors

7567See,e.g.,Lehman,LehmanBrothersConfidentialityAgreement[LBEXLL3668555].
7568ExaminersInterviewofSatuS.Parikh,Jan.4,2010.
7569ExaminersInterviewofJamesP.Seery,Jr.,Jan.14,2010,atp.2.
7570ExaminersInterviewofThomasE.Hommel,Apr.29,2009,atp.4.
7571A&M, spreadsheet of employees mapped to legal entities as of Sept.20, 2008 [LBEXAM 5642400];

Lehman, FID Full Population Roster (Aug. 31, 2008) [LBEXDOCID 3102619], attached to email from
John Cannady Jr., Lehman, to Joann DeMange, Lehman, et al. (Sept.4, 2008) [LBEXDOCID 2880236];
ExaminersInterviewofJamesP.Seery,Jr.,Jan.14,2010,atp.2.
7572ExaminersInterviewofSatuS.Parikh,Jan.4,2010.

2048

orwaslargelyderivedfromLBIscustomerbase,LBCSdidgeneratesomeuniqueand
secretcustomerinformationofitsown.
In contrast, other LBHI Affiliates that traded with counterparties did not have
distinct customer bases developed by an independent sales team, but instead served
largelyasproductbookingentitiesintowhichLBIsbusinessesrecordedtransactions.7573
Forexample,compensationexpensesandemployeeswereallocatedtoLBSFandLCPI,
butthereisnoevidencethattheemployeeswhoperformedfunctionsfortheseentities
contributed to the development of a customer base that was distinct from LBIs
customerbase.7574Instead,employeesallocatedtoLBSFandLCPIconductedactivities
primarily related to LBI transactions, with the resulting transactions booked to LBSF
(forderivatives)andLCPI(forloans).7575
Therefore, the Examiner concludes that there was a sufficient basis to assert a
colorable claim that LBCS owned the LBCS Customer Information, but that there are
not sufficient facts to conclude that the other LBHI Affiliates owned customer
informationassets.

7573ExaminersInterviewofJamesP.Seery,Jr.,Jan.14,2010,atp.2;ExaminersInterviewofJonathanD.

Williams, Nov.18, 2009, at p. 3; Examiners Interview of Peter A. Tennyson, Oct.13, 2009, at p. 2;

Examiners Interview of Kleber Rodriguez, Dec.18, 2009, at p. 4; Examiners Interview of Michael
Montella,Oct.26,2009,atp.5.
7574ExaminersInterviewofJamesP.Seery,Jr.,Jan.28,2010.TheotherLBHIAffiliates,includingLBCC,
had no employees specifically allocated to them according to Lehmans internal records. See A&M,
SpreadsheetofEmployeesMappedtoLegalEntities(Sept.20,2008)[LBEXAM5642400].
7575Id.

2049

The Examiner also concludes that the LBCS Customer Information was
transferred to Barclays in connection with the sale transaction. The LBCS Customer
Information all was stored in Lehmans consolidated computer systems, which were
transferredtoBarclaysinconnectionwiththesaleclosing.7576LBCSdidnotmakeany
efforttoremovetheLBCSCustomerInformationfromtheconsolidatedsystems,orto
prevent Barclays from accessing or using that information, before the systems were
transferred to the control of Barclays. Given the consolidated and interconnected
nature of Lehmans computer system and the limited time available during the sale
period, the Examiner concluded (and the Debtors confirmed) that it would not have
been feasible to isolate or remove LBCS Customer Information before the Lehman
systemsweretransferredtoBarclaysonSeptember22,2008.7577
TheLBCSCustomerInformationalsolikelywastransferredtoBarclaysthrough
the employees who performed functions exclusively for LBCS who were offered and
acceptedemploymentatBarclays.7578

7576ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon

and Jeffrey Donaldson, Jan. 22, 2010. See APA, at pp. 4 (1.1), 6 (1.1) (definitions of Furniture and
Equipment,HardwareandPurchasedAssets);seealsotransitionServicesAgreementbetweenLBHI
andBarclays(Sept.22,2008),atSection3.01(providingforrightsofDebtorsestatestoaccessinformation
systemsnowinthepossessionofBarclays);TranscriptofdepositiontestimonyofBryanP.Marsal,Inre
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Dec.22,2009,atpp.2526.
7577ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon
andJeffreyDonaldson,Jan.22,2010;ExaminersInterviewofJeffreyD.Osterman,Jan.28,2010.
7578LBIemployeeswhoperformedfunctionsexclusivelyforLBCSshouldnothavebeenincludedwithin
thegroupofOffereesthatBarclaysagreedtoemployfollowingtheclosingofthesaletransaction.See
APA, at p. 34 (9.1(a)) (defining Offeree to include each active employee employed primarily in
connection with the Business at the Closing); id. at p. 2 (1.1) (defining Business as the U.S. and

2050

TheExaminerthus concludesthatLBCSCustomerInformation was transferred

toBarclaysinconnectionwiththesale.Asdiscussedbelow,however,thatinformation
likelywouldhavebeenoflittlevaluetoBarclays,giventhesmallnumberofcustomers
both unique to LBCS and not readilydeterminable by competitors, and Barclays
superiorcommoditiesmarketshareandcustomerbase.
(2) ProprietarySoftware
TheExaminerandhisfinancialadvisorsdeterminedthatLehmansconsolidated
computer systems included: (1)software developed or customized by Lehmans
information technology (IT) department for product lines across numerous Lehman
entities,orforaspecificlegalentity;and(2)offtheshelfsoftware.7579
LehmansinhouseITdepartmentdevelopedandcustomizedsoftwarebothfor
theentireLehmanorganization,andalsoforindividuallegalentities.Forexample,as
describedabove,LehmandevelopedGFStotrackfinancingrequirements,MTStosettle

Canadian investment banking and capital markets businesses of [LBHI and LBI] including the fixed
income and equities cash trading, brokerage, dealing, trading and advisory businesses, investment
bankingoperationsandLBIsbusinessasafuturescommissionmerchant.).TheExaminerdetermined
thatLehmanHRpersonnelidentifiedtheemployeesthatwouldbetransferredtoBarclays,andincluded,
amongothers,allemployeeswithinFID,whichincludedalloftheemployeeswhoperformedservicesfor
LBCS. Email from Tracy Binkley, Lehman, to Steven Berkenfeld, Lehman (Sept.23, 2008) [BCIEX(S)
00005498];ExaminersInterviewofTracyBinkley,Dec.22,2009.
7579Examiners Interview of Michael Montella, Oct.26, 2009, at p. 13; Examiners Interview of Kleber
Rodriguez,Dec.18,2009,atp.2;ExaminersInterviewofJonathanD.Williams,Nov.18,2009,atp.2.

2051

certain fixed income products and ITS to process multicurrency trades.7580 It also
developedRISCasafrontofficederivativestradingsystem.7581
TheExaminersfinancialadvisorsevaluatedwhetheranyLBHIAffiliatesowned
softwarethatwasdevelopedorcustomizedforthatentitybyLehmansITdepartment.
TheExaminersfinancialadvisorsdeterminedthatsoftwaredevelopmentcostsmeeting
certainsoftware capitalization requirements werecapitalizedonLBHIsbalancesheet,
and that no software development costs were capitalized on the balance sheets of the
LBHIAffiliates.
TheExaminersfinancialadvisorsdeterminedthatexpensesrelatingtosoftware
development and customization were booked to certain of the LBHI Affiliates.7582
Underapplicablelegalprinciples,however,anentitydoesnotowncomputersoftware
simply because that entity pays for its development. The Copyright Act of 1976
protectsoriginalworksofauthorshipfixedinanytangiblemediumofexpression.7583
Computer programs may qualify for protection as a literary work under this
definition.7584ThoughtheCopyrightOfficegrantsregistrationsthatserveasprimafacie

7580SeeSectionIII.C.3.a.1.a.i.
7581ExaminersInterviewofKleberRodriguez,Dec.18,2009,atp.2.
7582TheExaminerandhisfinancialadvisorsdeterminedthatitwouldrequireincurringsignificantcostto

attempttospecificallyidentifythesoftwaretowhichtheexpensesbookedtotheentityrelated,andthat,
inanyevent,suchananalysiswasunlikelytogeneratecompleteorreliableinformation.
758317U.S.C.102(a)(2006).
7584SeeTorahSoftLtd.v.Drosnin,136F.Supp.2d276,283(S.D.N.Y.2001);JamisonBus.Sys.,Inc.v.Unique
SoftwareSupportCorp.,No.CV024887,2005WL1262095,at*6(E.D.N.Y.May26,2005).

2052

evidence of valid copyrights,7585 copyright protection exists automatically when an

originalworkofauthorshipiscreatedandfixedinatangiblemedium.7586Asaresult,
where software has been developed by one person for the benefit of another, the
developergenerallyretainsownershipofthesoftwareunlessthepartieshaveprovided
otherwise.7587
An exception to this rule exists when the software is produced as a work for
hire. In that case, the employer or other person for whom it was prepared is
considered to be the owner.7588 A work for hire can be either: (1) a work that an
employee prepares in the scope of his or her employment; or (2) a work specially
ordered or commissioned for use . . . if the parties expressly agree in a written
instrumentsignedbythemthattheworkshallbeconsideredaworkmadeforhire.7589
Here,LehmansITdepartmentwasemployedbyLBHIandLBI,notbytheLBHI
Affiliates. The Examiners financial advisors also did not identify any evidence
suggestingthatLBHIAffiliateswerepartiestoanyworkforhireagreementsrelatingto
software that was developed or customized exclusively for them by Lehmans IT
department.

758517U.S.C.410(c)(2006).
7586Jamison,2005WL1262095,at*6(citing17U.S.C.102(a)).
758717U.S.C.201(a)(2006);Aymesv.Bonelli,980F.2d857,860(2dCir.1992).
758817U.S.C.201(b)(2006).
758917U.S.C.101(2006).

2053

Asaresult,theExaminerconcludesthatthereisinsufficientevidencetosupport
a finding that the LBHI Affiliates owned proprietary software prior to the sale
transaction.
Lehman also purchased offtheshelf software that the LBHI Affiliates, among
others, used in their operations. Numerous software licenses were assumed and
assignedtoBarclayspursuanttotheClosingDateContractsprovisionsintheAPA.7590
The Schedule of IT Closing Date Contracts, however, does not purport to assign to
BarclaysanysoftwarelicenseagreementstowhichLBHIAffiliatesareaparty.7591
(3) AssembledWorkforce
Atrainedandassembledworkforceisapotentiallyvaluableintangibleasset.7592
An assembled workforce has value because of the cost that would be incurred in
replacingit.7593
TheLehmanemployeeswhomovedtoBarclaysinconnectionwiththesalewere
almostallemployedbyLBI.7594Compensationexpensesforcertainofthoseemployees

7590See,e.g.,APA,atp.15(4.2(b));ListofITClosingDateContractsassumedandassignedunderthe

APA(Oct.1,2008).
7591ListofITClosingDateContractsassumedandassignedundertheAPA(Oct.1,2008).
7592ROBERT F. REILLY & ROBERT P. SCHWEIHS, VALUING INTANGIBLE ASSETS 400 (McGrawHill1999);Ithaca
Indus.,Inc.v.Commr.ofInternalRevenue,17F.3d684(4thCir.1994);BurlingtonN.R.R.Co.v.Blair,815F.
Supp.1223(S.D.Iowa1993),affd,60F.3d410(8thCir.1995).
7593ROBERT F. REILLY & ROBERT P. SCHWEIHS, VALUING INTANGIBLE ASSETS 401 (McGraw Hill 1999); La.
HealthServ.&Indem.Co.v.UnitedStates,CivilActionNo.05914JVPDLD,2009WL1916864,at*12(M.D.
La.July2,2009).
7594TranscriptofdepositiontestimonyofBryanP.Marsal,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Dec.22,2009,atp.32.

2054

werebookedtolegalentitiesotherthanLBI,includingLBCS,LBSFandLCPI.7595Those
entitiesthusarguablyownedanassembledworkforceassetbeforetheLBHIbankruptcy
filing.
The Examiner determined, however, that the transfer of employees to Barclays
does not provide a sufficient basis to conclude that a colorable claim arises from the
transfer of an assembled workforce. While an assembled workforce may have
ascertainablevalueforaccountingpurposesinthecontextofthesaleofabusiness,itis
not an asset that is subject to transfer in light of employees inherent right to work
whereandforwhomtheychoose,particularlywhenthebusinessitselfisnotbeingsold
asagoingconcern.7596
4.

LehmanALITransaction

ShortlybeforeLBIcommenceditsSIPAproceeding,LBHIandLBImanagement
(inconsultationwithWeil)determinedthatallentitiesdirectlyorindirectlyownedby
LBIthatwerenotbeingsoldtoBarclaysshouldbemovedtoanLBHIsubsidiary.The
reasoning was that as LBHI subsidiaries, the entities would have better access to
personnelandworkingcapital,andwouldbeabletooperateand/orwinddowntheir
businessesinamoreorderlyfashionthantheywouldasasubsidiaryofLBI,whichwas

7595A&M,SpreadsheetofEmployeesMappedtoLegalEntities(Sept.20,2008)[LBEXAM5642400].
7596See,e.g.,Inre3dfxInteractive,Inc.,389B.R.842,853(Bankr.N.D.Cal.2008)(terminatedemployeesnot

subject to restrictive covenants were not property that could give rise to a fraudulent transfer action);
Atchison,Topeka&SantaFeRy.Co.v.Brown&Bryant,Inc.,159F.3d358(9thCir.1997);Orthotec,LLCv.
REOSpineline,LLC,438F.Supp.2d1122,112930(C.D.Cal.2006);cf.Robinsonv.WattsDetectiveAgency,
Inc.,685F.2d729,734(1stCir.1982)(anassembledworkforcemaybepropertythatissubjecttotransfer
whenitissoldaspartofabusinessthatistransferredvirtuallywholesaletoacompetitor).

2055

soontobeadebtorinaSIPAliquidationproceeding.Thismovementwouldhavethe
practicaleffectoftransferringcontroloftheliquidationoftheseentitiesfromtheSIPA
Trustee(whohadnotyetbeenappointed)toLBHIsestate.
A meeting of the LBI Board of Directors was held on September19, 2008, at
whichRodMillerofWeilpresentedtheplantotransfersubsidiariesofLBItoLehman
ALI,anondebtorentitythathadbeenselectedtoholdthesecompaniesbecauseitwas
identifiedprimarilyasaholdingcompany.7597HeinformedtheBoardthatallofthese
subsidiaries were part of LBIs Investment Management Division and/or shared
resourceswithLBHIentities.7598HealsoadvisedtheBoardthatasecuredpaymentin
kind(PIK)notewouldbeexecutedinconsiderationforthetransfer,andthattheinitial
value of the note would be determined by Lazard. Miller reported that the SIPA
Trustee supported this plan and had asked for input into the valuation method.7599
Miller explained the terms of the note, stating that the intention was to provide the
SIPATrusteewiththesamecashflowsandprotectionsasifLBIhadcontinuedtoown
the subsidiaries.7600 The Board determined that a memo should be prepared by Weil
memorializingtheirdiscussionswiththeSIPATrusteeandhisapproval.7601TheBoard

7597LehmanBrothersInc.,MinutesofMeetingofBoardofDirectors(Sept.19,2008),atpp.12[LBEXAM

004030];ExaminersInterviewofRodMiller,Feb.27,2009.
7598Lehman Bros. Inc., Minutes of Meeting of Board of Directors (Sept. 19, 2008), at p.2 [LBEXAM
004030].
7599Id.
7600Id.
7601Id.

2056

also determined that the SIPA Trustee should be reminded of the plan to transfer the
LBIsubsidiariestoLehmanALIatthesalehearing.7602TheBoardthenauthorizedthe
transfer.7603
Counsel to the SIPA Trustee told the Examiner that the SIPA Trustee was
informed about, but did not specifically approve, the transfer. Counsel noted that
becauseLBIsSIPAproceedinghadnotyetbeencommencedandtheSIPATrusteehad
not yet been formally appointed, the SIPA Trustee technically could not agree to
anything. The SIPA Trustee was informed that the book value of the affected
subsidiarieswassubstantial,andbelievedtheimplicationofthisstatementwasthatthe
LehmanALItransactionthereforewouldresultinsubstantialvaluefortheLBIestate.7604
On September19, 2008, 25 legal entities and their subsidiaries were transferred
fromLBItoLehmanALIpursuanttoaPIKNote&SecurityAgreement7605andTransfer
Agreement.7606ThelegalentitiestransferredtoLehmanALIincluded:
a.
b.
c.
d.
e.
f.
g.

BlueJAYRealtyCorp.
FRAHSpecialServicesInc.
LBIGroupInc.(holdingcompanyforTownsendAnalytics)
LBIIndiaHoldingsMauritiusIIILimited
LBLeasingInc.
LehmanBrothers(Israel)Inc.
LehmanBrothers(Spain)S.A.

7602Id.
7603Id.atpp.23.
7604ExaminersInterviewofKennethE.Lee,Jan.8,2010,atp.2.
7605PIKNote&SecurityAgreementbetweenLehmanALIInc.andLehmanBrothersInc.(Sept.19,2008).
7606Transfer Agreement among Lehman Brothers Inc., LBI Group Inc., and Lehman ALI Inc. (Sept.19,

2008);ExaminersInterviewofRajeshAnkalkotiandWilliamFox,May6,2009,atp.2.

2057

h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
v.
w.
x.
y.

LehmanBrothersdeVenezuelaC.A.
LehmanBrothersDerivativesProductsInc.
LehmanBrothersEuropeInc.
LehmanBrothersFinance(Japan)Inc.
LehmanBrothersFinancialProductsInc.
LehmanBrothersInvestmentHoldingCompanyInc.
LehmanBrothersInternationalServices,Inc.
LehmanBrothersHoldingsInternationalInc.
LehmanBrothersInvestmentManagementAsiaLimited
LehmanBrothersOverseasInc.
LehmanBrothersSecuritiesTaiwanLimited
LehmanBrothersSouthAsiaLimited
Lehman Brothers Special Financing Inc. (parent company of
LehmanBrothersCommodityServices)
LehmanCommercialPaper,Inc.anditssubsidiaries
LehmanRealtyandDevelopmentCorp.
MBR/GPCorp.
RIBCOLLC
RIBCOSPC,Inc.

These 25 legal entities generally had no business operations other than trading
and/oractingasholdingcompaniesforprivateequity(limitedand/orgeneralpartner)
investments.7607Lazardbelievesthattheseentitieshadnogoingconcernorothervalue
over and above the value of their assets, and therefore has determined to value these
entities based solely upon the value of the securities, derivatives, private equity
investmentsandotherassetsheldbythem.7608TheSIPATrusteegenerallyagreesthat
thisvaluationmethodologyisappropriate.7609

7607ExaminersInterviewofRajeshAnkalkotiandWilliamFox,May6,2009,atp.2.
7608ExaminersInterviewofDavidDescoteaux,MatthewWhiting,PhilipKruseandThomasE.Hommel,

Mar.26,2009,atp.2.
7609ExaminersInterviewofKennethE.Lee,Jan.8,2010,atp.2.

2058

The PIK Note & Security Agreement calls for a valuation of the transferred
subsidiaries by Lazard as of the transfer date (September19th).7610 In connection with
the Examiners investigation into the Lehman ALI transaction, A&M provided to the
Examiner a PIK Note Analysis Proforma Combining Balance Sheet, reflecting
financialinformation for the transferredentities asof September14,2009.7611 The Pro
formaCombiningBalanceSheetconsistsofproformabalancesheetsforthefivelargest
entities transferred to Lehman ALI, as well as a sixth pro forma balance sheet
consolidatingtheremainingtwentyentities.7612Itshowsapproximately$175billionin
consolidated book value of assets on Sunday, September14, 2008 (the last date on
which Lehmans books were closed), and $173 billion in consolidated book value of
liabilities.7613ItexcludesLehmanALIspreexistingbusinessesbeforethetransferofthe
25 legal entities.7614 A&M indicated that there are significant limitations to the values
usedintheProformaCombiningBalanceSheet,includingthelackofmarkscurrentas

7610PIKNote&SecurityAgreementbetweenLehmanALIInc.andLehmanBrothersInc.(Sept.19,2008),

atp.1.
7611September14ProformaCombiningBalanceSheet[LBEXAM086496086499].OnJanuary28,2010,
A&MprovidedtheExaminerwithanupdatedversionoftheSeptember14ProformaCombiningBalance
Sheet. [LBEXAM 56432115643214]. The changes were modest in nature, and did not impact the
Examinersanalysisorconclusions.
7612Id.
7613ExaminersInterviewofRajeshAnkalkotiandWilliamFox,May6,2009,atp.2.
7614Id.

2059

ofSeptember14, 2008,insomecases,and limitationsinherentto anoutofcycle, mid

monthclose.7615
The Proforma Combining Balance Sheet organized the assets transferred to
Lehman ALI into six groups: (1) LB Special Financing, Inc., which is the parent
company of LBCS; (2)LCPI and its subsidiaries, which were the group of companies
engagedinoriginationandtradingofsecuredandunsecuredloans;(3)LBIGroup,Inc.,
which is the holding company for a number of private equity investments; (4) LBFP
(oneofthetwostandaloneAAAratedderivativestradingentities);(5)LBDP(theother
standalone AAArated derivatives trading entity); and (6)Other, representing the
remaining20legalentities.7616
None of the data in the September14 Proforma Combining Balance Sheet
reflects September19 values, or indeed trading information from the week of
September15.7617Tensofthousandsofderivativesandothertradeswereterminatedby
counterparties beginning the week of September15, so by September19, substantial
value in these entities had been lost, very likely in the range of tens of billions of
dollars.7618 In addition, many assets delivered to counterparties as collateral were

7615Id.atpp.23;ExaminersInterviewofWilliamFox,BradGoldsmithandMichaelTarsatana,Jan.28,

2010.
7616ExaminersInterviewofWilliamFox,BradGoldsmithandMichaelTarsatana,Jan.28,2010,
atp.3.
7617BecauseSeptember14wasaSunday,valuesfromSeptember12(theprecedingFriday)wereused.Id.
atp.4.
7618Id.

2060

liquidated during the week of September15 at very disadvantageous prices.7619 As a

result,thenetbookvalueofthetransferredsubsidiariesassets,asmarkedbyLehman
asofSeptember12,2008,appearstobeaverypoorindicatorofthevalueofthoseassets
oneweeklater.7620Forexample,accordingtoLehmansSeptember12,2008marks,the
security assets included $19 billion in government securities, several billion dollars in
asset backed securities, $4 billion in real estate securities, and smaller amounts of
securitiesinothercategories.7621AlthoughLazardhasbeenunabletoaccessmuchdata
for these securities for the period between September12 and September19, it is very
likelythattheirvaluesdecreasedsignificantlyduringthisperiod.7622
More than 70,000 securities and derivatives were reflected on the books of the
Lehman ALI entities, many of which were closedout or liquidated by counterparties
duringtheweekofSeptember15.7623Virtuallyeveryassetliquidatedbyacounterparty
presentsuniquevaluationissuespertainingto thevaluesselectedbythecounterparty
atliquidation,thecommercialreasonablenessofthecounterpartyliquidation,andsetoff
issues with respect to inthemoney liquidations.7624 It is likely that many of the
valuations used by counterparties may be the subject of future litigation between the

7619ExaminersInterviewofDavidDescoteaux,MatthewWhiting,PhilipKruseandThomasE.Hommel,

Mar.26,2009,atp.2.
7620Id.
7621Id.
7622Id.
7623Id.atpp.23.
7624Id.

2061

counterpartiesandtheDebtors,andthusthereappearstobenorealisticscenariounder
whichLazardwillbeabletoperformameaningfulvaluationoftheLehmanALIassets
untilthesecomplicatedissuesaresortedoutduringthecourseofadministrationofthe
Debtorsestates.7625
After taking into account the termination of derivatives positions, the
consolidatedbalancesheetsfortheentitiestransferredtoLehmanALIwillbeseverely
negative.7626Ifonelooksatindividualentitiesratherthanall25asapackage,however,
two of the entities (LBFP and LBDP, the AAArated derivatives trading entities)
managedtomaintainpositivevalue.7627However,thePIKNote&SecurityAgreement
does not specify whether the entities should be valued on an entitybyentity or
consolidated basis, and the Debtors and the SIPA Trustee are in disagreement on this
issue. The SIPA Trustee maintains that any positive value attributable to LBFP and
LBDP should be paid to the LBI estate under the PIK Note& Security Agreement,7628
while the Debtors assert that any positive value in LSFP and LBDP should be offset

7625Id.
7626ExaminersInterviewofRajeshAnkalkotiandWilliamFox,May6,2009,atp.5;ExaminersInterview

ofKennethE.Lee,Jan.8,2010,atp.2;ExaminersInterviewofWilliamFox,BradGoldsmithandMichael
Tarsatana,Jan.28,2010,atp.2.
7627ExaminersInterviewofKennethE.Lee,Jan.8,2010,atpp.23(notingthatathirdentitymighthave
inconsequential positive value); Examiners Interview of William Fox, Brad Goldsmith and Michael
Tarsatana,Jan.28,2010,atp.2.
7628Examiners Interview of Kenneth E. Lee, Jan. 8, 2010, at p. 3; Lehman, Lehman Brothers, Inc. and
PrincipalSubsidiariesasofNovember30,2007[LBEXDOCID003813].

2062

against the negative value attributable to other LBI entities transferred to Lehman
ALI.7629
5.

Conclusions
a) Summary

Asdescribedabove,theExaminerconcludesthatthereisinsufficientevidenceto
supportafindingthattherewereanytransferstoBarclaysofsecuritiesownedbyLBHI
Affiliatesinconnectionwiththesaletransaction.Thereare,however,asnotedabove,a
limited number of securities associated with 817 CUSIPs that were transferred to
Barclays for which the Examiner has been unable to obtain definitive ownership
information.ItthereforeispossiblethatsomeofthosesecuritieswereownedbyLBHI
AffiliatesatthetimetheyweretransferredtoBarclays.
With respect to the potential transfer of securities owned by LBHI Affiliates to
Barclays, the Examiner concludes that, unless there is a determination that Barclays
engaged in actual fraud or colluded with LBI in connection with the sale transaction
(issues with respect to which the Examiner is not reaching conclusions, in light of the
current litigation), the evidence does not support the existence of a colorable claim
againstBarclays.
TheExaminerconcludesthatsomeassetsofLBHIAffiliatesweretransferredto
Barclaysthatwerenotsupposedtobeincludedinthesaletransaction,namely:(1)the

7629ExaminersInterviewofWilliamFox,BradGoldsmithandMichaelTarsatana,Jan.28,2010.

2063

LBCSCustomerInformation(informationidentifyingcustomersofLBCSwhowerenot
partofLBIscustomerbase,theproductsthatthosecustomerstradedandthepricesat
which the products were traded); and (2)communications equipment, computer
equipment and furniture of LBCS, LBSF and LCPI (the LBHI Affiliate Office
Equipment).
The Examiner concludes that the transfers of LBCS Customer Information and
LBHI Affiliate Office Equipment (together, the LBHI Affiliate Assets) to Barclays in
connectionwiththesaletransactiongiverisetocolorableclaimsagainstBarclaysunder
theBankruptcyCode.
TheExamineralsoconcludesthattheevidencedoesnotsupporttheexistenceof
acolorableclaimagainsttheofficersanddirectoroftheLBHIAffiliatesarisingfromthe
transfertoBarclaysoftheLBHIAffiliateAssets.
The Examiner concludes that the Lehman ALI transaction was undertaken in
goodfaith,andproperlydisclosedunderthecircumstances.
b) ColorableClaimsArisingfromTransferofLBHIAssets
(1) ThereAreNoColorableClaimsAgainstBarclaysArisingfrom
TransferofLBHIAffiliateSecurities
AsdiscussedinSectionIII.C.3.aofthisReport,theExaminersfinancialadvisors
did not identify any securities transferred to Barclays that were associated with LBHI
Affiliates,whichLBIdidnotownorhavetheauthoritytotransfer.TheExaminerwas
notabletoverifythatLBIheldforitsownaccount,orhadtheauthoritytotransferto

2064

Barclays,arelativelysmallgroupofsecuritiesandsecuritiesentitlementsthatmightbe
attributable to LBHI Affiliate Entities.7630 Even if LBI did not have authorization from
LBHI Affiliates to transfer securities held for their account, however, the securities
intermediary and protected purchaser rules of Article 8 of the Uniform Commercial
Code (the UCC), as well as the safe harbor provisions of the Bankruptcy Code,
precludeclaimsbyLBHIAffiliatesagainstBarclaysarisingfromtransfersofsecurities
unlessBarclayshadactualorconstructivenoticethatthetransferswereunauthorized,
orBarclaysengagedinfraud,collusiveconductorotherwisedidnotactingoodfaithin
connectionwiththesale.Becausethosemattersarethesubjectoflitigationbeforethis
Court,theExaminerhasnotreachedanyconclusionswithrespecttosuchissues.
The LBHI Affiliates may use the Bankruptcy Code to compel Barclays to turn
overtotheirestatesanypropertyinwhichtheyhaveaninterest,potentiallyincluding
LBHI Affiliate securities. Section 542 of the Bankruptcy Code provides that a debtor
maycompeltheturnoverofanypropertythatadebtorispermittedtouse,sellorlease
under Section 363 of the Bankruptcy Code.7631 Section 363, in turn, provides that a
debtormayusepropertyoftheestate.

7630AsexplainedaboveinSectionIII.c.3.a.2.d,thereisarelativelysmallnumberofsecurities(consisting

of817CUSIPs)thatweretransferredtoBarclays,forwhichtheExaminerwasunabletoobtainsufficient
informationtomakeadefinitivedeterminationregardingownership.
763111 U.S.C. 542(a) (2006). Although these sections by their express terms refer to a trustee, section
1107(a)oftheBankruptcyCodemakesthemapplicabletoadebtorinaChapter11case.Consequently,
thisSectionrefersinterchangeablytoadebtorandatrustee.

2065

Section 541 of the Bankruptcy Code defines property of the estate broadly to
encompass all legal or equitable interests of the debtor in property as of the
commencement of the case.7632 In the absence of controlling federal law, property
and interests in property are creatures of state law.7633 In enacting the Bankruptcy
Code, Congress generally left the determination of property rights in the assets of a
bankruptsestatetostatelaw.7634
New York whose laws apply to the transactions at issue7635 has enacted
Revised Article 8 of the Uniform Commercial Code, which sets forth rules governing,
among other things, property rights and obligations of parties in connection with
securities and securities entitlements.7636 The LBHI Affiliates rights to securities
maintained at LBI are governed by Article 8 of the Uniform Commercial Code as
adoptedbyNewYork.

763211U.S.C.363(b),541(a)(2006).
7633Barnhillv.Johnson,503U.S.393,398(1992).
7634Butnerv.UnitedStates,440U.S.48,54(1979).
7635Under NY U.C.C. 8110 (2001), New York law is likely to govern an action by LBHI Affiliates in

connectionwithLBIstransfersoftheaffiliatessecurities,ifany,toBarclays.Id.NYU.C.C.8110(b)(4)
states that [t]he local law of the securities intermediarys jurisdiction governs whether an adverse
claim can be asserted against a person who acquires a security entitlement from the securities
intermediary Id. NY U.C.C. 8110(e)(5) defines securities intermediarys jurisdiction to include
the jurisdiction in which the chief executive office of the securities intermediary is located. Id. Here,
LBIwasheadquarteredinNewYork.
7636See S.E.C. v. Credit Bancorp, Ltd., 386 F.3d 438, 447 (2d Cir. 2004). All states have adopted Revised
Article8 of the Uniform Commercial Code, the Official Text of which was promulgated in 1994 by the
NationalCommissionersofUniformStateLawsandtheAmericanLawInstitute.NewYorkadoptedthe
OfficialTextofRevisedArticle8onOctober10,1997.RevisedArticle8recognizestheindirectholding
system for securities and provides rules governing entitlements held and transferred by securities
intermediarieswhicharethesubjectofthissectionoftheExaminersReport.

2066

UCC8503governstransfersmadebysecuritiesintermediariesoffinancial
assets, in which entitlement holders have property interests. Here, LBI was a
securities intermediary that held LBHI Affiliates securities.7637 The LBHI Affiliates
were entitlement holders7638 that held security entitlements7639 to their securities
throughLBIactingastheirsecuritiesintermediary.
The concept of security entitlement under Article 8 is not the same as the
commonlawconceptofpropertyownership:theincidentsofthispropertyinterestare
established by the rules of Article 8, not by common law property concepts it is a
package of rights and interests that a person has against the persons securities
intermediary and the property held by the intermediary.7640 Article8 substantially
limits the rights of entitlement holders, such as the LBHI Affiliates, to recover from
third parties losses resulting fromwrongfultransfersoftheirsecuritiesby asecurities
intermediary. An entitlement holder cannot assert rights directly against other
persons, such as third parties to whom the intermediary may have wrongfully
transferredinterests,exceptinextremelyunusualcircumstanceswherethethirdparty

7637U.C.C.

8102(a)(14) (1994) (defining securities intermediary to include a broker that in the

ordinarycourseofitsbusinessmaintainssecuritiesaccountsforothers).
7638U.C.C.8102(a)(7)(1994)(defininganentitlementholderasapersonidentifiedintherecordsofa
securitiesintermediaryasthepersonhavingasecurityentitlementagainstthesecuritiesintermediary).
7639U.C.C. 8102(a) (1994) (defining a security entitlement as the rights and property interest of an
entitlementholderwithrespecttoafinancialassetheldbyasecuritiesintermediary).
7640U.C.C.8503cmt.2(1994).

2067

wasitselfaparticipantinthewrongdoing.7641Thisbroadprotectionofpurchasersthat
acquire securities from securities intermediaries reflects the general policy of the
commerciallawofthesecuritiesholdingandtransfersystemstoeliminatelegalrules
that might induce purchasers to conduct investigations of the authority of persons
transferring securities on behalf of others for fear that they might be held liable for
participatinginawrongfultransfer.7642
UCC 8503(d) provides that an entitlement holders property interest with
respectto financialassets held by asecuritiesintermediarymaybeenforced against a
purchaser of the financial assets only if: (1) the securities intermediary is insolvent,
(2)it cannot satisfy the security entitlements of all of its entitlement holders to the
financial asset, (3)it wrongfully transferred the financial assets to the purchaser and
(4)the purchaser is not protected under subsection 8503(e). UCC 8503(e) in turn,
provides that an entitlement holder cannot assert any common law claims, including
conversion, replevin, constructive trust or equitable lien, against the purchaser of the
financial assets which were held by the securities intermediary, as long as the
purchaser:(1)givesvalue,(2)obtainscontroland(3)doesnotactincollusionwiththe

7641Id.
7642U.C.C.8503cmt.3(1994);EgonGuttman,ModernSecuritiesTransfers11A3;11A4(Thompson

2009).

2068

securities intermediary in violating the securities intermediarys obligations to the

entitlementholder.7643
Similarly, the protected purchaser provisions of UCC 8303 provide that a
purchaserofacertificatedor uncertificatedsecurity,orofaninterest therein, acquires
its interest in the security free of any adverse claim if the purchaser: (1)gives value,
(2)doesnothavenoticeofanyadverseclaimtothesecurityand(3)obtainscontrolof
thecertificatedoruncertificatedsecurity.7644Apersongivesvalueforrightsifheor
she acquires them in return for any consideration sufficient to support a simple
contract.7645
With respect to obtaining control, [t]he key to the control concept is that the
purchaser has the present ability to have the securities sold or transferred without
furtheractionbythetransferor.7646Ifacertificatedsecurityisinbearerform,controlis
obtained by delivery to the purchaser. Where certificated securities are in registered
form,theremustbebothdeliveryandeitheraneffectiveendorsementorregistrationof
thetransferbytheissuer.7647Apurchaserhascontrolofanuncertificatedsecurityif
eithertheuncertificatedsecurityisdeliveredtothepurchaser,ortheissuerhasagreed

7643U.C.C.8503(e)(1994).
7644U.C.C.8303(1994).
7645U.C.C.1201(44)(d)(1994).
764617WillistononContracts51:57(4thed.2004).
7647U.C.C.8106(b)(1994).

2069

that it will comply with instructions originated by the purchaser without further
consentbytheregisteredowner.7648
UnderUCC8105(a),apersonhasanoticeofanadverseclaimiftheperson:
(1)hasactualknowledgeoftheadverseclaim,(2)isawareoffactssufficienttoindicate
that there is a significant probability that the adverse claim exists and deliberately
avoidsinformationthatwouldestablishtheexistenceoftheadverseclaimor(3)hasa
duty,imposedbystatuteorregulation,toinvestigatewhetheranadverseclaimexists,
andtheinvestigationsorequiredwouldestablishtheexistenceoftheadverseclaim.7649
UCC 8105 cmt. 6 explains that, [k]nowledge of the existence of the representative
relation is not enough in itself to constitute notice of an adverse claim that would
disqualify the purchaser from protected purchaser status. A purchaser may take a
securityontheinferencethattherepresentativeisactingproperly.7650
The UCC 8303 protected purchaser rule applies only to directly held
securities.7651Purchasersofsecuritiesentitlementsfromsecuritiesintermediariesbenefit
fromtheprotectionsassetforthinPart5ofArticle8oftheUCC.

7648U.C.C.8106(c)(1994);17WillistononContracts51:57(4thed.2004).
7649SeealsoEgonGuttman,ModernSecuritiesTransfers11A3(Thompson2009).
7650Barclays

would be deemed to have had a notice of an adverse claim if the security certificate:
(1)whetherinbearerorregisteredform,hasbeenindorsedforcollectionorforsurrenderorforsome
otherpurposenotinvolvingtransfer,or(2)isinbearerformandhasonitanunambiguousstatementthat
itisthepropertyofapersonotherthanthetransferor,butthemerewritingofanameonthecertificateis
notsuchastatement.17WillistononContracts51:57(4thed.2004).
765117WillistononContracts51:58(4thed.2004).

2070

Here, under both the securities intermediary rule of UCC 8503 and the
protectedpurchaserruleofUCC8303,BarclaysgavevaluefortheLBHIAffiliates
securities,ifany,andobtainedcontrolofthem.7652Barclaysalsogavevaluebecause
itacquiredanyLBHIAffiliatessecuritiesinreturnforanyconsiderationsufficientto
support a simple contract.7653 Finally, Barclays obtained control of those securities
when it took delivery of them, registered them in its name, settled the entries on the
booksofitsclearingcorporation,orbyothermeans.7654
The Examiner has not found material evidence that, prior to any transfers,
Barclayshadeitheractualorconstructivenoticeofanyadverseclaimstothesecurities,
or of collusion or other improper conduct specifically directed at violating LBI
obligationstoanLBHIAffiliatewithrespecttosecuritiesheldbyLBIinwhichanLBHI
Affiliatemayhavehadsomeinterestorclaim.Therefore,theExaminerconcludesthat
even if any securities were transferred to Barclays in which an LBHI Affiliate held an
interest and LBI lacked authoritytomake thetransfer, in theabsenceofa showing of
fraud or collusion on the part ofBarclays,orBarclaysactualorconstructivenotice of
the LBHI Affiliates adverse claims, Article8 of the UCC protects Barclays against
commonlawclaimstothosesecuritiesthattheLBHIAffiliatesmightassert.

7652TheExaminerfoundnoevidencethatBarclaysdidnotobtaincontrolofthesecuritiestransferredtoit

byLBIbyoneofthemethodscontemplatedbyU.C.C.8106(1994).
7653U.C.C.1204(d)(1994).
7654U.C.C.8301cmt.3(1994).

2071

BecauseArticle8oftheUCCpreventsLBHIAffiliatesfromassertinganinterest
or adverse claim under state law against LBHI Affiliate securities transferred to
Barclays,anysuchsecurities,aftertheirtransfertoBarclayspursuanttotheAPA,likely
were not property of the LBHI Affiliates estates under Section 541 of the Bankruptcy
Code at the time the LBHI Affiliates commenced their respective bankruptcy cases.
Therefore,suchsecurities(ifany) could not be recoveredfromBarclays under Section
542oftheBankruptcyCode.
The Examiner also concludes that, absent fraud or bad faith, any transfers of
LBHI Affiliate securities also may not be avoided under applicable Bankruptcy Code
avoidance provisions. By the weight of current judicial authority, in the absence of a
showingofactualfraudonthepartofLBI,LBIssecuritiestransferstoBarclayswould
beprotectedfromavoidanceunderSection544(transfersavoidablebydebtorstanding
in the shoes of certain hypothetical or actual creditors), Section 545 (avoidance of
statutory liens), Section 547 (preferences) and Section 548 (fraudulent transfers) of the
BankruptcyCode.
TheBankruptcyCodessafeharborprovision,Section546(e)(asamendedbythe
FinancialNettingImprovementsActof2006),provides:
[T]hetrusteemaynotavoidatransferthatisamarginpaymentorsettlement
payment made by or to (or for the benefit of) a commodity broker, forward
contract merchant, stockbroker, financial institution, financial participant, or
securitiesclearingagency,orthatisatransfermadebyorto(orforthebenefitof)
a commodity broker, forward contract merchant, stockbroker, financial
institution,financialparticipant,orsecuritiesclearingagency,inconnectionwith
2072

asecuritiescontractcommoditycontractorforwardcontract,thatismade
before the commencement of the case, except under Section 548(a)(1)(A) of this
title.

Section 548(a)(1)(A) allows a debtor to avoid only those transfers of the debtors
propertythatweremadebythedebtorwithactualintenttohinder,delay,ordefraud.
Fraudulentintentreferstotheintentofthedebtortransferor(LBI),nottheintentofthe
transferee(Barclays).7655
The legislative history of the safe harbor provisions indicates that Congress
soughttoreducethesystematicriskinthefinancialmarketplaceandpreventaripple
effect in which the insolvency of one financial firm triggers failures elsewhere in the
market.7656 Many courts have interpreted the safe harbor provisions expansively,
emphasizingthatthephraseinconnectionwithhasabroadmeaning.7657Courtshave
also construed the term settlement payments broadly,7658 extending the safe harbor
protectionstopurelyprivatesecuritiestransactions,suchasLBOs7659

7655SeeRubinBros.Footwear,Inc.v.Chem.Bank(InreRubinBros.Footwear,Inc.),119B.R.416,423(S.D.N.Y.

1990)(Forthepurposesof11U.S.C.548(a)(1),plaintiffmustshowfraudulentintentonthepartofthe
transferor,ratherthanonthepartofthetransferee.(citationomitted)).
7656H.R.Rep.No.97420(1982);U.S.CodeCong.&Admin.News(1982).
7657SeeInterbulk,Ltd.v.LouisDreyfusCorp.,240B.R.195,202(Bankr.S.D.N.Y.1999)(inconnectionwith
issimilartorelatedto);InreCasadeCambioMajapara,390B.R.595(Bankr.N.D.Ill.2008)(prejudgment
attachments obtained in state court actions as a result of debtors breach of swap agreements were
transfersmadeinconnectionwithswapagreements).
7658 The Bankruptcy Court for the Southern District of New York recently ruled that, in determining
whether a transfer constituted a settlement payment entitled to safe harbor protection, courts should
consider,amongotherthings,whetherthetransactionshavelongsettledbymeansofactualtransfersof
consideration,sothatsubsequentreversalofthetrademayresultindisruptioninthesecuritiesindustry;
whether consideration was paid out in exchange for the securities or property interest as part of
settlementofthetransaction;andwhetherthetransfersweremadetofinancialintermediariesinvolvedin
thenationalclearanceandsettlementsystems.Alfa,S.A.B.deC.V.v.EnronCreditorsRecoveryCorp.(Inre

2073

The Financial Netting Improvements Act of 2006 (FNIA) substantially

broadened the safe harbor protections by extending them not only to settlement and
margin payments, but also to transfers made by or to (or for the benefit of) a
commodity broker, forward contract merchant, stockbroker, financial institution,
financial participant, or securities clearing agency, in connection with a securities
contract commodity contract or forward contract.7660 Consequently, absent a
showingthatLBImadethesecuritiestransferstoBarclayswithactualintenttohinder,
delay, or defraud the LBHI Affiliates or other creditors, the Bankruptcy Codes safe
harborprovisionslikelyprotectBarclaysfromavoidanceclaimsthatmightbeasserted
bytheLBHIAffiliatesestates.7661
Even if LBI made the transfers with actual fraudulent intent, however, Section
548(c) still may provide a limited defense to Barclays against any avoidance claims.
UnderSection548(c),atransfereethattakesforvalueandingoodfaithhasalienor
may retain an interest transferred (or enforce an obligation incurred) to the extent it

EnronCreditorsRecoveryCorp.),BankruptcyNo.0116034(AJG)2009WL5174119at*16(S.D.N.Y.Nov.20,
2009) (transactions in which notes were redeemed by debtor prior to maturity, using the customary
mechanism of the Depository Trust Company for trading in commercial paper, constituted settlement
payments).
7659InreQSIHoldingsInc.,571F.3d545(6thCir.2009);ContemporaryIndus.Corp.v.Frost,564F.3d981(8th
Cir.2009);InreResortsIntl,Inc.,181F.3d505(3dCir.1999);InreKaiserSteelCorp.,952F.2d1230(10thCir.
1991);KaiserSteelCorp.v.CharlesSchwab&Co.,Inc.,913F.2d846(10thCir.1990).
766011U.S.C.546(e).
7661ForamoredetaileddiscussionseeSectionD.2ofAppendix1.

2074

gavevaluetothedebtorinexchangeforsuchtransferorobligation.7662TheBankruptcy
Code does not define good faith as used in Section 548(c). Nonetheless, federal
courts have reached a consensus that good faith as used in Section 548(c) must be
determined according to an objective or reasonable person standard, and does not
turn on the subjective knowledge or belief of the transferee.7663 Consequently, a
transfereecannotbefoundtohavetakenatransferingoodfaithifthecircumstances
would place a reasonable person on inquiry of a debtors fraudulent purpose, and a
diligentinquirywouldhavediscoveredthefraudulentpurpose.7664
Solongasthesecuritiestransferswerenotmadewiththeactualintenttohinder,
delay, or defraud LBHI Affiliates or other creditors, or Barclays acted in good faith
(issuesastowhichtheExaminerreachesnoconclusionsinlightoftheongoingBarclays
litigation), the safe harbor provisions of the Bankruptcy Code likely would protect
Barclaysfromanavoidanceactionorclaimarisingfromtransfers,ifany,toBarclaysof
securitiesinwhichanLBHIAffiliatemayhaveheldaninterest.7665

7662 See 11 U.S.C. 548(c); see also In re Adler, Coleman Clearing Corp., 263 B.R. 406, 471 (Bankr. S.D.N.Y.

2001)(Asathresholdmatter,byitsveryterms548(c)providesthat,inordertoinvokethisdefense,the
transferee must satisfy three standards: take (1) for value and (2) in good faith, and (3) claim the
applicablerighttotheinterestonlytotheextentthetransfereegavevaluetothedebtorinexchange).
7663InreBayouGroup,LLC,etal.,396B.R.810,844(Bankr.S.D.N.Y.2008)(citationsomitted).
7664Id.at845.
7665Inaddition,caseshaveheldthatstatelawcausesofactionbaseduponthesameunderlyingfactsas
thefederalbankruptcycausesofactionarepreemptedbyfederallaw.SeeContemporaryIndus.,564F.3d
at 988 (state law claims for unjust enrichment and illegal and/or excessive shareholder distributions
preempted by Section 546(e)); Official Comm. Unsecured Creditors of Hechinger Inv. Co. v. Fleet Retail Fin.
Group (In re Hechinger Inv. Co.), 274 B.R. 71, 96 (D. Del. 2002) (unjust enrichment claim preempted by

2075

Asnotedabove,whetherfraudulentorimproperconductoccurredinconnection
withthesaleofLBIsbusinesstoBarclaysisthesubjectofongoinglitigation,including
extensive fact and expert discovery. The Examiner is not reaching conclusions in this
Reportpertainingtothemattersthatarethesubjectofthatlitigation.TheExaminers
findingsherearelimitedsolelytowhetheradditionalclaims,independentoftheclaims
thatarethesubjectoftheBarclayssalelitigation,maybeassertedagainstBarclaysfor
thetransferofLBHIAffiliatesecuritiestoBarclays.
(2) ThereAreColorable,LimitedClaimsAgainstBarclaysArising
fromTransferofLBHIAffiliateOfficeEquipmentandLBCS
CustomerInformation
The Examiner concludes that the transfer to Barclays of LBHI Affiliate Assets
givesrisetocolorableclaimsagainstBarclays.However,inthecontextoftheDebtors
cases,thetransferredassetsmaynotbeofmaterialvaluetotheDebtorsestates,andthe
costsofpursuingrecoveryofthoseassetsmayevenexceedtheirvalue.
The Examiner notes that whether fraud or improper conduct occurred in
connectionwiththesaleofLBIsassetstoBarclaysisthesubjectofongoinglitigation.
Except for the facts reported in Section III.C.6 of the Report, the Examiner is not
addressingfactsorreachingconclusionsinthisReportpertainingtothemattersthatare
the subject of that litigation. Thus, the Examiners findings here are limited solely to
whetheradditionalclaims,independentoftheclaimsthatarethesubjectoftheBarclays

section546(e)).Thus,thesafeharborprovisionsalsomaypreemptatrusteeordebtorfromproceeding
onalternativestatelawtheoriestorecoveronaccountofotherwiseunavoidabletransfers.

2076

salelitigation,maybeassertedagainstBarclaysforthetransferofLBHIAffiliateAssets
toBarclays.
(a) BankruptcyCodeClaims
(i) Section542
ColorableclaimsagainstBarclaysexistunderSection542oftheBankruptcyCode
arising from the transfers of LBHI Affiliate Assets to Barclays in connection with the
saletransaction.
Section 542(a) provides that an entity, other than a custodian, in possession,
custody, or control, during the case, of property of the estate shall deliver to the
trustee, and account for, such property or the value of such property, unless such
property is of inconsequential value or benefit to the estate.7666 Section 541 of the
Bankruptcy Code, in turn, provides that the debtors estate consists of all legal and
equitable interests of the debtor in property as of the commencement of the debtors
[bankruptcy]case.7667Evenpropertytransferredbythedebtortoathirdpartymaybe
subjecttoSection542smandatoryturnoverprovisions,ifthedebtorretainsitsinterest
in the property.7668 Thus, under this framework, if a debtors assets were stolen or
otherwise improperlytransferred withoutthe debtorsauthorization, the debtorcould

766611U.S.C.542(a)(2006).
766711U.S.C.541(a)(2006).
7668See, e.g., U.S. v. Whiting Pools, 462 U.S. 198, 206 (1983) (While there are explicit limitations on the

reach of 542(a), none requires that the debtor hold a possessory interest in the property at the
commencementofthe[bankruptcycase].);InrePyatt,486F.3d423(8thCir.2007)(debtorspostpetition
transfer of funds recoverable pursuant to 542); In re U.S.A. Diversified Prods., Inc., 193 B.R. 868 (Bankr
N.D.Ind.1995)(trusteemayrecoverdebtorsprepetitiontransferoffundstotrustaccount).

2077

compelthereturnofthepropertypursuanttoSection542asthedebtorwouldretaina
nonpossessoryinterestintheproperty.7669InWhitingPools,theSecondCircuitheldthat
even if Section 542 were narrowly construed, it would, at a minimum, authorize the
debtor to recover property from persons in wrongful possession following theft or
conversion.7670
AsindicatedaboveinSectionsIII.C.3.bandIII.C.3.c,theExaminerconcludesthat
(1)LBHI Affiliate Office Equipment owned by LBCS, LCPI and LBSF; and (2)LBCS
Customer Information, were transferred to Barclays as part of the sale. As was made
clearintheSaleOrderandatthesalehearing,theBankruptcyCourtdidnotauthorize
thetransfertoBarclaysofanyassetsownedbyLBHIAffiliates,andBarclaysspecifically
disclaimed any expectation that it would receive such assets. Because the assets are
propertyofLBCS,LBSFandLCPI,thoseestateshavecolorableclaimsunderSection542
torecovertheassets,ortheirvalue.7671
In response to such a claim, Barclays might argue, among other things, that a
claimdoesnot existunderSection 542becausetheassetsweretransferredto Barclays
beforetheLBHIAffiliatesrespectivepetitiondates,andthatthereforetheassetsdonot
constitute property of the estate. That argument, however, may not preclude a
Section542claimwithrespecttothoseassets.TheassetswereownedbyLBCS,LBSF

7669UnitedStatesv.WhitingPools,Inc.,674F.2d144(2dCir.1982),affdby462U.S.198(1983).
7670Id.at155;seealsoInreVogt,245B.R.53(Bankr.E.D.Va.2000).
767111 U.S.C. 542(a) (2006); United States v. Whiting Pools, Inc., 462 U.S. 198, 207 (1983); Braunstein v.

McCabe,571F.3d108,116(1stCir.2009).

2078

andLCPIatthetimeofthesaletransaction.Thetransfersofthoseassetswereneither
authorizedbytheownersoftheassets(LBCS,LBSFandLCPI)norbytheCourtsSale
Order, and Barclays asserted that it would not be buying any LBHI Affiliate assets.
LBCS,LBSFandLCPIthuslikelymaintainedinterestsintheLBHIAffiliateAssetsatthe
timetheyfiledtheirrespectiveChapter11petitions,andthoseassetsremainpropertyof
theirbankruptcyestates.7672
With respect to the LBCS Customer Information, it is possible that any
protectable property rights were lost in connection with consummation of the sale
transaction.LBCSmayhavewaivedthesecrecynecessarytopossesslegallyprotectable
rights in the LBCS Customer Information when that information was transferred to
Barclayswithoutanyconfidentialityrestrictions.Becauseoneoftheelementsrequired
for the legal protection of a competitively valuable trade secret or customerrelated
asset is that the holder take reasonable steps to maintain its secrecy,7673 the Second
Circuithasheldthatwhenabusinesssellsmostofitsassetstoacompetitor,evenwhen
itdoesnotintendtoincludeotherwiseprotectablecustomerlistsinthesale,thefailure
to take adequate measures to remove the lists from assets that are transferred
constitutes legal abandonment of the trade secret.7674 Because Lehman and its
employeesmadenoefforttoextractorsegregatetheLBCSCustomerInformationfrom

767211 U.S.C. 542(a) (2006) (property of the estate includes property that the trustee may use, sell or

leaseunderSection363).
7673DefianceButtonMach.Co.v.C&CMetalProds.Corp.,759F.2d1053,1063(2dCir.1985).
7674Id.at106364.

2079

theotherassetstransferredtoBarclays,7675thesecrecyofthisintangiblecouldhavebeen
lost,thusstrippingitoflegallyprotectablepropertyrights.
Nonetheless, the terms of the Transition Services Agreement (TSA) likely
preservedthesecrecyoftheLBCS CustomerInformationand otherproprietary assets
transferredinthesaletransaction.TheTSAspecificallyprovidedfortheTreatmentof
ConfidentialInformationthatmighthavebeenexchangedinthecourseofthesale.7676
Pursuanttothisagreement,thepartieswereobligatedtokeepconfidentialanysecretor
proprietaryinformationoftheotherpartytowhichtheyobtainedaccess,7677thoughthe
TSAdidnotpurporttotransferrightstothisinformationorspecifytheinformationto
whichitapplied.TheLBCSCustomerInformationlikelyretaineditsprotectedstatus,
therefore,becausethe partiestook reasonablestepstomaintainits secrecydespitethe
transfertoBarclays.7678
In any event, the Examiner concludes that this asset has little value. As
discussed above, most of the customer information that LBCS possessed related to
customersthatwerewellknownintheindustryandeasilyidentifiable.7679Inaddition,
Barclays had a more established and robust commodities business than LBCS, which

7675ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon

andJeffreyDonaldson,Jan.22,2010.
7676Transition Services Agreement between Lehman Brothers Holdings Inc. and Barclays Capital Inc.
(Sept.22,2008),atp.17.
7677Id.
7678Cf.Defiance,759F.2dat106364(notingthatabusinessfailedtoprotectitsrightswhenittooknosteps
toprotectsecrecyofconfidentialinformationinconnectionwithatransferofassets).
7679ExaminersInterviewofJoeGold,Jan.15,2010;ExaminersInterviewofSatuS.Parikh,Jan4,2010.

2080

was still building its business at the time of the bankruptcy, and as a result already
independentlyknewmuchoftheinformationthatmayhavebeenincludedintheLBCS
CustomerInformation.7680
AlimitednumberofLBCScustomerswereunknowntothepublicandBarclays,
andtheidentityandhistoricaltradinginformationforsuchcustomerswouldhavehad
somevalue.However,withoutLBIandLBHIscreditandothersupport,nonewould
have maintained their relationships with LBCS. Any value in the LBCS Customer
Information would have dissipated almostimmediately following LBHIs bankruptcy,
as customers terminated safeharbored derivatives transactions, and sought new
trading counterparties and shared their trading information with them. Thus, to the
extentLBCShadaprotectableinterestintheLBCSCustomerInformation,theExaminer
concludesthatthevalueofthisassetwouldhavebeenminimalbySeptember19,2009.
(ii) Section548
IfacourtweretofindthatanyoftheLBHIAffiliateAssetswerenotpropertyof
thebankruptcyestatesoftheLBHIAffiliatesatthetimeofthecommencementoftheir
respective bankruptcy cases a finding that could preclude a Section 542 claim
colorable claims might still exist for the benefit of the LBCS, LBSF and LCPIs estates
againstBarclaysunderSection548oftheBankruptcyCode.

7680ExaminersInterviewofJoeGold,Jan.15,2010.

2081

Section548permitsadebtortoavoidanytransfermadewithintwoyearsofthe
bankruptcy filing that is actually or constructively fraudulent.7681 A transfer is
constructivelyfraudulentifthedebtorreceivedlessthanreasonablyequivalentvalueor
fair consideration for the transfer or obligation, and, inter alia, (1)the debtor was
insolventorrenderedinsolventasaresultofthetransferorobligationor(2)thedebtor
wasundercapitalized.7682
Here, the Examiner concludes that there is credible evidence sufficient to
establishthattheLBHIAffiliatesdidnotreceiveanythinginexchangeforthetransferof
anyoftheirassetstoBarclaysinconnectionwiththesaletransaction,andthereforethey
receivedlessthanreasonablyequivalentvalueorfairconsiderationforthetransferor
obligation.Therealso is credibleevidenceto supportafinding that LCPI, LBSF and
LBCS were insolvent as of September 22, 2008, the date on which their assets were
transferred to Barclays.7683 Barclays might argue that the LBHI Affiliates received
indirect benefits from the sale transaction to establish the receipt of reasonably
equivalent value, and also might contest insolvency. A trier of fact would need to
resolvetheseconflicts.

768111U.S.C.548(a)(1)(2006).
768211U.S.C.548(a)(1)(B)(2006).Foramoredetaileddiscussionofthelawapplicabletoconstructively

fraudulenttransfers,seeAppendix1.
7683Inparticular,asofSeptember22,2008,counterpartieshadclosedoutasmanyoftheirpositionswith
these entities at prices that were very unfavorable to LCPI, LBSF and LBCS. For a discussion of the
counterpartyterminationsandtheireffectonLBHIAffiliatesbusinesses,seeSectionIII.C.6.b.2.

2082

The Examiner concludes that, in the event a court were to determine that the
LBHIAffiliateAssetstransferredtoBarclayswerenolongerpropertyoftheirestatesat
the time of the commencement of their bankruptcy cases, the LCPI, LBSF and LBCS
estatesnonethelessmayassertclaimsunderSection548oftheBankruptcyCodeforthe
transfer of the LBHI Affiliate Assets to Barclays. As explained above, however, the
Examiner concludes that the value of such assets is limited, and that the cost of
pursuinganyclaimsmayexceedthevalueofthetransferredassets.7684
(b) CommonLawClaims
TheExamineralsoevaluatedwhethercolorableclaimsagainstBarclaysexistfor
recovery of chattel, conversion, unjust enrichment, misappropriation of trade secrets,
unfair competition or tortious interference with employment relations in connection
withthetransferoftheLBHIAffiliateAssetstoBarclays.TheExaminerconcludesthat
theevidencedoesnotsupporttheexistenceofacolorableclaimonanyofthesegrounds
withrespecttothetransferofthoseassetstoBarclays.
(i) RecoveryofChattel
The Examiner evaluated whether the LBHI Affiliates have a colorable claim
againstBarclaysforrecoveryofchatteltransferredtoBarclays.7685Anactiontorecover
chattelprovidesaplaintiffwiththerighttoseekpossessionofchattelonthebasisofthe

7684SeeSectionIII.C.5.b.2.
7685Forafurtherdiscussionoftheapplicablelaw,seeAppendix1.

2083

plaintiffssuperiorrightofpossessiontoit.7686Evenifacourtfindsthatthedefendants
originalassertionofpossessionofthechattelwaslawful,iftheplaintiffhassuperior
right of possession, the plaintiff is entitled to recovery. The plaintiff must demand
return of the chattel, and the defendant must refuse the demand, in order for the
plaintifftosustainanactiontorecoverchattel.7687Thereisanexceptiontothisdemand
requirementwhendemandwouldbefutileoruseless.
Here, Barclays obtained the LBHI Affiliate Assets in the wholesale transfer of
LBHIandLBIassetsthatoccurredfollowingtheclosingofthesaletransaction.Though
Barclays was entitled only to LBHI, LBI and LB745 assets under the terms of the sale
documents,certainassetsoftheLBHIAffiliatesweresointermingledwithLBHIsand
LBIs property that it would have been exceedingly difficult to identify and segregate
them in the short time before the sale closing. When the sale was consummated,
LehmandeliveredtoBarclaysinbulkallofthefacilities,communicationsandcomputer
equipmentandfurnitureintheLehmanheadquartersbuildingandtheotherproperties

7686See N.Y. C.P.L.R. 7101 (McKinney 2009) (An action under this article may be brought to try the

rightofpossessionofachattel.);seealsoByrneCompressedAirEquip.Co.v.Sperdini,506N.Y.S.2d593,594
(App.Div.1986).
7687SeeN.Y.CityTransitAuth.v.N.Y.HistoricalSocy,635N.Y.S.2d998,1001(Sup.Ct.1995)(Ademandis
only a substantive requirement of a cause of action to recover chattels where one in possession of the
chattels acquired such possession lawfully or where . . . the initial possession of the chattels is not
considered wrongful (citations omitted)); Borneo Sumatra Trading Co. v. Sec. Door & Panel Corp., 183
N.Y.S.2d137,138(Sup.Ct.1959).

2084

ithadpurchased,andneitherLBHInortheLBHIAffiliatesmadeanyefforttosegregate
orretaintheLBCSCustomerInformationortheLBHIAffiliateOfficeEquipment.7688
Further, there is evidence that would support a finding that, at the time of the
consummationoftheBarclayssale,LehmanandBarclayspersonnelbelievedthatallof
thepropertyBarclayswasacquiringactuallybelongedtoLBHIandLBI,andwasbeing
transferredpursuanttothetermsofthesale.Inthedaysprecedingtheconsummation
of the sale, Barclays interviewed LBI employees who had performed work solely for
LBCS. Those employees had been designated by Lehman for transfer to Barclays.
Thus,BarclayswasleftbyLehmanwiththeimpressionthatthoseemployeesweretobe
transferred to Barclays in connection with the sale.7689 Some of those employees
possessedLBCSCustomerInformation, andsharedit with Barclaysduringthe course
of their employment interviews. As a result, although Barclays received customer
informationtowhichitmaynothavebeenentitledunderthesaledocuments,Barclays
conductinthisrespectwasnotwrongfulorunlawful.7690
Because there is evidence to suggest a finding that Barclays possession of the
LBHIAffiliateassetswasnotwrongfulorunlawful,inordertorecoverchattelthatwas
improperlytransferredtoBarclays,theLBHIAffiliateswouldneedtomakeademand

7688ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon

andJeffreyDonaldson,Jan.22,2010.
7689See, e.g., email from Satu S. Parikh, Lehman, to Joe Gold, Barclays (Sept.19, 2008) [LBEXDOCID
3456032];ExaminersInterviewofJoeGold,Jan.15,2010.
7690N.Y.CityTransitAuth.,635N.Y.S.2dat1001.

2085

foritsreturn.ThoughtheDebtorshaveevaluatedclaimstheymighthavetoproperty
that was transferred to Barclays,7691 the Examiner has uncovered no evidence that the
LBHIAffiliateshaverequestedordemanded,todate,thatBarclaysactuallyreturnthe
LBHIAffiliateassetsaddressedhere.Thefactsthusdonotsupporttheexistenceofa
colorableclaimagainstBarclaystorecoverchattel,unlesstheLBHIAffiliatesdetermine
toseekrecoveryoftheLBHIAffiliateassets.
(ii) Conversion
TheExaminerevaluated whethertheLBHIAffiliateshaveacolorableclaim for
conversionagainstBarclays.Conversionistheunauthorizedassumptionandexercise
of the right of ownership over goods belonging to another to the exclusion of the
ownersrights.7692Thedefendantmustcommitsomeaffirmativeactofownershipover
thepropertywithouttherighttodoso,7693andthedefendantsaction(orrefusaltoact)
must interfere with the plaintiffs rights of ownership (such as possession, control, or
dominion)overitsproperty.7694Although,asageneralrule,aplaintiffneednotdemand

7691ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon

andJeffreyDonaldson,Jan.22,2010.
7692VigilantIns.Co.ofAm.v.Hous.Auth.ofElPaso,660N.E.2d1121,1126(N.Y.1997);seealsoHoffmanv.
Unterberg,780N.Y.S.2d617,619(App.Div.2004),abrogatedonothergroundsbyTzolisv.Wolff,885N.Y.S.2d
6 (App. Div. 2008). See Appendix1, Section V.N to the Report, which discusses the law applicable to
conversionclaimsingreaterdetail.
7693SeeN.Y.CityTransitAuth.,635N.Y.S.2dat1001;NewYorkv.SeventhRegimentFund,Inc.,774N.E.2d
702,711(N.Y.2002);seeColavitov.N.Y.OrganDonorNetwork,Inc.,860N.E.2d713,717(N.Y.2006).
7694See Colavito, 860 N.E.2d at 717; Galtieri v. Kramer, 648 N.Y.S.2d 144, 145 (App. Div. 1996); Thyroffv.
NationwideMut.Ins.Co.,460F.3d400,404(2dCir.2006).

2086

thereturnofthepropertyfromthedefendanttoprevailinanactionforconversion,7695
where the defendants original possession was lawful, the plaintiff must first demand
thereturnofpropertyfromthedefendant.7696
Asdiscussedabove,itisunlikelythatBarclayspossessionoftheLBHIAffiliate
assets would qualify as unlawful. At the time of the consummation of the sale
transaction,LehmantransferredassetstoBarclaysinbulkformanddidnotmakeany
effort to segregate the LBCS Customer Information or the LBHI Affiliate Office
Equipment assets from the LBHI and LBI assets that were being transferred in
connection with the sale transaction.7697 There is sufficient evidence to establish that
Barclays believed that the assets it received in connection with the sale were those of
LBHI and LBI, to which Barclays was entitled under the terms of the sale documents,
and that Barclays did not target any assets of LBHI Affiliates.7698 If, as the evidence
indicates,BarclayspossessionofanyLBHIAffiliatesassetswaslawful,thentheLBHI
Affiliateswouldneedtomakeademandforthereturnoftheirassetsbeforetheycould
stateaclaimforconversion.NoevidencewaspresentedtotheExaminerthattheyhave
donesotodate.

7695SeeN.Y.CityTransitAuth,635N.Y.S.2dat1001;seealsoDAmicov.FirstUnionBank,728N.Y.S.2d146,

151(App.Div.2001).
7696See Heneghan v. CapARadiator Shops, 506 N.Y.S.2d 132, 134 (App. Div. 1986); Johnson v. Gumer, 464
N.Y.S.2d318,319(App.Div.1983);Lawrencev.Meloni,558N.Y.S.2d360,361(Sup.Ct.1990).
7697ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,WilliamB.Gordon
andJeffreyDonaldson,Jan.22,2010.
7698ExaminersInterviewofJoeGold,Jan.15,2010.

2087

EvenifBarclaysoriginalpossessionorcontroloftheLBHIAffiliateAssetswas
unlawful,oriftheLBHIAffiliatesdidmaketherequireddemand,thereisnoindication
thatBarclayshasassertedsuchcontinuedownershiporcontrolovertheassetsthatthe
LBHI Affiliates would have a colorable conversion claim against Barclays. While a
defendant need not act in bad faith in holding or controlling an asset to be liable for
conversion,thedefendantmustexercisedominionoverthepropertytotheexclusionof
the plaintiff.7699 If Barclays denied the LBHI Affiliates access to their assets, Barclays
could be liable for conversion,7700 but there is no indication that Barclays has done so.
Although the Debtors have evaluated whether or not Barclays currently has property
that belongs to the LBHI Affiliates, they have not asserted any such claims to date
against Barclays arising from that analysis.7701 For these reasons, the facts do not
supporttheexistenceofacolorableclaimagainstBarclaysforconversion.
(iii) UnjustEnrichment
The Examiner also considered whether the LBHI Affiliates would have a
colorable claim for unjust enrichment arising from the transfer of the LBHI Affiliate
AssetstoBarclays.Adefendantisliableforunjustenrichmentwhen:(1)theplaintiff
conferredabenefitonthedefendant;(2)withoutbeingadequatelycompensatedbythe

7699Dywerv.CitizensUnitedBank,N.A.,470N.Y.S.2d200,202(App.Div.1983);N.Y.CityTransitAuth.,635

N.Y.S.2dat1001.
7700Thyroff,460F.3dat40305.
7701Transition

Services Agreement between Lehman Brothers Holdings Inc. and Barclays Capital Inc.
(Sept.22,2008),atp.17;ExaminersInterviewofThomasE.Hommel,KellyL.Gargiulo,LaurenSheridan,
WilliamB.GordonandJeffreyDonaldson,Jan.22,2010.

2088

defendant for the conferred benefit; and (3) equity and good conscience require
restitution.7702 Unjust enrichment does not require wrongful conduct by the one
enriched[,]onlythattheenrichmentbeunjust.7703Evenadefendantthatdidnottake
anyactiontoobtainthebenefitcanbeunjustlyenriched.7704
In order to be unjustly enriched by an acquisition of property, the benefit
received must actually be of value to the defendant.7705 Moreover, where a defendant
thatdidnotengageintortiousconductandwasnotatfault,oratleastnotmoreatfault
thanthe plaintiff for the conferralofthe benefit,themeasureofrecoveryislimited to
thevalueofthebenefitinadvancingtheinterestsofthedefendant.7706
Here,theLBHIAffiliateassetsthatweretransferredconferredlimitedbenefiton
Barclays, particularly in the context of the billions of dollars of assets acquired and
liabilities assumed under the sale transaction. For example, the LBCS Customer
Information was largely either readilydeterminable or duplicative of what Barclays

7702SeeWienerv.LazardFreres&Co.,672N.Y.S.2d8,13(App.Div.1998);InreMidIslandHosp.,Inc.,276

F.3d123,12930(2dCir.2002);seealsoBradkinv.Leverton,257N.E.2d643,645(N.Y.1970);WhitmanRealty
Group,Inc.v.Galano,838N.Y.S.2d585,588(App.Div.2007).SeeAppendix1,SectionV.EtothisReport,
whichdiscussesthelawapplicabletoclaimsforunjustenrichmentingreaterdetail.
7703UltramarEnergy,Ltd.v.ChaseManhattanBank,N.A.,579N.Y.S.2d353,355(App.Div.1992)(citations
omitted).
7704SeeAetnaCas.&Sur.Co.v.LFOConstr.Corp.,615N.Y.S.2d389,391(App.Div.1994);UltramarEnergy,
579N.Y.S.2dat355.
7705Cyberchron Corp. v. Calldata Sys.Dev., 831 F. Supp.94,11012 (E.D.N.Y. 1993); McGrath v.Hilding,41
N.Y.2d625,630(1977).
7706See22AN.Y.JUR. 2D, Contracts587(2009)(citingRESTATEMENT (FIRST)OF RESTITUTION 142 cmt.b
(1937).

2089

already possessed through its much larger existing commodities trading business.7707
Givensuchcomparativelylimitedbenefit,andthefactsindicatingthatBarclaysdidnot
target any LBHI Affiliate assets or otherwise play a role in causing their transfer, the
Examinerconcludesthatthereareinsufficientfactstosupportafindingthatequityand
goodconsciencerequirerestitutionbyBarclaysandthatthereisnocolorableclaimfor
unjustenrichment.
(iv) TradeSecretMisappropriation
TheExamineralsoevaluatedwhetherLBCShasacolorableclaimfortradesecret
misappropriationarisingfromBarclaysacquisitionoftheLBCSCustomerInformation.
Toprevailonaclaimformisappropriationoftradesecrets,aplaintiffmustdemonstrate
(1) that it had a protectable trade secret; and (2)that the trade secret was
misappropriatedinviolationofaconfidentialityobligationoragreement,orwasused
ordisclosedwiththeknowledgeitwasobtainedthroughimpropermeans.7708
It is wellestablished that a customer list developed by a business through
substantial effort, and kept in confidence, may be a trade secret protected against
disclosuretoacompetitor.7709Whetheracustomerlistisentitledtoprotectiontypically
turns on whether the information on the list is readily ascertainable from other

7707ExaminersInterviewofSatuS.Parikh,Jan.4,2010;ExaminersInterviewofJoeGold,Jan.15,2010.
7708See

Appendix 1, Section V.K to this Report, which discusses the law that applies to trade secret
misappropriationclaimsingreaterdetail.
7709E.g.,DefianceButtonMach.Co.v.C&CMetalProds.Corp.,759F.2d1053,1063(2dCir.1985).

2090

sources.7710 Even if it is obtainable from readily accessible sources, a compilation of

customer names may be protectable if a company has catalogued those customers
buyingpracticesandpreferencesinsuchawaythatwouldbedifficult,timeconsuming
orexpensivetoreplicate.7711
TheExaminerconcludesthatthereisacolorableclaimthattheLBCSCustomer
Informationconstitutedatradesecret.Throughtheeffortsofitsdedicatedsalesforce,
LBCSdevelopedalistofcustomeridentitiesandproductandpricinginformationthat
was separate and distinct from the LBI customer base.7712 At least some of that
informationwasunknowntoothersintheindustry.7713Lehmantookstepstomaintain
the secrecy of that information by establishing corporate confidential information

7710E.g.,MeyersAssocs.v.ConologCorp.,No.600824/07,2008WL711702,at*1(N.Y.Sup.Ct.Mar.5,2008);

N.Atl.Instruments,Inc.v.Haber,188F.3d38,4047(2dCir.1999)(concludingthateventhoughthesizable
companies on a customer list were easily identifiable, a compilation of the identities of the one or two
engineerswithinthosecompanieswhowouldpurchaseaspecializeddevicewasprotectable);VeloBind,
Inc.v.Scheck,485F.Supp.102,10307(S.D.N.Y.1979)(acustomerlistdesignatingthespecificcompanies
thatusedaparticulartypeofdocumentbindingmachinewasprotectableeventhoughthenamesofthose
companiesallappearedinpubliclyavailablesources).
7711See, e.g., Garvin GuyButler Corp. v. Cowen & Co., 548 N.Y.S. 2d 56, 57 (Sup. Ct. 1992); IKON Office
Solutions,Inc.v.UsherwoodOfficeTech.,Inc.,No.920208,2008WL5206291,at*5(N.Y.Sup.Ct.Dec.12,
2008); Johnson Controls, Inc. v. A.P.T. Critical Sys., Inc., 323 F. Supp. 2d 525, 538 (S.D.N.Y. 2004); Am.
BuildingMaint.Co.ofN.Y.v.AcmePropertyServs.,Inc.,515F.Supp.2d298,308(N.D.N.Y.2007)(noting
that information related to [an employers] clients preferences and the customization of its services
undertakentoaddressthosepreferencesaretradesecrets).
7712ExaminersInterviewofSatuS.Parikh,Jan.4,2010.
7713Id.

2091

policies,andbyrequiringemployeestosignconfidentialityagreements.7714Asaresult,
thereisacolorableclaimthattheLBCSCustomerInformationwasatradesecret.7715
Toestablishacolorableclaimfortradesecretmisappropriation,however,LBCS
would needto showthatBarclayseither obtainedthe LBCSCustomerInformation by
impropermeans,orusedordisclosedtheinformationknowingithadbeenobtainedby
impropermeans.TheExaminerhasuncoverednofactsindicatingthatBarclaysdidso.
The facts the Examiner found indicate that Barclays believed the LBCS Customer
Information it received belonged to LBI.7716 In light of the confusion surrounding the
closingofthesaleandtheintegratedmannerinwhichLehmanranitsbusinesses,that
belief was reasonable. Further, to date LBCS has not requested and is unlikely to
request at this late date that Barclays return the LBCS Customer Information, and
Barclaysthereforeneverwasputonfairnoticethattheinformationwasnotitstouse.
As a result, there are not sufficient facts to support a colorable claim for trade secrets
misappropriationclaimagainstBarclays.
(v) UnfairCompetition
The Examiner also considered whether LBCS would have a colorable claim for
unfair competition against Barclays. Anunfair competition claim allows a plaintiff to

7714See,e.g.,Lehman,LehmanBrothersConfidentialityAgreement[LBEXLL3668555].
7715See infra Section III.C.5.b.2.a.i of the Report, which discusses that an argument could be made that

LBCSwaivedprotectionoftheCustomerInformationbyfailingtosegregateitfromtheassetsthatwere
properly transferred to Barclays, thereby relinquishing its secrecy. It is likely, however, that the
confidentialityprovisionsintheTSAwouldhavepreservedthesecrecyoftheinformation,whichwould
allowLBCStoproceedwithatradesecretsmisappropriationclaim.
7716ExaminersInterviewofJoeGold,Jan.15,2010,atp.2.

2092

recoverwhencompetitivelyusefulinformationithasspenttime,resourcesandeffortto
createisacquiredbyadefendantthroughactionsrisingtothelevelofbadfaith.7717Bad
faith typically is found where a party acquires information through trespass, fraud or
similarwrongdoing.7718
Here,theExaminerhasfoundnofactsthatwouldindicateBarclays,orLehman
employees acting on Barclays behalf, took wrongful actions to cause the LBCS
Customer Information to be transferred to Barclays. The facts uncovered by the
Examiner suggest that Barclays believed that the LBCS Customer Information it
received belonged to LBI, and therefore was properly included in the sale.7719 In the
days preceding the consummation of the sale, Barclays and Lehman personnel
discussed some of the information that comprised LBCS Customer Information, but
appear to have been unaware that the information was not LBIs to sell.7720 Given the
immensetimepressuresandthecomplexityofLehmansorganizationandoperations,
itwouldhavebeenexceedinglydifficultforthepartiestoevaluateownershipissuesin
the few days that they had to negotiate the sale, and there is no indication that either
Barclays or Lehman employees acting on Barclays behalf deliberately transferred the

7717See

Appendix 1, Section V.L of this Report, which discusses the law that applies to unfair
communicationsingreaterdetail.
7718Demetriades v. Kaufman, 698 F. Supp. 521, 52628 (S.D.N.Y. 1988); Robotic Vision Sys., Inc. v. General
Scanning,Inc.,No.96CV3884JG,1997WL1068696at*56(E.D.N.Y.Sept.8,1997);LinkCo,Inc.v.Fujitsu,
Ltd.,230F.Supp.2d492,50102(S.D.N.Y.2002).
7719ExaminersInterviewofJoeGold,Jan.15,2010.
7720See, e.g., email from Satu S. Parikh, Lehman, to Joe Gold, Barclays (Sept.19, 2008) [LBEXDOCID
3456032];ExaminersInterviewofJoeGold,Jan.15,2010.

2093

information with the knowledge it belonged to LBCS. As a result, the Examiner

concludes that there are insufficient facts to support a colorable claim for unfair
competitionagainstBarclays.
(vi) TortiousInterferenceWithEmploymentRelations
As discussed above, the Examiner concludes that the LBHI Affiliates did not
have assembled workforces that were transferred to Barclays in connection with the
sale. The Examiner did consider, however, whether there is a colorable claim against
Barclays for tortious interference with employment relations for hiring the LBI
employeesthatperformedfunctionssolelyfortheLBHIAffiliates.7721
To prevail on a claim for tortious interference with contractual employment
relations, a plaintiff must establish that: (1) there is a valid contract; (2) a third party
knew of the contract; (3) the third party intentionally and improperly procured the
breach of the contract; and (4) the plaintiff was damaged by the breach.7722 If the
employeedidnothaveacontractandwasanatwill employee,however,theplaintiff
would have to show that the third party engaged in fraud or misrepresentation or
acted with malice in interfering with the employment relationship in order to
recover.7723

7721See

Appendix 1, Section V.M to this Report, which discusses the law that applies to tortious
interferencewithemploymentrelationsclaimsingreaterdetail.
7722Siotkasv.LabOne,Inc.,594F.Supp.2d259,27475(E.D.N.Y.2009).
7723Id.at275;seealsoAlbertv.Loksen,239F.3d256,274(2dCir.2001)(recognizingthatanatwillemployee
maynotrecoverfortortiousinterferencewithemploymentrelationsunderNewYorklawunlessheor

2094

ThefactsidentifiedbytheExaminerindicatethatLBIemployeeswhoperformed
functionssolelyforLBHIAffiliateswerenotsubjecttorestrictivecovenants.7724Evenif
those employees were parties to contracts with such clauses, Barclays would only be
liableifitactuallyknewthatthoseprovisionsexisted.Giventheconfusionsurrounding
the sale and the sheer volume of employees transferred, there are insufficient facts to
conclude that Barclays had knowledge of the existence or terms of employment
contracts with restrictive covenants (if any exist) to possess the requisite intent to
establishaclaimfortortiousinterferencewithemploymentrelations.
The Examiners sampling of Lehman employment offers confirms that
employeeswerehiredonanatwillbasis.7725Asdiscussedintheprevioussubsections,
there is no indication that Barclays knew that the employees it was hiring were
anythingotherthanLBIemployeeswhowereemployedprimarilyinconnectionwith

she demonstrates that the interference was procured by fraud, misrepresentation, or threats or that the
defendantactedwithmaliceorinviolationofaduty).
7724Seee.g.,letterfromScottKimmel,Lehman,toThomasJ.Noto,Lehman,re:employmentoffer(Mar.26,
2007)[LBEXDOCID024128];letterfromChristopherM.OMeara,Lehman,toJohnDeRosa,Lehman,re:
employment offer (Nov.10, 2006) [LBEXAM 023144]; letter from Karen Dennehy, Lehman, to Peter
Keavey, Lehman, re: employment offer (Dec.12, 2005) [LBEXAM 017535]; letter from Christine
Thomson, Lehman, to Roy Salame, Lehman (May 5, 2007) [LBEXAM 027429]; letter from Christine
Thomson, Lehman, to Jeff Frase, Lehman (May 10, 2007) [LBEXAM 011714]; Examiners Interview of
TracyBinkley,Dec.22,2009.
7725See letter from Scott Kimmel, Lehman, to Thomas J. Noto, Lehman, re: employment offer (Mar. 26,
2007), at p. 3 [LBEXDOCID 024128]; letter from ChristopherM. OMeara, Lehman, to John DeRosa,
Lehman, re: employment offer (Nov.10, 2006), at p. 2 [LBEXAM 023144]; letter from Karen Dennehy,
Lehman,toPeterKeavey,Lehman,re:employmentoffer(Dec.9,2005),atp.2[LBEXAM017535];letter
from Christine Thomson, Lehman, to Roy Salame, Lehman (May 5, 2007), at p. 3 [LBEXAM 027429];
letterfromChristineThomson,Lehman,toJeffFrase,Lehman(May10,2007),atp.4[LBEXAM011714].

2095

theBusiness,7726towhomBarclayswascontractuallyobligatedtoofferemployment.7727
The LBI employees at issuebelieved that they were employed by LBI rather than any
LBHI Affiliate,7728 which was reasonable in light of the fact that LBI hired and paid
almost all Lehman employees regardless whether they performed services for a
particular subsidiary.7729 Moreover, it was Lehman, not Barclays, that identified the
employeestobeofferedemploymentatBarclays.7730ThereisnoindicationthatBarclays
intendedtoharmtheLBHIAffiliatesbyofferingemploymenttotheLBIemployeesthat
Lehman identified (which included LBI employees who performed work solely for
LBHIAffiliates).Asaresult,thefactsuncoveredbytheExaminerdonotsupportthe
existence of a colorable claim for tortious interference with employment relations
againstBarclays.
(3) ClaimsAgainstLBHIAffiliateOfficersandDirectors
TheExaminerconcludesthatthefactsdonotsupporttheexistenceofacolorable
claim against the LBHI Affiliate officers and directors for breach of the duty of care,
dutyofgoodfaithordutytomonitorarisingfromthetransferofLBHIAffiliateassets
toBarclays.

7726APA,atp.35(9.1(a)).
7727Id.
7728See, e.g., email from Paul Gregg, Lehman, to Peter Keavey, Lehman (Sept.16, 2008) [LBEXDOCID

3571486] (employees allocated to LBCS discussing transfer of LBI employees to Barclays and noting
thatsus).
7729Email from Kaushik Amin, Lehman, to Herbert H. McDade, III, Lehman (Sept.19, 2008)
[LBHI_SEC07940_656489].
7730ExaminersInterviewofTracyBinkley,Dec.22,2009.

2096

The circumstances of Lehmans collapse and the LBHI bankruptcy made it

difficult, if not impossible, for LBHI Affiliate officers and directors to focus their
attention before the sale closing on Monday, September 22 on potential transfers of
LBHI Affiliate Assets to Barclays. As just one example, during this period, LBHI
Affiliate officers and directors were attempting to preserve the value of (or at least to
limit losses pertaining to) derivatives positions worth billions of dollars. The LBHI
Affiliate Assets that were ultimately transferred to Barclays office equipment and
customerinformationwereoflimitedvaluebycomparison.Takingthecircumstances
surroundingLehmanscollapseasawhole,itwouldhavebeenunreasonabletoexpect
LBHIAffiliateofficersanddirectorstoshifttheirfocusfromtheotherpressingmatters
thatrequiredtheirimmediateandundividedattention.
Asnotedelsewhereherein,exceptforthefactsdescribedinSectionIII.C.6ofthis
Report, the Examiner is not addressing facts or reaching conclusions in this Report
pertainingtothemattersthatarethesubjectofthelitigationarisingfromthesale.The
Examiners findingshereare limited solely to whether additionalclaims,independent
of the claims that are the subject of the sale litigation, may be asserted against LBHI
Affiliate officers and directors as a result of the LBHI Affiliate assets that were
transferredtoBarclays.

2097

(a) DutyofCare
As explained above, the Examiner concluded that certain assets of LBCS, LBSF
and LCPI were transferred to Barclays in the sale. LBCS and LBSF were Delaware
corporations. LCPI was a New York corporation. The Examiner therefore primarily
addressesDelawarelawhere,anddiscussesNewYorklawonlytotheextentthereisa
difference.
UnderDelawarelaw,disinteresteddirectorsofaninsolventsubsidiaryenjoythe
protection of the business judgment rule in carrying out their duties, such that only
grossly negligent actions or inactions will give rise to liability.7731 While the party to
whom the directors owe their fiduciary duties expands upon insolvency to embrace
creditorsofthecompany,thedegreeofscrutinyappliedtothedirectorsactionsandthe
applicabilityofthebusinessjudgmentruleremainsunchanged.7732
Adirectorofawhollyownedsubsidiarywhoalsoisanemployeeoftheparent
entityistreatedasdisinterested,andentitledtotheprotectionofthebusinessjudgment
rule,solongasthesubsidiaryissolvent.7733Thisissobecauseasolventwhollyowned
subsidiarys interests are aligned with those of the parent.7734 If the subsidiary is
insolvent,however,thesubsidiarysdirectorsowedutiestocreditorsaswellasto the

7731Trenwick,906A.2dat174.
7732SeeAppendix1,SectionII.DtothisReport,whichdiscussesfiduciarydutiesforofficersanddirectors

ofwhollyownedsubsidiariesingreaterdetail.
7733Trenwick, 906 A.2d at 174; see Appendix 1, Section II.D to this Report, which discusses in detail the
fiduciarydutiesofthedirectorsofawhollyownedsubsidiary.
7734Id.

2098

parent, which renders the directors who are employees of the parent interested and
deprivesthemoftheprotectionofthebusinessjudgmentrule.7735
Absent the protection of the business judgment rule, a court will examine a
challenged transaction under the stricter entire fairness standard.7736 Under that
standard,a director must show that the transaction was a product offair dealing and
that the corporation received a fair price.7737 The court will consider all relevant
factorstodeterminewhetherthetransactionwasfair.7738Inorderforatransactionto
satisfy entire fairness, directors must demonstrate their utmost good faith and the
mostscrupulousinherentfairnessofthebargain.7739
Even if the officers and directors of LBCS, LBSF and LCPI were interested as a
resultoftheinsolvencyofthoseentitiesandtheiremploymentrelationshipswithLBHI
or LBI, the Examiner concludes that there is sufficient evidence to support the
conclusionthattheofficersanddirectorsactionswere,intheirentirety,fairtoLBCS,
LBSFandLCPI.
In light of all the circumstances, it would have been unreasonable, in the brief
windowbeforetheclosingofsale,toexpecttheLBHIAffiliateofficersanddirectorsto

7735Id.
7736Weinbergerv.UOP,Inc.,457A.2d701,710(Del.1983).
7737Id.at711.
7738Id.
7739Id.at710;NewYorklawdoesnotdiffer:[W]henthereisaninherentconflictofinterest,theburden

shifts to the interested directors or shareholders to prove good faith and the entire fairness of the
transaction.Alpertv.28WilliamsSt.Corp.,473N.E.2d19,26(N.Y.1984).

2099

diverttheirattentionfrom,amongotherthings,attemptingtoprevent(oratleastlimit)
losses in the billions of dollars arising primarily from the termination of derivatives
contracts, to identifying LBHI Affiliate assets that potentially would be transferred to
Barclays. The actions of the officers and directors were vital to preserving billions of
dollarsinvaluefortheLBHIAffiliates,comparedtotherelativelylimitedvalueofLBHI
Affiliateassetsthatweretransferredto Barclays.Indeedthereisnoevidencethatthe
LBHIAffiliateofficersanddirectorsmadeanyconsciencedecisiontopermittheLBHI
Affiliate Assets to be transferred to Barclays. The Examiner thus concludes that the
evidencedoesnotsupporttheexistenceofacolorableclaimagainsttheLBHIAffiliate
officersanddirectorsforbreachofthedutyofcare.
(b) DutyofGoodFaith
The facts do not support a colorable claim that the LBHI Affiliate officers and
directors breached their duty of good faith. A failure to act in good faith may be
shown . . . where the fiduciary intentionally acts with a purpose other than that of
advancingthebestinterestsofthecorporation,wherethefiduciaryactswiththeintent
toviolateapplicablepositivelaw,orwherethefiduciaryintentionallyfailstoactinthe
face of a known duty to act, demonstrating a conscious disregard for his duties.7740
Because the facts uncovered by the Examiner do not suggest that any LBHI Affiliate
officer or director acted with respect to the LBHI Affiliate Assets with a purpose

7740InreWaltDisneyCo.DerivativeLitig.,906A.2d27,67(Del.2006).

2100

other than that of advancing the best interests of LBCS, LBSF and LCPI, or ignored a
knowndutytoacttopreventthetransferoftheLBHIAffiliateAssetstoBarclays,there
arenotsufficientfactstosupportacolorableclaimagainsttheofficersanddirectorsfor
breachofthedutyofgoodfaith.
(c) DutytoMonitor
Finally, the Examiner concludes that, in light of the circumstances surrounding
the sale, the LBHIAffiliate officersand directors didnotbreach theirduty tomonitor
LBHI Affiliate operations. Directors breach the duty to monitor if (a) the directors
utterly failed to implement any reporting or information system or controls; or
(b)having implemented such a system or controls, consciously failed to monitor or
oversee its operations thus disabling themselves from being informed of risks or
problemsrequiringtheirattention.7741[I]mpositionofliability[forbreachoftheduty
tomonitor]requiresashowingthatthedirectorsknewthattheywerenotdischarging
theirfiduciaryobligations.7742Adutytomonitorclaimispossiblythemostdifficult
theoryincorporationlawuponwhichaplaintiffmighthopetowinajudgment.7743
Here, the officers and directors of the LBHI Affiliates had only a very short
periodoftimebeforetheSeptember22closingofthetransactiontoimplementsystems

7741InreCitigroupInc.SholderDerivativeLitig.,964A.2d106,123(Del.Ch.2009)(quotingStonev.Ritter,

911A.2d362,370(Del.2006)).
7742Stone,911A.2dat370.
7743In re Caremark Intl Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996). See Appendix 1, Section
II.A.4tothisReport,whichdiscussesthedutytomonitoringreaterdetail

2101

or controls intended to prevent the transfer of LBHI Affiliate assets to Barclays in

connection with the sale. That was also the period during which those same officers
anddirectorswerecalledupontodealwithfarmorepressingmatters.Itwouldhave
been unreasonable for the LBHI Affiliate officers and directors to have diverted
resources necessary to set up systems and controls to monitor the sale, and then to
actuallyengageinthatmonitoring.
Whether there was any fraudulent or improper conduct in connection with the
saleofLBIsbusinesstoBarclaysisthesubjectofongoinglitigation,includingextensive
factandexpertdiscovery.ExceptforthefactsreportedinSectionIII.C.6oftheReport,
theExaminerisnotaddressingfactsorreachingconclusionsinthisReportpertainingto
themattersthatarethesubjectoflitigation.TheExaminersfindingsherearelimited
solelytowhetheradditionalclaims,independentoftheclaimsthatarethesubjectofthe
Barclayssalelitigation,maybeassertedagainsttheLBHIAffiliateofficersanddirectors
forthetransferofLBHIAffiliateAssetstoBarclays.
Subjecttotheabovequalifications,theExaminerconcludesthatthefactsdonot
supporttheexistenceofacolorableclaimforbreachofthedutyofcare,goodfaithor
the duty to monitor against LBHI Affiliate officers and directors arising from the
transferoftheLBHIAffiliateAssetstoBarclays.

2102

c)

LehmanALITransaction

TheExaminerconcludesthatthedecisiontotransfercertainsubsidiariesofLBI
to Lehman ALI shortly before the commencement of LBIs SIPA proceeding was the
result of a goodfaith, wellgrounded business judgment, and that therefore no
colorableclaim(otherthanclaimsarisingunderthePIKNote&Securitiesitself)arises
from that decision. The Examiner notes that the valuation of the subsidiaries
transferred to Lehman ALI (and therefore the consideration to be paid to LBIs estate
under the PIK Note& Security Agreement) will be exceedingly challenging if not
resolvedbyagreement.
6.

BarclaysTransaction

The facts set forth in this Section pertain to matters that are the subject of
pending litigation involving the Debtors, the SIPA Trustee, the Creditors Committee
and Barclays. Because these matters are the subject of pending litigation before this
Courtwithrespecttowhichdiscoveryisongoing,withlimitedexceptionstheExaminer
does not discuss in this Section of the Report the law or the parties arguments, and
expresses no view on the merits of the parties positions or whether the evidence
supportstheexistenceofcolorableclaims.

2103

a) PreBankruptcyNegotiations
(1) BarclaysInterestinaTransactionInvolvingLehman
BarclaysinterestinatransactioninvolvingLehmandatedbacktoatleastApril
2008.7744 RobertE. Diamond, Jr., the President of Barclays PLC and chief executive of
Barclaysinvestmentbankingandinvestmentmanagement(IBIM)businesses,received
a telephone call from Robert Steel, who at the time was Undersecretary for Domestic
FinanceattheUnitedStatesDepartmentoftheTreasury.7745Steelinquiredwhether,if
there was a situation with Lehman similar to what had happened with Bear Stearns,
therewasapriceatwhichBarclayswouldbeinterestedinpurchasingLehman,andif
so, what Barclays would need in terms of a working relationship with the Treasury
Department.7746 Diamond told Steel that the question was interesting and thought
provoking,andthankedhimforthecall.7747
In July 2008, Barclays prepared a Discussion Document, apparently for its
board of directors, regarding a potential Lehman transaction.7748 The documents
executivesummarynotesthatLongIsland[theBarclayscodenameforLehman]had
been a prime victim of the recent market turmoil, and consequently might be on the

7744TranscriptofdepositiontestimonyofRobertE.Diamond,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.

0813555,Bankr.S.D.N.Y.,Sept.11,2009,atp.9.
7745Id.
7746Id.
7747Id.atp.10.
7748Barclays, Project Long Island Discussion Document (July 2008) [BCIEX(S)00026269], attached to e

mailfromRichardHaworth,Barclays,toRobertE.Diamond,Jr.,Barclays,etal.(Sept.9,2008)[BCIEX
(S)00026268].

2104

block.7749 The summary analyzes a potential acquisition under two aggressive

scenarios given the possibility of a distressed sale, including Bear Stearns valuation
metrics and a 50 percent discount to current market value, and opines that
[s]trategically,LongIslandwouldbeanexcellentfitfor[Barclays]IBIMbusiness,but
notes that [f]urther due diligence is needed to get comfort around their book and
exposures.7750
Following the Barclays board meeting, Diamond contacted Treasury to advise
that,iftherewasadistressedsituationinvolvingLehman,Barclayswouldliketogeta
call.7751
In August and early September2008, as Lehmans distress became more
apparent,andthecompanyactivelyshoppeditselftopotentialsuitors,7752Barclaystook
steps toward entering into discussions with Lehman. Barclays spoke with Lazard,
whichwasadvisingLehmanwithrespecttostrategicalternatives,includingthesaleof
partorallofthecompany.7753ThosecommunicationswerefocusedonwhetherBarclays
would be interested in purchasing Lehmans asset management business, which

7749Id.
7750Id.
7751TranscriptofdepositiontestimonyofRobertE.Diamond,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.

0813555,Bankr.S.D.N.Y.,Sept.11,2009,atpp.2829.
7752See SectionIII.A.3.C of the Report, which discusses Lehmans efforts to find a strategic partner in

greaterdetail.
7753EmailfromRobertE.Diamond,Jr.,Barclays,toJohnVarley,Barclays,etal.(Aug.24,2008)[BCIEX
00078686]; email from John Varley, Barclays, to Robert E. Diamond, Jr., Barclays, et al. (Aug. 25, 2008)
[BCIEX00078684]; email from Robert E. Diamond, Jr., Barclays, to Richard Haworth, Barclays, et al.
(Aug.25,2008)[BCIEX00078653].

2105

included the Neuberger Berman business.7754 Lazard advised Barclays that Lehman
needed to do something to add stability and capital, and was looking for someone to
purchasemorethan50percent,butlessthanall,oftheassetmanagementbusiness.7755
Barclays response was that Barclays prime goal in the United States was a high net
worthbusiness,andthatwhileNeubergerBermanwasnotapureplayinthatregard,
Barclaysdidnotwanttobeontheoutside,astherewerepiecesofNeubergerBerman
thatwouldbeofinteresttoBarclays.7756
During the first two weeks of September, Barclays was in contact with senior
officialsatTreasuryandtheFRBNY.7757SecretaryHenryM.Paulson,advisedDiamond
thatTreasurywouldbepleasedtohaveBarclaystakealookatLehman,but,according
toDiamond,wasveryclearthattherewouldbenogovernmentmoneyforadeal.7758
FRBNYPresidentTimothyF.GeithnerencouragedDiamondtocallFuld.7759According
to Diamond, he resisted because he believed the only way Barclays would pursue an

7754EmailfromRobertE.Diamond,Jr.,Barclays,toJohnVarley,Barclays,etal.(Aug.24,2008)[BCIEX

00078686]; email from John Varley, Barclays, to Robert E. Diamond, Jr., Barclays, et al. (Aug. 25, 2008)
[BCIEX00078684]; email from Robert E. Diamond, Jr., Barclays, to Richard Haworth, Barclays, et al.
(Aug.25,2008)[BCIEX00078653].
7755EmailfromRobertE.Diamond,Jr.,Barclays,toJohnVarley,Barclays,etal.(Aug.24,2008)[BCIEX
00078686].
7756Id.
7757TranscriptofdepositiontestimonyofRobertE.Diamond,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.
0813555,Bankr.S.D.N.Y.,Sept.11,2009,atp.24;HenryM.Paulson,Jr.,U.S.Dept.ofTreasury,CallLog,
(Sept.11, 2008), available at http://www.scribd.com/doc/21221123/TooBigToFailPaulsonCallLogs
andCalendarSept2008(notingthatPaulsonspoketoDiamondfrom5:10p.m.to6:00p.m.).
7758TranscriptofdepositiontestimonyofRobertE.Diamond,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.
0813555,Bankr.S.D.N.Y.,Sept.11,2009,atp.29.
7759Id.atp.30.

2106

acquisition of Lehman was at a distressed price, and at a distressed price this is a

rescueandyouarenotgoingtowantDickFuldthere.7760
On Wednesday, September10, Diamond emailed John Varley, Group Chief
Executive for Barclays PLC, and Christopher Lucas, Group Finance Director for
Barclays PLC, and stated, in the subject line of his message: Geithner called, long
conversation, call when convenient.7761 Varley replied to Diamonds email, stating:
Onefurtherthought:givenpatternsofar,fuldwillring.Thinkweshouldpushhim
off.Ifweengagewithhim,hewilluseit.ThatswhyImcautiousaboutthemarriage
brokerphrase.Thinkthe[U.S.]authoritiesneedtobemoreactivistthanthatifweare
to be prepared to play.7762 Diamond, in turn, responded to Varleys email, saying
[y]es,butgivenmyconversationwithGeithnerdonotthink[Fuld]will[]ring.7763
Later in the day on September10, Diamond emailed Varley, Jerry del Missier,
Lucas, and Rich Ricci, Chief Operating Officer for Barclays IBIM division, and said
[g]oodconversationwithbothFedandTreasury,talkinam.7764

7760Id.
7761EmailfromRobertE.Diamond,Jr.,Barclays,toJohnVarley,Barclays,etal.(Sept.10,2008)[BCIEX

00078635];seealsotranscriptofdepositiontestimonyofRobertE.Diamond,Jr.,InreLehmanBros.Holdings
Inc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.11,2009,atp.30.
7762Email from John Varley, Barclays, to Robert E. Diamond, Jr., Barclays (Sept.10, 2008) [BCIEX
00078635];seeemailfromRobertE.Diamond,Jr.,Barclays,toJohnVarley,Barclays(Sept.10,2008)[BCI
EX00078643].
7763Email from Robert E. Diamond, Jr., Barclays, to John Varley, Barclays (Sept.10, 2008) [BCIEX
00078643].
7764EmailfromRobertE.Diamond,Jr.,Barclays,toJohnVarley,Barclays,etal.(Sept.10,2008)[BCIEX
00078630];seeemailfromJohnVarley,Barclays,toRobertE.Diamond,Jr.,Barclays(Sept.10,2008)[BCI
EX00078655].

2107

DiamondalsohadbeendiscussingthepotentialLehmanacquisitionwithSteel,
whohadleftTreasury,andwasthepresidentandCEOofWachovia.OnWednesday,
September10, Diamond emailed Steel and said can u call me, rather important.7765
Steel responded that [he] spoke with HMP [Paulson], he will call you.7766 Diamond
repliedthathehadsubstantiveandinterestingcallswithTimG[Geithner]andTony
R. [presumably Anthony Ryan, Steels successor as Undersecretary for Domestic
Finance at the Treasury Department] . . . did not hear from Hank, disappointing but
probablyunderstandable....Bob,yourhelphasbeenperfect,thanks!!theremaybea
wayforward,wewillknowverysoon.7767
Others at Barclays also were in contact with Lehman during that time. On
Wednesday,September10,ArchibaldCox,Jr.,ChairmanofBarclaysAmericas,sentan
emailtoDiamondthatstated:
IgotanemailandacalllastnightfromLongIslandafteranothercalllate
in the afternoon. (No names, please.) In the afternoon call I was asked
whetheryouhadtalkedwiththeirCEO.IsaidIdidntknow,butthatif
youhadIdidntthinkitwassubstantive.IntheeveningcallIwasfurther
questioned about whether you had talked with their CEO as their
impressionwasthatyouhad.Iwasaskedtocheckonthis,becausethey
wantedtomakesureyouhadand,ifnot,tomakesurethathappened.I

7765EmailfromRobertE.Diamond,Jr.,Barclays,toRobertK.Steel,Wachovia(Sept.10,2008)[BCIEX

00078662].
7766EmailfromRobertK.Steel,Wachovia,toRobertE.Diamond,Jr.,Barclays(Sept.10,2008)[BCIEX
00078662].
7767EmailfromRobertE.Diamond,Jr.,Barclays,toRobertK.Steel,Wachovia(Sept.10,2008)[BCIEX
00078662].

2108

saidIwouldgetintouchwithyouearlythismorning.IthinktheirCEO
isundertheimpressionwehavenointerest.7768
OnWednesday,September10,andThursday,September11,Coxwaspassingon
toDiamondrequeststocontactFuld7769andthewordthatapparentlymanyatLI[Long
Island]think Barclayswouldbethebesthomeforthem. Thatwouldhelp in keeping
people.7770
The Barclays Board of Directors met by conference call on Thursday afternoon
(Londontime),September11,todiscusswhethertoauthorizethecompanytoenterinto
aduediligenceprocesswiththegoalofpotentiallyacquiringLehman.7771
At 10:00 a.m. London time on Friday, September12 (5:00 a.m. in New York),
Varley, Diamond, Lucas and Ricci participated in a conference call to prepare for the
boardmeetingscheduledfor2:00p.m.Londontimethatday.7772Aboardpresentation

7768Email from Archibald Cox, Jr., Barclays, to Robert E. Diamond, Jr., Barclays, et al. (Sept.10, 2008)

[BCIEX00078697].
7769SeeemailfromArchibaldCox,Jr.,Barclays,toRobertE.Diamond,Jr.,Barclays(Sept.10,2008)[BCI
EX00078661];emailfromArchibaldCox,Jr.,Barclays,toRobertE.Diamond,Jr.,Barclays(Sept.11,2008)
[BCIEX00078769].
7770EmailfromArchibaldCox,Jr.,Barclays,toRobertE.Diamond,Jr.,Barclays(Sept.11,2008)[BCIEX
00078660].
7771See,e.g.,emailfromLawrenceDickinson,Barclays,toRobertE.Diamond,Jr.,Barclays(Sept.10,2008)
[BCIEX00078637]; email from Robert E. Diamond, Jr., Barclays, to Lawrence Dickinson, Barclays
(Sept.10, 2008) [BCIEX00078626]; email from Marie Smith, Barclays, to Marcus Agius, Barclays, et al.
(Sept.12,2008)[BCIEX00081498].
7772SeeemailfromRichardHaworth,Barclays,toJohnVarley,Barclays,etal.(Sept.12,2008)[BCIEX(S)
00053305].Diamond,delMissier,RicciandotherseniorBarclaysexecutiveshadflownfromLondonto
New York on Thursday evening, September11. Transcript of deposition testimony of Robert E.
Diamond,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.11,2009,atp.24;
email from Robert E. Diamond, Jr., Barclays, to Patrick Durkin, Barclays (Sept.11, 2008) [BCIEX
00078759](informingPatrickDurkinat11:26p.m.onSeptember11thatDiamondjustlandedinny).

2109

was circulated in advance of the call, which set forth two acquisition scenarios, both
involvingtransactionsfor$5pershareofLehmanstock.7773
During the board meeting on Friday, September12, beginning at 2:00 p.m.
(Londontime),theBarclaysBoardofDirectorsauthorizedthecompanytopursuedue
diligence to determine whether there was an opportunity for a transaction with
Lehman.7774
(2) NegotiationsBeforeSeptember15
Diamond and Fuld met facetoface on Friday morning, September12.7775 In
order to avoid the TV cameras that were stationed outside Lehmans Manhattan
headquarters, Fuld sent his driver to pick up Diamond and take him into Lehmans
buildingthroughthegarage.7776
DiamondexplainedtoFuldthattherecouldbenodealat...thecurrentmarket
price,becauseoftheriskandbecauseoftheoverlap[betweenBarclaysandLehman],

7773Barclays,LongIslandTransactionOverview(Sept.12,2008)[BCIEX(S)00053305],attachedtoemail

fromRichardHaworth,Barclays,toJohnVarley,Barclays,et.al(Sept.12,2008)[BCIEX(S)00053306].
7774TranscriptofdepositiontestimonyofRobertE.Diamond,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.
0813555, Bankr. S.D.N.Y., Sept.11, 2009, at p. 24; email from Marie Smith, Barclays, to Marcus Agius,
Barclays,etal.(Sept.12,2008)[BCIEX00081498].
7775EmailfromHeidiSmith,Barclays,toRobertE.Diamond,Jr.,Barclays,etal.(Sept.12,2008)[BCIEX
00078716];transcriptofdepositiontestimonyofRobertE.Diamond,Jr.,InreLehmanBros.HoldingsInc.,
CaseNo.0813555,Bankr.S.D.N.Y.,Sept.11,2009,atp.25.
7776EmailfromHeidiSmith,Barclays,toRobertE.Diamond,Jr.,Barclays,etal.(Sept.12,2008)[BCIEX
00078716];transcriptofdepositiontestimonyofRobertE.Diamond,Jr.,InreLehmanBros.HoldingsInc.,
CaseNo.0813555,Bankr.S.D.N.Y.,Sept.11,2009,atpp.2526.

2110

butthatBarclayshadaninterestifthisisarescuesituation,meaningifthisisavery,
verydistressedprice.7777
At 2:26 p.m. New York time on September12, Varley emailed Diamond and
RiccitoprepareforacallthatafternoonwithSecretaryPaulson:
Bob
Ahead of our next chat, my thoughts on the gist of the hp [Secretary
Paulson]callwouldbe:
1.

Sincewelastspokebobhasmetdick.Thatmeetingwentwell.

2.

Wevealsohadafurthermeetingoftheboard

3.

Thatmeetingwentwell.

4.

Weseeawayforwardbuttherearetwoareaswherewewillneed
help.

5.

Bothareareasofpotentialconcerntothefsa.

6.

Firstisthesubjectoflongtermfunding.Weneedtoknowthatwe
would continue to have access in such size as we need to run the
businessprudently.

7.

Second is the subject of certain risk assets, which you and we

referredtoinourconversationofyesterday.Bobsteamhasbeen
analyzing the data and let me hand over to him to give you our
thoughts.

8.

Red[Diamond]covers,includingtheask.

9.

Although we have further work to do in many areas, we believe

thatifyoucangiveusthehelpweneedinthesetwoareas,wecan
getthisdone,andwillcontinuetoworkroundtheclocktothatend

7777TranscriptofdepositiontestimonyofRobertE.Diamond,Jr.,InreLehmanBros.HoldingsInc.,No.08

13555,Bankr.S.D.N.Y.,Sept.11,2009,atpp.2627,32.

2111

togettoapositionwheretherecanbeanannouncementaheadof
marketopeningatthebeginningofnextweek.7778
On Friday, September12, Barclays retained Cleary Gottlieb Steen& Hamilton
LLP(ClearyGottlieb)torepresentBarclaysinitsnegotiationswithLehman.7779Victor
LewkowandRobertDavisledtheClearyGottliebteam.7780
Barclays and Cleary began negotiations with Lehman and its legal counsel,
SimpsonThacher,onFridaymorning,September12th.7781JohnFinleyledtheSimpson
Thacher team. Those negotiations continued until Sunday, September14, at about
noon.7782
The Barclays team included Diamond Cox, Jerry del Missier, Ricci, Michael
Klein, Gerard LaRocca, Michael Keegan, Stephen King, Michael Evans, and Patrick
Clackson.7783TheprincipalnegotiatorsforLehmanwereBartMcDade,MarkG.Shafir,

7778EmailfromJohnVarley,Barclays,toRobertE.Diamond,Jr.,Barclays,etal.(Sept.12,2008)[BCIEX

00078748]. That evening, between 5:10 p.m. and 6:00 p.m., Varley and Diamond participated in a
conferencecallwithPaulsonandGeithner.SeeHenryM.Paulson,Jr.,U.S.Dept.ofTreasury,CallLog
(Sept.12, 2008), available at http://www.scribd.com/doc/21221123/TooBigToFailPaulsonCallLogs
andCalendarSept2008.
7779Email from Richard Smith, Barclays, to Gerard LaRocca, Barclays, et al. (Sept.12, 2008) [BCIEX
00078725].BarclaysrequestedandreceivedfromLehmanaconflictwaiverthatallowedClearyGottlieb
to work on Barclays behalf in connection with the transaction. Email from Victor I. Lewkow, Cleary
Gottlieb,toThomasA.Russo,Lehman(Sept.12,2008)[BCICG00000004].
7780See, e.g., email from Richard Smith, Barclays, to Gerard LaRocca, Barclays, et al. (Sept.12, 2008)
[BARCLAYSLB00042759]forwardingClearyGottliebcontactlist);emailfromRichardSmith,Barclays,
toGerardLaRocca,Barclays,etal.(Sept.12,2008)[BCIEX00078725].
7781ExaminersInterviewofLindseeP.GranfieldandRobertDavis,Mar.10,2009,atp.2.
7782Id.
7783SeeemailfromHansJoergRudloff,Barclays,toRobertE.Diamond,Jr.,Barclays,etal.(Sept.12,2008)
[BCIEX00078742](notingMichaelKleinsinterestinassistingBarclays);emailfromHansJoergRudloff,
Barclays, to Robert E. Diamond, Jr., Barclays (Sept.12, 2008) [BCIEX00078729] (passing along Kleins
statementthathedidnothaveanyconflicts);emailfromRichRicci,Barclays,toRobertE.Diamond,Jr.,

2112

Michael GelbandandAlexKirk.7784McDade didnot engagewithDiamond andhis

team until late Friday evening, September12; before then, McDade, HughE. Skip
McGee,IIIandotherswerefocusedontheduediligenceinwhichBankofAmericawas
engaged.7785 Barclays already had begun assembling its due diligence team and
requestingduediligenceinformationontheafternoonofThursday,September11,but
Lehman was not able to begin delivering the bulk of the information until
September12.7786
OnSaturdaymorning,RichardHaworthofBarclayscirculatedtoClacksonand
LaRocca adocumentonkeyDD[duediligence]findingsto date as partofa pre
Board briefing going to Varley and Diamond.7787 The summary stated, among other

Barclays(Sept.12,2008)[BCIEX00078740](advisingthatCitigrouphadagreedtopermitKleintoadvise
Barclays, notwithstanding that Klein was within his gardening leave period after leaving Citigroup);
transcript of deposition testimony of Rich Ricci, In re Lehman Bros. Holdings Inc., No. 0813555, Bankr.
S.D.N.Y., Sept.8, 2009, at pp. 1011; transcript of deposition testimony of Alex Kirk, In re Lehman Bros.
HoldingsInc.,No.0813555,Bankr.S.D.N.Y.,Aug.31,2009,atp.28;transcriptofdepositiontestimonyof
PatrickClackson,InreLehmanBros.HoldingsInc.,No.0813555,Bankr.S.D.N.Y.,Sept.4,2009,atp.7.
7784TranscriptofdepositiontestimonyofAlexKirk,InreLehmanBros.HoldingsInc.,No.0813555,Bankr.
S.D.N.Y., Aug. 31, 2009, at p. 28; transcript of deposition testimony of Herbert H. McDade, III, In re
LehmanBros.HoldingsInc.,No.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atpp.1112.
7785TranscriptofdepositiontestimonyofHerbertH.McDade,III,InreLehmanBros.HoldingsInc.,No.08
13555,Bankr.S.D.N.Y.,Sept.2,2009,atpp.89,10.
7786See, e.g., email from Diahann Turner, Barclays, to Haejin Baek, Barclays, et al. (Sept.11, 2008)
[BARCLAYSLB 00023235]; email from Haejin Baek, Barclays, to Gerard LaRocca, Barclays, et al.
(Sept.11,2008)[BCIEX(S)00033903];emailfromJamesWalker,Barclays,toPatrickClackson,Barclays
(Sept.11, 2008) [BCIEX(S)00021957]; email from Gerard LaRocca, Barclays, to Rich Ricci, Barclays
(Sept.11, 2008) [BCIEX00078752]; email from Gerard LaRocca, Barclays, to Rich Ricci, Barclays
(Sept.11,2008)[BCIEX00078770]; emailfrom ErinMansfield, Barclays, to HaejinBaek, Barclays, et al.
(Sept.11, 2008) [BARCLAYSLB 00023388]; transcript of deposition testimony of Gerard LaRocca, In re
LehmanBros.HoldingsInc.,No.0813555,Bankr.S.D.N.Y.,Aug.19,2009,atpp.1315,1718.
7787EmailfromRichardHaworth,Barclays,toPatrickClackson,Barclays,etal.(Sept.13,2008)[BCIEX
00081257]. Barclays had gone through business by business . . . looking at those assets and ascribing
what [Barclays] thought were the fair values to those assets. Transcript of deposition testimony of

2113

things, that [i]n the previous report to the Board, we estimated a total of $7.5 bn in
furtherwritedownstoLongIslandassetsbasedonahighlevelanalysisoftherisksof
thevaluationofkeyassets,butthat[b]aseduponduediligenceundertakeninthelast
24 hours, this estimate of the further immediate writedowns to L.I.s book has
increased significantly to $23bn$27bn . . . [including] $35bn trading writedowns,
primarilyrelatingtoRMBS.7788Thesummaryfurtherstatesthat[t]heserevisionsare
based upon: [b]ringing L.I. marks in line with [Barclays] valuation policies . . . [and]
[f]orthemostmaterialsegments(e.g.CMBS)thisestimateisbasedonanassetbyasset
basis, while elsewhere, where markets are highly illiquid, these are conservative top
downestimates.7789
Duringthatweekend,BarclaysandLehmanreachedagreementinprincipleona
transactionunderwhichBarclayswouldpurchasecertaingoodassetsofLehmanand

Patrick Clackson, In re Lehman Bros. Holdings Inc., No. 0813555, Bankr. S.D.N.Y., Sept.4, 2009, at p. 13.
Transcript of deposition testimony of Jerry del Missier, In re Lehman Bros. Holdings Inc., No. 0813555,
Bankr. S.D.N.Y., Sept.1,2009, at pp. 2528; transcript of deposition testimony of Patrick Clackson, In re
Lehman Bros. Holdings Inc., No. 0813555, Bankr. S.D.N.Y., Sept.4, 2009, at pp. 1316; transcript of
depositiontestimonyofJerrydelMissier,InreLehmanBros.HoldingsInc.,No.0813555,Bankr.S.D.N.Y.,
Sept.1,2009,atp.26.Theteamswereinstructedtogetagenuine,realisticvalueofwhat...thisstuff
wasworth.Id.
7788Barclays, Long Island key exposures key due diligence findings (Sept. 13, 2008), at p. 1 [BCIEX
00081255], attached to email from Richard Haworth, Barclays, to Patrick Clackson, Barclays, et al.
(Sept.13,2008)[BCIEX00081257].BarclaysmadeverycleartoLehmanthattheywerenotinterested
in purchasing Lehmans private equity and commercial real estate assets because of the impact on
Barclays balance sheet, and because of the difficulty in valuing those assets. Transcript of deposition
testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., No. 0813555, Bankr. S.D.N.Y.,
Sept.2,2009,atp.14;transcriptofdepositiontestimonyofPatrickClackson,InreLehmanBros.Holdings
Inc.,No.0813555,Bankr.S.D.N.Y.,Sept.4,2009,atpp.1011.
7789Barclays, Long Island key exposures key due diligence findings (Sept. 13, 2008), at p. 1 [BCIEX
00081255] attached to email from Richard Haworth, Barclays, to Patrick Clackson, Barclays, et al.
(Sept.13,2008)[BCIEX00081257].

2114

leavecertainbadassets(theprivateequityandcommercialrealestateassets)behind
inashellthatwouldbefinancedbyaconsortiumofWallStreetfirms.7790
On Sunday, September14, it became clear that the proposed transaction would
notgoforward.7791Thatafternoon,Lehmanpersonnelstartedworkingonanorderly
liquidation plan, which contemplated a sixmonth period to effect an orderly
unwinding of Lehmans positions. During that time, Lehman would continue to
employasubstantialnumberofpeople,andwouldpaybonusestokeepthem.7792The
planassumedthattheFRBNYwouldprovidefinancingsupportthroughoutthewind
downprocess.7793
Work on an orderly six month liquidation plan came to an abrupt halt when
word circulated that, as described in SectionIII.A.3, LBHI would file bankruptcy that
evening.7794

7790Examiners Interview of Lindsee P. Granfield and Robert Davis, March 10, 2009, at pp. 23; Share

ExchangeAgreement[Draft][STBLEH0001507],AcquisitionAgreement[Draft][STBLEH0001518],and
Stockholder Voting Agreement [Draft] [STBLEH 0001567], attached to email from Michael Salerno,
Cleary Gottlieb, to H. Rodgin Cohen, Sullivan & Cromwell, et al. Sept. 14, 2008 [STBLEH 0001506];
transcript of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., No. 08
13555,Bankr.S.D.N.Y.,Sept.2,2009,atpp.1415.
7791SeeSectionIII.A.3oftheReport,whichdiscussesingreaterdetailtheinteractionsbetweentheFSA,
TreasuryandtheFRBNY.
7792ExaminersInterviewofJamesP.Seery,Jr.,Nov.12,2009,atp.2.
7793Id.
7794Id.;ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atpp.1213;ExaminersInterviewof
HarveyR.Miller,Apr.23,2009,atpp.78;ExaminersInterviewofScottAlvarez,Nov.12,2009,atp.8
(explaining that the FRBNY did not consider bankruptcy inevitable until Sunday night when it was
apparenttherewasnobuyerforLehman).SeeSectionIII.A.3ofthisReport,whichdescribesLehmans
decisiontofilebankruptcyingreaterdetail.

2115

b) LBHIBankruptcy
(1) LBHIFilesChapter11
At 1:45 a.m. on the morning of Monday, September15, LBHI filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code in the United States
BankruptcyCourtfortheSouthernDistrictofNewYork.7795Thecasewasassignedto
theHonorableJamesM.Peck.
(2) PostPetitionClearingandFinancing
Prior to LBHIs bankruptcy, LBI relied on clearing banks and organizations to
settle and clear its trading activity. Clearing banks and organizations advanced
substantial amounts intraday to LBI in order to clear trades, and held the assets they
cleared as collateral for LBI obligations.7796 Lehman also relied on shortterm repo
financingtofunditsbusinessoperations.7797Theseclearingandfinancingarrangements
werevitaltoLBIscontinuedviabilityfollowingLBHIsbankruptcy,becauseLBIcould
not conduct its core business without an ability to clear and finance securities and
derivativetrades.JPMorganactedasLBIsprincipalclearingbankforsecuritiestrading
andtripartyrepotransactions.7798LBIcouldnotcontinuetooperateitsbusinesswithout
theservicesprovidedbyJPMorgan.

7795SeeIntroductiontothisReport.
7796SeeSectionIII.A.5ofthisReportwhichdiscussesclearingingreaterdetail.
7797ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atpp.4,8.
7798SeeSectionIII.A.5.bofthisReport,whichdiscussesLBIsrelationshipwithJPMorganingreaterdetail.

2116

LBI did not file a bankruptcy petition at the same time as LBHI. Rather, as
Lehman advised JPMorgan when LBHI filed its bankruptcy proceedings, Lehmans
planwastoconductanorderlyliquidationofLBIbyunwindingLBIsreposandits
matchedbook,whileatthesametimeattemptingtofindabuyerforLBIsbrokerdealer
business.7799
The FRBNY had been a primary source of shortterm financing for Lehman.7800
On Sunday, September14, the FRBNY publicly announced that it would expand the
categoriesofcollateralacceptedthroughthePrimaryDealerCreditFacility(PDCF).7801
Previously, the FRBNY had accepted only investmentgrade securities; on Monday,
September15, the FRBNY announced that it would accept any collateral that was
acceptablefortripartyrepos.7802

7799EmailfromJaneBuyersRusso,JPMorgan,toJamieL.Dimon,JPMorgan,etal.(Sept.14,2008)[JPM

2004 0006506] (recounting conversation between Jane BuyersRusso and PaoloR. Tonucci); Examiners
InterviewofShariD.Leventhal,Apr.30,2009,atpp.45.
7800ExaminersInterviewofShariD.Leventhal,Apr.30,2009,atpp.45;DeclarationofShariD.Leventhal
in Support of Trustees Motion for Entry of an Order Approving a Settlement Agreement, 6, In re
LehmanBros.Inc.,No.0801420(Bankr.S.D.N.Y.Dec.5,2008)(theLeventhalDecl.),attachedtoMotion
Under 11 U.S.C. 105 and 363 Fed. R. Bankr. P. 9019(a) for Entry of an Order Approving Settlement
Agreement,DocketNo.387,InreLehmanBros.Inc.,No.0801420(Bankr.S.D.N.Y.Dec.5,2008).
7801FederalReservePressRelease(Sept.14,2008)availableat
http://www.federalreserve.gov/newsevents/press/ monetary/20080914a.htm; Examiners Interview of
ChristopherR.Burke,July7,2009,atp.3;ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.8;
ExaminersInterviewofScottAlvarez,Nov.12,2009,atp.9.
7802Examiners Interview ofChristopherR. Burke,July 7,2009,atp. 3; emailfrom Christopher Killian,
SecuritiesIndustryandFinancialMarketsAssociation,toJackFondacaro,Lehman(Sept.14,2008)[LBEX
DOCID 30719] (attaching the FRBNYs announcement); email from Ricardo Chiavenato, JPMorgan, to
ChristopherCarlin,JPMorgan,etal.(Sept.15,2008)[JPM20040055329].

2117

TheFRBNYadvisedLehmanthatitwouldnotallowLehmantoaccessthePDCF
asameansofavoidingabankruptcyfiling.7803TheFRBNY,however,advisedLehman
that it would provide up to two weeks of overnight secured financing through the
PDCFtoallowLBItoaccomplishanorderlyliquidation.7804
The FRBNY anticipated that LBI ultimately would need to be placed in a SIPA
proceeding, but that most of LBIs customers would move their accounts to other
brokerdealers during the orderly unwinding of LBI, leaving a relatively small
portionofLBIscustomeraccountswhentheSIPAproceedingwascommenced(which
the FRBNY hoped could be delayed until approximately two weeks after the LBHI
filing).7805 Without FRBNY funding an orderly unwind of LBIs business, customers
mightbeforcedtowaitmonthstogainaccesstotheirmoneyinaSIPAproceeding.7806
The FRBNY and Lehman believed, correctly, that it would be necessary for the
FRBNYtoprovideexpandedPDCFfinancingtoLehmanbecause,withthefilingofthe
LBHIs bankruptcy petition, parties that previously had provided Lehman with

7803Examiners

Interview of Shari D. Leventhal, Apr. 30, 2009, at p. 5 (explaining the FRBNY would
provideuptotwoweeksoffundingforanorderlyunwindofLBI);ExaminersInterviewofRichardS.
Fuld,Jr.Apr.28,2009,atp.13.
7804ExaminersInterviewofShariD.Leventhal,Apr.30,2009,atpp.45;LeventhalDecl.6.Someatthe
FRBNYbelievedthattheFRBNYwasriskingtoomuchexposurewiththetwoweekfundingtimeframe.
ExaminersInterviewofShariD.Leventhal,Apr.30,2009,atp.5.
7805ExaminersInterviewofShariD.Leventhal,Apr.30,2009,atp.5.
7806Id.

2118

overnight secured financing through repos would refuse to roll (i.e., renew) those
reposbeginningonMonday,September15.7807
AlthoughtheFRBNYhadexpandedthecategoriesofcollateralgenerallyeligible
forpledgethroughthePDCF,theFRBNYlimitedthecollateralthatLBIcouldpledgeto
the collateral that had been in LBIs clearance box at JPMorgan as of Friday,
September12.7808ThisrestrictionwasreferredtoastheFridaycriteria.7809Inaddition,
the FRBNY imposed larger PDCF borrowing haircuts on LBI than it did on other
investment banks.7810 These haircuts also were larger than the haircuts applied under

7807Leventhal Decl. 6; Examiners Interview of Shari D. Leventhal, Apr. 30, 2009, at p. 5; email from

Robert Azerad, Lehman, to Monique Wise, Lehman, et al. (Sept.21, 2008) [BCIEX(S)00013154]
(explainingtheFederalReserveextendedthePDCFtoamuchwiderrangeofassetclassesSundaynight
therebyprovidingabackupsourceoffundingtomitigateanylossofrepocapacity,whichwasbound
tohappenonceLBHIfiledforbankruptcy);seealsoJPMorganAnalysis(Sept.11,2008),atp.3[JPM2004
0032965] (analyzing a worstcase scenario, in which triparty investors did not renew their repos and
Lehman was forced to rely on the PDCF for overnight financing); email from David Weisbrod,
JPMorgan, to Jamie L. Dimon, JPMorgan, et. al. (Sept.15, 2008) [JPM2004 0080146] (reporting that
Lehmanstripartyrepoborrowingfellfrom$87billiononFridayeveningto$51billion($28billionfrom
thePDCF,$2billionfromBarclays,and$21billionfromotherinvestors)onMondayevening).
7808ExaminersInterviewofRobertAzerad,Apr.20,2009,atp.5;ExaminersInterviewofChristopherR.
Burke,July7,2009,atp.3.
7809ExaminersInterviewofRobertAzerad,Apr.20,2009,atp.5;ExaminersInterviewofChristopherR.
Burke, July 7, 2009, at p. 3; see also email from Timothy G. Lyons, Lehman, to Ian T. Lowitt, Lehman
(Sept.14, 2008) [LBEXDOCID 70210] (stating the [FRBNY] is letting the other eighteen broker dealers
fundamuchbroaderrangeofcollateralthanus).
7810ExaminersInterviewofRobertAzerad,Apr.20,2009,atp.5;seealsoemailfromRicardoChiavenato,
JPMorgan,toChristopherCarlin,JPMorgan,etal.(Sept.15,2008)[JPM20040055329](notingtheFRBNY
seta Lehmanspecific PDCF schedule . . . with higher margin than for otherdealers); Chase Triparty
HaircutSummaryofTradesMaturingSept.15,2008,asofSept.12,2008[LBEXDOCID428627](listing
an estimate haircut impact at approximately $4 billion), attached to email from Sindy Aprigliano,
Lehman,toPaoloR.Tonucci,Lehman,etal.(Sept.15,2008)[LBEXDOCID4146462];emailfromSindy
Aprigliano, Lehman, to George V. Van Schaick, Lehman, et al. (Sept.15, 2008) [LBEXDOCID 077028]
(discussing the larger haircuts imposed by the FRBNY on Lehmans PDCF borrowing); email from
Robert Azerad, Lehman, to Susan E. McLaughlin, Lehman, et al.(Sept.15,2008)[LBEXDOCID 457643]
(explaining the PDCF haircuts would result in a $4 billion drain in liquidity . . .); PDCF Schedule of
EligibleSecurities(Sept.14,2008)[LBEXDOCID405695](detailingthePDCFhaircutsappliedtoLehman

2119

Lehmansprebankruptcytripartyborrowingfacilities.Theincreasedhaircutsreduced
theliquiditygeneratedbyLehmansPDCFborrowing.7811
The FRBNYs postLBHI bankruptcy financing of LBI began Monday evening,
September15,withLehmanborrowingapproximately$28billionviathePDCF,7812and
continued through Thursday morning, September18.7813 In addition to the PDCF,
Lehman also continued to borrow under two other FRBNY programs, Open Market
Operations (OMO) and the Term Securities Lending Facility (TSLF).7814 On
Monday,theFRBNYadvancedapproximately$18.5billiontoLBIundertheTSLF,and
approximately $2.8 billion in OMO,7815 and continued to advance funds to LBI under
theseprogramsthroughThursdaymorning,September18,whenBarclaysreplacedthe
FRBNYpursuanttotheReplacementTransactiondescribedbelow.

for the various categories of accepted securities); email from Ricardo Chiavenato, JPMorgan, to
ChristopherCarlin,JPMorgan,etal.(Sept.15,2008)[JPM20040055329].
7811Examiners Interview of Robert Azerad, Apr. 20, 2009, at p. 5. See email from Robert Azerad,
Lehman, to Susan E. McLaughlin, FRBNY, et al. (Sept.15, 2008) [LBEXDOCID 457643] (explaining the
PDCFhaircutswouldresultina$4billiondraininliquidity...).
7812See email from EdwardJ. Corral, JPMorgan, to William Walsh, FRBNY, et al. (Sept.15, 2008) [JPM
2004 0031195] (notifying the FRBNY that the Lehman assets used in LBIs $28 billion PDCF repo on
MondaynightsatisfiedtheFridaycriterion).EarlieronMonday,Lehmanestimatedthatitwouldborrow
up to $35 billion through the PDCF on Monday night. See email from Sindy Aprigliano, Lehman, to
Robert Azerad, Lehman (Sept.15, 2008) [LBEXDOCID 1071653] (providing Feracas PDCF estimate of
$27 billion plus a buffer of $8 billion); email from Robert Azerad, Lehman, to Susan E. McLaughlin,
FRBNY,etal.(Sept.15,2008)[LBEXDOCID071550](estimating$34billionofPDCFborrowing);email
from PaoloR. Tonucci, Lehman, to Susan E. McLaughlin, FRBNY, et al. (Sept.15, 2008) [LBEXDOCID
071550](estimating$28.3billionforthecollateralvalueofthePDCFborrowing).
7813ExaminersInterviewofRobertAzerad,Apr.20,2009,atp.5.
7814Id.
7815A&MsInterviewofJamesW.Hraska,Oct.8,2008,atp.1.

2120

On Sunday, September14, JPMorgan was immediately advised of the fact that

theFRBNYhadagreedtoextendPDCFfinancingtoLBI.7816LBIsabilitytoobtainPDCF
financing from the FRBNY was critical to JPMorgan because Lehman needed to pay
JPMorgan on a daily basis for clearing advances (which were, in effect, intraday
extensionsofcredit),orJPMorganwouldrefusetocontinuetocleartradesandactasa
tripartyrepoagentforLBI.7817
BylateSundayevening,internalJPMorganemailsindicatethatithaddecidedto
continue as the operating bank for [LBI] as long as it didnt file and was doing an
orderly liquidation . . . . [JPMorgan also] would unwind triparty and return cash to
investors.7818EarlyMondaymorning,however,theextenttowhichJPMorganwould
continue to provide clearing and settlement services for LBI was unclear.7819 Kevin
MurphyofJPMorgansaidinaninternalemail,Soourstancewillbethatwearenot
going to facilitate an orderly unwind but that we are rather going to potentially put
Lehmanindefaultofitsobligationstothevariousclearinghouses?Isthisthemessage

7816EmailfromJaneBuyersRusso,JPMorgan,toJamieL.Dimon,JPMorgan,etal.(Sept.14,2008)[JPM

20040054242];emailfromBarryL.Zubrow,JPMorgan,toBillT.Winters,JPMorgan,etal.(Sept.15,2008)
[JPM20040006510].
7817SeeemailfromRobertAzerad,Lehman,toMoniqueWise,Lehman,etal.(Sept.21,2008)[BCIEX(S)
00013154] (explaining that because of the LBHI bankruptcy filing, LBI needed a backup source of
funding, the PDCF, to collateralize the clearing banks against their intraday exposure to Lehman
Brothers).
7818EmailfromJaneBuyersRusso,JPMorgan,toJamieL.Dimon,JPMorgan,etal.(Sept14,2008)[JPM
20040054242].
7819SeeemailfromScottSandler,JPMorgan,toEdwardJ.Corral,JPMorgan,etal.(Sept.15,2008)[JPM
2004 0030786] (conveying confusion regarding what Lehman trades were cancelled and what Lehman
tradeswerepermittedtosettle).

2121

our senior management wants us to send?7820 The FRBNY also grew concerned on
Monday morningthat JPMorganwouldnot continueto extendintraday creditto LBI,
prompting an email from ThomasC. Baxter, Jr., General Counsel to the FRBNY, to
StephenCutleratJPMorgan.7821
Throughout the morning, Scott Sandler and Jane BuyersRusso at JPMorgan,
among others, emailed back and forth regarding why Lehman trades were cancelled
and whether trades, if any, should have been cancelled.7822 By midmorning on
Monday,JPMorganclarifieditsposition,anddeterminedthatJPM[would]continueto
act as the operating bank for [LBI] which include[d] being settlement bank for the
various exchanges and the fed wire . . ., but limited its aggregate exposure to $1
billion.7823
Other clearing banks and organizations also continued to provide clearing
services and financing to LBI during the week following LBHIs bankruptcy. From
Monday,September15throughWednesday,September17,BarclaysprovidedLBIwith
securedfinancingpursuanttoanovernightrepofacility.Barclaysfinancingunderthat
repo facility grew from approximately $2 billion on Monday to $15.8 billion by

7820EmailfromKevinMurphy,JPMorgan,toHenrySteward,JPMorgan,etal.(Sept.15,2008)[JPM2004

0047736].
7821SeeemailfromThomasC.Baxter,Jr.,FRBNY,toStephenCutler,JPMorgan(Sept.15,2008)[JPM2004
0055286](expressingtheFRBNYsconcernthatJPMorganwasnotwillingto provideintradaycreditto
LBI).
7822SeeemailfromScottSandler,JPMorgan,toEdwardJ.Corral,JPMorgan,etal.(Sept.15,2008)[JPM
20040030786].
7823EmailfromJaneBuyersRusso,JPMorgan,toBarryL.Zubrow,JPMorgan,etal.(Sept.15,2008)[JPM
20040055008].

2122

Wednesdayevening.7824BarclaysalsoagreedtoprovideLBHIwith$450millioninDIP
financing.7825
Depository Trust & Clearing Corporation (DTCC) entities, which provided
clearingandsettlementservicesforarangeofequities,corporateandmunicipalbonds,
government and mortgagebacked securities, money market instruments and OTC
derivatives, continued to clear transactions for LBI during the week following LBHIs
bankruptcy.7826 The CME Group, which was comprised of four commodities markets
(the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York
Mercantile Exchange and COMEX), also continued to clear customer transactions;
however,whenonWednesday,September17,theCMElearnedthatBarclayswouldnot
beassuminganyLBIhousepositionsaspartofthesale,theCMEliquidatedallofLBIs
housepositionsattheCMEatasubstantiallosstoLBIanditsaffiliates.7827TheOptions
ClearingCorporation (OCC), the clearingorganizationformost domestic exchange
traded commodities options, also continued to clear option transactions for LBI even
after BofA, LBIs settlement bank for OCC transactions, refused to continue acting for
LBIandtheOCChadtosettledirectlywithLBIbywire.7828

7824Examiners Interview of James W. Hraska, Oct.8, 2008, at p. 4; email from Teri Scott, Barclays, to

JonathanStone,Barclays,etal.(Sept.18,2008)[BCIEX(S)00038011].
7825SeeSeniorSecuredSuperpriorityDebtorinPossessionCreditAgreementamongLBHI,BarclaysBank
PLCandBarclaysCapital(Sept.17,2008).
7826ExaminersInterviewofIsaacMontal,May19,2009,atp.5.
7827ExaminersInterviewofTimothyDoar,Oct.16,2009,atpp.45.
7828SeeSectionIII.C.6.f.3ofthisReport,whichdiscussestheOCCingreaterdetail.

2123

Citi,7829LehmansproviderofContinuousLinkedSettlement,orCLS,services
for transactions conducted in more than one currency, also continued to provide
clearing services to LBI postpetition, albeit only after LBI posted a deposit with Citi.
AswithJPMorgan,CitiprovidedshorttermfinancingtoLehmantofacilitateitsmulti
currency transactions. Citi terminated LBIs access to Citis CLS services on
September17,2008,butwithdrewthatterminationafterBarclayspledged$700million
toCitionLehmansbehalf.7830
LBI also was party to triparty term repos that had not yet expired, and also
continuedtoobtainovernightfundingthroughGCF(GeneralCollateralFinance)repos,
a triparty dealertodealer program offered by Fixed Income Clearing Corporation (a
DTCCsubsidiary)onananonymousbasis.7831
Together,thesesourcesofclearingandsecuredrepofinancingpermittedLBIto
survivewhileasaletoBarclayswasnegotiatedandconsummated.
c)

NegotiationsLeadingtoAPA

AsnewsoftheimpendingLBHIbankruptcyspreadthroughLehmanonSunday,
September14,Lehmanbegantoconsiderwhetherasaleofonlythebroker/dealer(LBI)

7829SeeSectionIII.A.5.cofthisReport,whichdiscussesCitiingreaterdetail.
7830SeeSectionIII.A.5ofthisReport,whichdiscussesCitisterminationofC&SServicesingreaterdetail.
7831SeeemailfromDavidWeisbrod,JPMorgan,toJamieL.Dimon,JPMorgan,et.al.(Sept.15,2008)[JPM

2004 0080146] (listing $21 billion in mainly term repos as part of LBIs triparty borrowing for
September15).

2124

in bankruptcy was possible.7832 At about 6:00 p.m. on Sunday, September14, MarkJ.

Shapiro, the head of the restructuring group at Lehman, went to McDades office to
make sure that [McDade] understood that Barclays could purchase Lehman in
bankruptcy.7833
McDade called Diamond and asked if Barclays was interested.7834 Diamond
calledMcDadebackashorttimelater,saidthatBarclayswas,andthatLehmanshould
haveitsteamreadytomeetwithBarclaysteamat7:00a.m.thenextmorning.7835Calls
also were made to Bank of America, HSBC and Nomura, but Barclays was the only
entityinterestedinpursuingatransactionwithLBI.7836
Around10:30p.m.thatevening,ShapirocalledBryanMarsalofA&Mandasked
MarsaltoserveasthechiefrestructuringofficerofLBHI.7837

7832ExaminersInterviewofJamesP.Seery,Jr.,Nov.12,2009,atp.2.
7833TranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBros.HoldingsInc.,CaseNo.08

13555,Bankr.S.D.N.Y.,Aug.7,2009,atp.16.Shapirohadnotbeeninvolvedinthepreviousnegotiations
betweenLehmanandBarclays;hehadbeenpreparingforapossiblebankruptcyfiling.Id.atpp.1415.
7834TranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBros.HoldingsInc.,CaseNo.08
13555, Bankr. S.D.N.Y., Aug. 7, 2009, at pp. 1617; transcript of deposition testimony of Herbert H.
McDade,III,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atp.16;
transcriptofdepositiontestimonyofRichRicci,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.
S.D.N.Y.,Sept.8,2009,atpp.1819;transcriptofdepositiontestimonyofJerrydelMissier,InreLehman
Bros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.1,2009,atpp.4243.
7835Email from Michael Klein, consultant retained by Barclays, to Robert E. Diamond, Jr., Barclays
(Sept.15,2008)[BCIEX(S)00110306](discussingthe7:00a.m.meetingscheduledforthatmorningwith
Lehman);transcriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBros.HoldingsInc.,CaseNo.
0813555, Bankr. S.D.N.Y., Aug. 7, 2009, at p. 20; transcript of deposition testimony of Rich Ricci, In re
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.8,2009,atp.21.
7836ExaminersInterviewofJamesP.Seery,Jr.,Nov.12,2009,atp.2.
7837TranscriptofdepositiontestimonyofBryanP.Marsal,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Dec.22,2009,atpp.67;transcriptofdepositiontestimonyofPhilipKruse,Inre
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Dec.17,2009,atp.8.A&Msfirstdayat

2125

Barclayshadanticipatedthatthere mightbeanopportunityto negotiatea deal

withLehmanafterLBHIfileditsChapter11petition.InamemorandumtotheBarclays
BoardofDirectorsdatedSeptember15,Varleystated:
WementionedatthetelephonemeetingoftheBoardonSundayevening
that wewouldseek to pursuevigorouslyopportunities coming to out of
Long Island going into Chapter 11 in the US and into administration
elsewherearoundtheworld.
Asweanticipated,[Diamond]wascontactedovernightbytheLongIsland
leadershipteamaskingwhetherwemightbeinapositiontoacquirelarge
parts of the business from the administrators; and that if so they would
seektoprotectasmuchofthebusinessastheycouldasagoingconcern.
We received assurance from them that this was a conversation taking
placeonlywith Barclaysand wehave noreasonto doubt that assurance
although, of course,Long Island staff arebeing raided freely around the
worldasIwrite.
Weareurgentlydimensioningwhatwethinkmaybeavailable.Thecore
would be the US broker deal[er] (securities trading, investment banking
and wealth management). We are assessing what this might imply in
terms of balance sheet takeon and associated WRAs [riskweighted
assets]andcapitalrequirements;andpeopletakeon.Wearealsoseeking
to formaviewwhichismuchlessscientificnowthat thereisnoLong
Islandsharepriceastotheconsiderationthatwemightbepreparedto
paytotheadministrator.
We have had contact with the US authorities today and they are, as you
wouldexpect,verysupportiveofthisinitiative....7838

LehmanwasonSept.15,2008.TranscriptofdepositiontestimonyofBryanP.Marsal,InreLehmanBros.
HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Dec.22,2009,atpp.67.
7838Memorandum from John Varley, Barclays, to Barclays Board of Directors, re: Long Island (Sept.15,
2008) [BCIEX00079170]; see also email from Marie Smith, Barclays, to Marcus Agius, Barclays, et al.
(Sept.15, 2008) [BCIEX00079168] (transmittal email to board members); transcript of deposition
testimonyofMichaelKlein,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.12,
2009, at p. 36 (testifying that, after word spread on Sunday that the proposed transaction between
BarclaysandLehmanwasnotgoingforward,theBarclaysteamhadanumberofcallstodeterminehow
deadisdead,andwhatcouldbedonenext).

2126

The postbankruptcy negotiations between Lehman and Barclays began in

earnest with a telephone call early Monday morning between McDade, McGee and
Shafir for Lehman, and Diamond, del Missier and Klein for Barclays.7839 During that
call, Barclays expressed concern about whether Barclays would be buying an intact
business, given media reports about Lehman employees leaving the headquarters
building in droves.7840 Lehman responded that it was confident that, if the deal was
donequicklyenough,itcouldkeepalargepartofthebusinesstogetheranddeliveritto
Barclays.7841
(1) Participants
The negotiations between Lehman and Barclays principally were conducted on
the32ndfloorofLehmansheadquartersbuilding.7842Thatfloorincludedamaindining
room that housed the principal negotiators and various others who came and went
during the negotiations; fifteen or so other dining rooms were assigned to the teams
thatLehman,Barclaysandothershadformedtoaddressvariousaspectsofthedeal.7843

7839Transcript of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case

No.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atp.16;seealsotranscriptofdepositiontestimonyofMichael
Klein, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.12, 2009, at p. 38
(recallingcall).
7840Transcript of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case
No.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atp.17.
7841Id.
7842TranscriptofdepositiontestimonyofStevenBerkenfeld,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.6,2009,atp.37.
7843Transcript of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case
No. 0813555, Bankr. S.D.N.Y., Sept.2, 2009, at pp. 2122; transcript of deposition testimony of Mark J.
Shapiro,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.6,2009,atp.42.

2127

McDade,Shapiro,ShafirandMcGeeofLehman,andHarveyR.Miller,LoriFife,
Thomas A. Roberts and Michael Lubowitz of Weil were the principal negotiators for
Lehman.7844TheyweresupportedbyanumberofseniorLehmanpersonnel,including
Steven Berkenfeld, Gerald Donini, Eric Felder, Michael Gelband, Martin Kelly, Alex
Kirk, Ian Lowitt, James Seery and Paolo Tonucci.7845 Lazard, which was advising
Lehman, also sent several people, including Barry Ridings, to participate in the
negotiations.7846
Ricci, Cox, and Klein of Barclays, and Lewkow of Cleary Gottlieb, were the
principal negotiators for Barclays.7847 They were supported by a number of Barclays
employeesaswellasClearyGottliebandSullivan&Cromwelllawyers.

7844SeeLehman,ProjectGreenWorkingGroupList(Sept.15,2008)[BCICG00001917],attachedtoemail

fromElizabethDayton,Lehman,toArchibaldCox,Jr.,Barclays,etal.(Sept.15,2008)[BC1CG00001916]
(contactlistfornegotiations);seealsotranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehman
Bros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.7,2009,atpp.4648;transcriptofdeposition
testimonyofHerbertH.McDade,III,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,
Sept.2, 2009, at pp. 1819; transcript of deposition testimony of Steven Berkenfeld, In re Lehman Bros.
HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.6,2009,atpp.3739.
7845TranscriptofdepositiontestimonyofMartinKelly,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Aug.18,2009,atpp.5253;transcriptofdepositiontestimonyofHughE.McGee,III,In
reLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.10,2009,atpp.1113;transcriptof
deposition testimony of Mark J. Shapiro, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr.
S.D.N.Y.,Aug.7,2009,atpp.4654;transcriptofdepositiontestimonyofJamesP.Seery,Jr.,InreLehman
Bros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.3,2009,atpp.4748;transcriptofdeposition
testimony of Steven Berkenfeld, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y.,
Aug.6,2009,atpp.3740.
7846See,e.g.,emailfromArthurBruhmuller,Lazard,toStephenCampbell,Lazard,etal.(Sept.15,2008)
[LAZC00044714].
7847TranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBros.HoldingsInc.,CaseNo.08
13555, Bankr. S.D.N.Y., Aug. 7, 2009, at pp. 4748; see Lehman, Project Green Working Group List
(Sept.15,2008)[BCICG00001917],attachedtoemailfromElizabethDayton,Lehman,toArchibaldCox,
Jr.,Barclays,etal.(Sept.15,2008)[BCICG00001916].

2128

The parties negotiated through the day Monday and through the night into
Tuesdaymorning,andreachedanagreementonageneralstructureandterms.Itthen
tookanotherdaytofinishnegotiatinganddraftingtheAPA.
(2) StructureofTransaction
The principal difference between the failed proposal that had been negotiated
prior to LBHIs bankruptcy, and the transaction Lehman and Barclays began
negotiatingonSeptember15,wasthattheprebankruptcyproposalcalledforBarclays
acquisitionoftheworldwideLehmanenterprisewiththeexceptionofcommercialreal
estate and private equity assets while the bankruptcy transaction involved the
acquisitionofonlyLehmansUnitedStatesbrokerdealerbusiness.Thatwasreflected,
interalia,inthesizeofthebalancesheetsofthebusinessesthatBarclayswasnegotiating
to acquire: approximately $600 billion in the prebankruptcy proposal, compared to
approximately$70billioninthepostbankruptcyproposal.7848
The structure of the postbankruptcy transaction began to take shape over the
course of the afternoon of September15.7849 Barclays would acquire the Lehman
headquartersbuildinginManhattanandtwodatacentersinNewJersey,atappraised

7848Lehman,LBIBalanceSheet(Sept.15,2008),atp.1[LBHI_SECO7940_382574],attachedtoemailfrom

RyanTraversari,Lehman,toArchibaldCox,Jr.,Barclays,etal.(Sept.15,2008)[LBHISEC07940382573];
Lehman, LBI Summary Balance Sheet (Sept.17, 2008), at p.1 [LBEXDOCID46613], attached to email
from James Walker, Barclays, to Martin Kelly, Lehman, et al. (Sept.17, 2008) [LBEXDOCID 464234];
transcript of deposition testimony of John Varley, In re Lehman Bros. Holdings Inc., Case No. 0813555,
Bankr.S.D.N.Y.,Sept.11,2009,atp.27.
7849Transcript of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case
No.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atp.18.

2129

values, and would pay $250 million to acquire the rights to operate Lehmans
broker/dealer business and the assets and liabilities directly associated with and
necessarytotheoperationofthebusiness.7850
Earlyin the afternoonofSeptember15,Diamond emailed Varleyand Lucas to
updatethemonthenegotiation,saying:
Highlevelnumbers
10,000 people (of 26,000), maybe some separately from Europe and Asia,
say2,000relatedtoUSbusinesses
100bdollarbalancesheet(of600)
Tech,indexes
IBDandMandAstaff
Probablyleasespace,butmaybebuysomebuildings.
Need US business, broker/dealer capitalized at $5 billion, we have 2 in
barcap.Soneed3to5billionequityraisingIthink
Priceminimal,wethink.7851
WitnessesadvisedtheExaminerthatthenegotiationsonMonday,September15,
andTuesday,September,16,werearmslengthandvigorousnegotiations.Ridings,for
example, indicated that notwithstanding the LBHI bankruptcy and the fact that
Barclays was the only bidder, Lehman nonetheless retained bargaining power in its

7850Transcript of deposition testimony of Michael Klein, In re Lehman Bros. Holdings Inc., Case No. 08

13555, Bankr. S.D.N.Y., Sept.12, 2009, at pp. 4753, 54; transcript of deposition testimony of James P.
Seery,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.3,2009,atpp.5253,
6061.
7851SeeemailfromRobertE.Diamond,Jr.,Barclays,toJohnVarley,Barclays,etal.(Sept.15,2008)[BCI
EX(S)00025361]; see also email from Rich Ricci, Barclays, to Robert Le Blanc, Barclays, et al. (Sept.15,
2008)[BCIEX00082251].

2130

negotiationswithBarclays.Ridingsstatedthatthenegotiationsweregenuine,inpart,
because there was a credible threat that the Court would refuse to approve the
transactionifthingswerenothandledappropriately.7852
(3) NegotiationsRegardingSecuritiesPositionstobePurchased
byBarclays
(a) OnSeptember15and16,LehmanandBarclaysReview
LehmansSecuritiesPositionsandMarks
DuringthenegotiationsonMondayandTuesday,assetexpertsfromLehman
and Barclays focused on reviewing the various classes of LBI securities positions, and
themarksassociatedwiththoseassets.7853
Thatprocessbeganwithdeterminingthepopulationofsecuritiespositionsthat
was held by LBI and available for transfer.7854 On Monday afternoon and evening,
Lehman assembled information regarding the LBI securities positions available to be

7852ExaminersInterviewofBarryW.Ridings,Oct.1,2009,atp.2.
7853Transcript of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case

No. 0813555, Bankr. S.D.N.Y., Sept.2, 2009, at pp. 2427; transcript of deposition testimony of Stephen
King,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.10,2009,atpp.2324,26
33; transcript of deposition testimony of Michael Keegan, In re Lehman Bros. Holdings Inc., Case No. 08
13555,Bankr.S.D.N.Y.,Aug.28,2009,atpp.2529;seetranscriptofdepositiontestimonyofMartinKelly,
InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.18,2009,atpp.3435(describing
involvementinassemblyofinformationrelatedtoassetstobesoldtoBarclays).
7854Transcript of deposition testimony of Stephen King, In re Lehman Bros. Holdings Inc., Case No. 08
13555,Bankr.S.D.N.Y.,Sept.10,2009,atpp.2325;transcriptofdepositiontestimonyofMarkJ.Shapiro,
In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 7, 2009, at pp. 97102.
DeterminingwhetheraparticularsecuritiespositiononLBIsbookswasavailablefortransfertoBarclays
wasanimportanttask,because,LBIheldsecuritiesinavarietyofcapacities.LBIdidnothavethelegal
right to transfer all of the securities in its possession and control. See Section III.C.3.a.1 of this Report,
whichdiscussesLBIsholdingofsecurities.

2131

sold,includingbothlongandshortpositions.7855Theresultwascapturedinasummary
document entitled Lehman Brother[s] Inc Balance Sheet by GAAP Asset Type
9/12/08.7856 The document described LBIs total long and short securities positions as
follows:
GAAPAssetClass

NetLongInventory

NetShortInventory

TotalCDsandOtherMonMkt
Instr.Total

$1,014,274,052

$0

TotalCorp.Obligations&Spot
Total

$5,141,203,903

($2,003,710,797)

CorporateStocks&Options
Total

$8,431,893,804

($6,951,162,769)

TotalDerivatives&OtherContr.
Total

$4,838,239,449

($4,535,705,348)

$39,173,255,499

($35,003,084,874)

$6,556,460,569

($15,959,609)

$65,155,327,276

($48,509,623,397)

TotalGovernments&Agencies
Total
TotalMortgages&Mortgage
BackedTotal
GrandTotal

Lehman provided that summary of LBI securities positions to Barclays.7857

Lehman also provided Barclays with voluminous listings of long and short securities
positionsasofSeptember12,2008.7858

7855See,

e.g., email from Kevin Horan, Lehman, to Gerard M. Reilly, Lehman, et al. (Sept.15, 2008)
[LBHI_SEC07940_2543309].
7856SeeLehman,BalanceSheetbyGAAPAssetType(Sept.12,2008)[LBEXDOCID999276],attachedtoe
mail from Gerard M. Reilly, Lehman, to Michael Gelband, Lehman (Sept.15, 2008) [LBEXDOCID
818160].
7857Seeid.;transcriptofdepositiontestimonyofStephenKing,InreLehmanBros.HoldingsInc.,CaseNo.
0813555, Bankr. S.D.N.Y., Sept.10, 2009, at pp. 3437 (testifying that he saw the summary schedule on

2132

Lehman also provided Barclays with an LBI balance sheet summary that
reflected an estimate of the securities assets and liabilities of the firm as of
September15. That balance sheet summary was provided to Barclays at 9:39 p.m. on
September15;arevisedversionwasprovidedtoBarclaysat10:04p.m.7859Therevised
LBI balance sheet summary listed estimated total assets as of September15 of $75.3
billion,consistingof$65.3billionofsecuritiesinventoryandcashassets,and$10billion
ofmatchedbookassets.7860Therevisedbalancesheetsummarylistedtotalliabilities
asofSeptember15of$73billion.7861Thebalancesheetsummaryisreproducedbelow:

September15 and 16); Barclays, Balance Sheet by GAAP Asset Type (Sept. 12, 2008) [BCIEX(S)
00074257] (with handwritten notes), attached to email from Jasen Yang, Barclays, to James Walker,
Barclays,etal.(Sept.17,2008)[BCIEX(S)00074256].
7858See Lehman, LBI long position inventory (Sept.15, 2008) [LBHI_SEC07940_2547489], attached to e
mail from Michael Garvey, Lehman, to Stephen King, Barclays, et al. (Sept.15, 2008)
[LBHI_SEC07940_2547488]; Lehman, LBI short balance sheet detail (excluding equities) as of Sept. 12,
2008(Sept.12,2008)[BCIEX(S)00054319],attachedtoemailfromMichaelGarvey,Lehman,toStephen
King, Barclays, et al. (Sept.15, 2008) [BCIEX(S)00054317]. Barclays subsequently determined that the
totalvalueslistedforthecategoriesofsecuritiesonthesummarychartdidnottieoutineveryinstance
to the sum of the individual values of the securities in the detail; for example, the summary sheet
indicated that the Total Corp. Obligations & Spot Total long positions totaled $5,141,203,903, but the
securitiesincludedinthedetailedlistingforthatcategorydidnotsumtothatamount.Seeemailfrom
JasenYang,Barclays,toJamesWalker,Barclays,etal.(Sept.17,2008)[BCIEX(S)00074256];transcriptof
deposition testimony of Stephen King, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr.
S.D.N.Y.,Sept.10,2009,atpp.3940.
7859Lehman, Balance Sheet (Sept.15, 2008) [LBHISEC 07940382490], attached to email from Ryan
Traversari,Lehman,toArchibaldCox,Jr.,Barclays,etal.(Sept.15,2008)[LBHI_SEC07940_382489];email
from Ryan Traversari, Lehman, to Archibald Cox, Jr., Barclays, et al. (Sept.15, 2008)
[LBHI_SEC07940_382573]andattachment[LBHI_SEC07940_382573](revisedbalancesheet).
7860Lehman, Balance Sheet (Sept.15, 2008) [LBHISEC 07940382573] attached to email from Ryan
Traversari,Lehman,toArchibaldCox,Jr.,Barclays,etal.(Sept.15,2008)[LBHI_SEC07940_382573].
7861Id.

2133

LBI
InUS$billion

CashandCashEquivalents

CashandSecuritiesSegregated

Inventory

MatchedBook

Receivables

InvestmentsinSubsidiaries

IntercompanyReceivables
TotalAssets

ShortPositions

MatchedBook

Payables

IntercompanyPayables

SubordinatedNotes
TotalLiabilities

ShareholdersEquity
TotalLiabilities&ShareholdersEquity

9/15/2008estimate
1.3
0.0
64.0
10.0
0.0
0.0
0.0
75.3

56.0
10.0
0.0
0.0
7.0
73.0

2.3
75.3

From Monday evening through early Tuesday morning, the Lehman and
Barclays teams discussed the marks associated with LBIs securities portfolio.7862
McDade testified that there was a bottomsup process, albeit in a very quick time
period,ofestablishingafairmarketvaluefortheindividualassets.7863Kingdescribed

7862SeeemailfromStephenKing,Barclays,toRyanBabcock,Barclays,etal.(Sept.15,2008)[BCIEX(S)

00054291] (stating, [n]eed to look just at securities. Do we have line by line pricing on all cusips?);
transcript of deposition testimony of Stephen King, In re Lehman Bros. Holdings Inc., Case No. 0813555,
Bankr. S.D.N.Y., Sept.10, 2009, at pp. 2324, 2633; transcript of deposition testimony of Herbert H.
McDade,III,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atpp.25
27; transcript of deposition testimony of Michael Keegan, In re Lehman Bros. Holdings Inc., Case No. 08
13555, Bankr. S.D.N.Y., Aug. 28, 2009,at pp. 2529; see also transcript of deposition testimony ofMartin
Kelly, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 18, 2009, at pp. 3435
(describinginvolvementinassemblyofinformationrelatedtoassetsbesoldtoBarclays).
7863Transcript of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case
No.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atp.26.

2134

a process on September 15 and 16 in which Barclays went through the LBI securities
andestimatedvalues.7864
As the discussions regarding the securities progressed, Martin Kelly and Paolo
Tonucciwerepreparingschedulesofassetsandliabilitiespertainingtothetransaction,
which were used in the negotiations.7865 Several versions of the schedules were
created.7866ThelastscheduleisdatedSeptember16,2008at11:18a.m.,andincludesa
handwritten notation 9/16/08 Final, with the initials SB underneath.7867 SB is
StevenBerkenfeld,whomadethehandwrittennotes.7868Berkenfeld,headoftheLegal,
Compliance and Audit Division at Lehman, characterized the schedule as the final
schedule of the estimate of assets and liabilities that would be transferred over to
Barclays.7869Thefinalscheduleisreproducedbelow:

7864Transcript of deposition testimony of Stephen King, In re Lehman Bros. Holdings Inc., Case No. 08

13555,Bankr.S.D.N.Y.,Sept.10,2009,atpp.2733.
7865TranscriptofdepositiontestimonyofStevenBerkenfeld,InreLehmanBros.HoldingsInc.,CaseNo.08
13555, Bankr. S.D.N.Y., Aug. 6, 2009, at pp. 3437, 47; see also email from James Walker, Barclays, to
MartinKelly,Lehman,etal.(Sept.17,2008)[LBEXDOCID464234](referringtoattachedbalancesheet
[that]wasusedbytheLEHsideintheovernightdiscussionsofMonday),Schedule(Sept.16,2008)[BCI
EX00115595];Schedule(Sept.16,2008)[BCICG00033789].
7866Email from Patrick Clackson, Barclays, to Bill Castell, Barclays, et al. (Sept.16, 2008) [BCIEX(S)
00023848];FinalSchedule(Sept.16,2008)[BCICG00033742].
7867LehmanFinalBalanceSheet(Sept.16,2008)[BCICG00033742];transcriptofdepositiontestimonyof
StevenBerkenfeld,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.6,2009,at
p.48(explainingwhytwoversionsoftheschedulebearhisinitialsandthewordfinal).
7868TranscriptofdepositiontestimonyofStevenBerkenfeld,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.6,2009,atpp.4748.
7869Id.atp.49;seetranscriptofdepositiontestimonyofIanT.Lowitt,InreLehmanBros.HoldingsInc.,Case
No.0813555,Bankr.S.D.N.Y.,Aug.20,2009,atp.80(testifyingthattheschedulewasdesignedtotrack
the assets and liabilities that Barclays would take); transcript of deposition testimony of Herbert H.
McDade,III,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atpp.53

2135

ASSETS

Gov&Ag
$40.0
CommercialPaper
1.1
Mortgages
2.7
TotalCorpDebt
4.9
CorpEquity
8.8
Derivatives
4.5
Cash
0.7
_________________________________
Total
$62.7

CollateralizedSTAgr
10.0
Receivables
0.0
OtherAssets
0.0
InvInConSubs
0.0
DueFromSubs
0.0
_________________________________
Total
10.0

_________________________________
Adj.TotalAssets
$72.65

LIABILITIES

STBorrowings
$0.0
Gov&Ag
21.0
CommercialPaper
0.0
Mortgages
0.0
CorpDebt
2.1
CorpEquities
6.3
Derivatives
4.5
_________________________________
Total
$33.9

34.5
CollateralizedSTFund
Payables
0.0
Deposits
0.0
DuetoSubs
0.0
SubNotes
0.0
_________________________________
Total
34.5

Total
68.4

Curepmt
2.25
Comp
2.0
_________________________________
Total
$72.65

Witnesses interviewed by the Examiner have different impressions of whether

the sale transaction was supposed to be a wash (other than $250 million for the
goodwill). For example, Thomas Roberts of Weil described the sale transaction, as
closed,asverysimilartothetransactioncontemplatedintheAPA.7870Robertsindicated
that both deals entailed (1)Barclays acquisition of assets and liabilities at a wash;
(2)the purchase of the 745 Seventh Ave. headquarters and other real estate assets at
appraised values; (3) the payment of $250 million for goodwill; and (4) job protection

55(testifyingthattheschedulerepresentedasummationoftheliabilitiesthatBarclayswouldassumeand
theassetsitwouldacquire).
7870ExaminersInterviewofThomasA.Roberts,Apr.28,2009.

2136

for roughly 10,000 employees for 90 days.7871 Roberts stated that Barclays eventually
bought the assets and liabilities generally at a wash, albeit in a smaller amount than
originally contemplated. The final schedule of assets and liabilities dated
September16circulatedinconnectionwiththetransactionshowedanequalamountof
financialassetsandliabilitiesbeingtransferredtoBarclays,7872asdidthemanilafolder
used by Michael Klein during the closing weekend to sketch out the terms of the
transactionfortheCreditorsCommittee.7873
James Seery indicated, however, that the sale transaction was intended to
maintainthebroker/dealerenterprisevalue.7874InSeerysmind,thetransactiondidnot
involve the concept of a wash sale or transfer of a balanced book of assets and
liabilities; rather, he viewed the transaction to simply involve the purchase of all
securitiespositions(nomatterthevalue)relatingtothebroker/dealerbusiness.7875Seery
indicated that when the Debtors and Barclays reached an agreement on Tuesday,
September16, all of the parties understood that the population of long and short
positions would change before the transaction closed because, among other things,
counterpartieswereclosingouttheirtradeswithLBI.7876Seeryindicatedthathedidnot
know,however,whethertherewasanagreementconcerningwhatwouldhappenifthe

7871Id.
7872Lehman,FinalBalanceSheet(Sept.16,2008)[BCICG00033742].
7873MichaelKlein,consultantretainedbyBarclays,NotesonFolder[DepositionExhibit338B].
7874ExaminersInterviewofJamesP.Seery,Jr.,Nov.12,2009,atp.2.
7875Id.
7876Id.

2137

approximately $1 billion spread between the long and short securities positions
identifiedintheAPAincreasedsignificantlybeyond$1billion(orvanished).7877
(b) BarclaysAgreestoPurchaseLongSecuritiesPositions
WithaBookValueofApproximately$70Billion
WhileLehmanandBarclaysnegotiatorswereaddressingthecategoriesofassets
tobeconveyedinthedeal,WeilandClearylawyersweredraftingandnegotiatingthe
APA. The first draft of the APA was circulated by email shortly before midnight on
Monday, September 15,7878 and the document was finalized early in the morning on
Wednesday,September17.7879
In the APA, Barclays agreed to purchase all of Sellers and its applicable
Subsidiaries right, title and interest in, to and under the Purchased Assets free and
clear of all Liens pursuant to Section 363(f) of the Bankruptcy Code.7880 Purchased
Assets were defined as all of the assets of Seller and its Subsidiaries7881 used in
connectionwiththeBusiness(excludingtheExcludedAssets),including:

7877Id.
7878Asset

Purchase Agreement [Draft] [BCICG00002116], attached to email from Andy R. Keller,

SimpsonThacher,toDuaneMcLaughlin,ClearyGottlieb(Sept.15,2008)[BCICG00002115].Thatisthe
firsttimethatadraftoftheAPAwascirculatedbyemail.Itispossiblethatearlierdraftswerecirculated
byhandorotherwisereviewedbythelawyerswhowereonthe32ndflooroftheLehmanheadquarters
building. Examiners Interview of Lindsee P. Granfield and Robert Davis, Mar.3, 2009, at p.2;
ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.10.
7879AssetPurchaseAgreement[FinalizedDraft][BCICG00008018],attachedtoemailfromLillianRaben,
ClearyGottlieb,toDanielChin,Weil,etal.(Sept.17,2008)[BCICG00008016].
7880APA,atp.11(2.1).
7881See Section III.C.2.a.c of this Report, which discusses the definition of Purchased Assets. The
definition was amended in the Clarification Letter to provide, among other things, that assets of
SubsidiarieswerenottobeconveyedtoBarclaysinconnectionwiththetransaction.Id.

2138

(a)
theRetainedCash;

[...]

(d) government securities, commercial paper, corporate

debt, corporate equity, exchange traded derivatives and
collateralized shortterm agreements with a book value as of the
date hereof of approximately $70 billion (collectively, Long
Positions);

(e)
50% of each position in the residential real estate
mortgagesecurities;

[...]7882

No securities, other than 50% of each position in residential real estate mortgage
securities(RMBS),wereExcludedAssets.7883
Inaddition,theAPAprovidedthatBarclayswouldassumecertainLiabilitiesof
Sellerand itsSubsidiaries,including,among other things,(i) allshortpositions and
repos relating to any securities or interests of the types included in the definition of
Long Positionswithabookvalue as ofthedatehereofofapproximately$69billion
(collectively,ShortPositionsand,togetherwithLongPositions,Positions).7884
TheAPAthusprovidedthatBarclayswouldpurchaseallofLBIslongsecurities
positionswiththeexceptionof50%ofeachpositioninRMBSandassumeallshort

7882APA,atp.6(1.1).
7883Id.
7884Id.atpp.1213(2.3(i)).

2139

securities positions relating to those long positions.7885 Presumably, by including both

long and short securities positions, Barclays would receive some protection against
risksassociatedwithmarketmovement;ifthemarketvaluesofthesecuritiesdropped,
thevalueofthelongpositionswoulddrop,butwouldbeoffsetbythereductioninthe
costoffulfillingBarclaysshortobligations.7886
TheLehmanandBarclaysnegotiatorsanticipatedthatthesecuritiescomprising
the Long Positions and Short Positions would change between execution of the APA
and the closing of the transaction, as LBI unwound its matched book and delivered
securitiestocompletetrades.7887

7885Id.atp.3(1.1)(definition(k)ofExcludedAssets),6(1.1)(definitions(d)and(e)ofPurchased

Assets), 11 (2.1, 2.2); see also email from GerardM. Reilly, Lehman, to Eric Felder, Lehman, et al.
(Sept.17, 2008) [LBEXDOCID 070268] (stating that [t]he only assets that are not going from my
understandingwhichis2ndhandare50%oftheresiandabsbooks);emailfromIanT.Lowitt,Lehman,
toGerardM.Reilly,Lehman,etal.(Sept.17,2008)[LBEXDOCID070268](replyingtoGerardM.Reillye
mailandstating,Thatismyunderstanding.Butcheckwithwhoeverdraftedthepurchaseagreement.);
email from Gerard M. Reilly, Lehman, to Martin Kelly, Lehman, et al. (Sept.17, 2008) [LBEXDOCID
464049](stating,[m]yunderstandingofthedealisthattheywillpurchaseourassetsthatremaininLBI
on the closing date which will not be the same as the assets on the 12th.); email from John Mahon,
Barclays,toMichaelKeegan,etal.(Sept.17,2008)[BCIEX00079087](stating,LBIhasborrowedandlent
stockandsecuritiesthatwerenotonthebalancesheetwesawonMondaynight....Theassetswesaw,
andsaidweweregoingtobuy,mayhavebeenlentoutandliabilitieswesawwouldhavebeencovered
byborrowingthosesecurities.);emailfromStephenKing,Barclays,toPatrickClackson,Barclays,etal.
(Sept.17, 2008) [BCIEX(S)00023992] (stating, [a]lso, can you[] think if there would be any securities
whichwouldhavebeengoodcollateralforthefedfacilitieswhichalsowouldhavebeenexcludedassets,
otherthanthesecuritiesthatIexcluded?Idontthinksobutwouldliketobesure.);emailfromPatrick
Clackson,Barclays,toStephenKing,Barclays,etal.(Sept.17,2008)[BCIEX(S)00023992](respondingto
King email, stating, The only excluded assets are the ones you excluded, nothing else, so no other
collateral.);transcriptofdepositiontestimonyofStephenKing,InreLehmanBros.HoldingsInc.,CaseNo.
0813555,Bankr.S.D.N.Y.,Sept.10,2009,atpp.22728.
7886ExaminersInterviewofJamesP.Seery,Jr.,Nov.12,2009,atpp.23.
7887Id.atp.2;transcriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBros.HoldingsInc.,Case
No.0813555,Bankr.S.D.N.Y.,Aug.7,2009,atpp.97100;emailfromJasenYang,Barclays,toCharles
Spero, Barclays, et al. (Sept. 17, 2008) [BCIEX(S)00054403]; email from Gerard M. Reilly, Lehman, to

2140

At issue in the litigation arising from the sale transaction is whether the
approximately $70 billion in book value of Long Positions referenced in the APA
reflectsanegotiatedpricebelowtheactualbookvalueofthosesecurities,andwhether
thetransactionincludedaburieddiscountthatwasretainedthroughtheclosing.As
explained above,theExamineris not reachingconclusions regardingthose issues,but
doessetforthbelowcertainfactsrelatingtothenegotiations.
At5:10a.m.onTuesdaymorning,September16,Kellysentan emailtoLowitt
andTonucci,stating:
Wellittookallnightandlotsofbackandforthbutthedealisdoneand
readyfortheBoard.Finalpricedidnotchangemeaningfullyapproxa
$5 b all in economic loss versus our marks and $3.6b of resi assets left
behind.Assumewecanfundthisaftereverythingelsewindsdownbut
Paolo you need to review this. Also, an extra $1b of comp beyond our
accrualandassumptionofalltradepayablesinLBIandLBHI.Took745
for$1bandseveraldatacentersfor$400mm.Bartreviewedallofitbefore
finalagreement....7888
On Wednesday, September 17, Gerard Reilly emailed Kelly, and said: My
understandingofthedealisthattheywillpurchaseourassetsthatremaininLBIonthe
closingdatewhichwillnotbethesameastheassetsonthe12th.Thatpurchasewillbe

MartinKelly,Lehman,etal.(Sept.17,2008)[LBEXDOCID464049](stating,[m]yunderstandingofthe
deal is that they will purchase our assets that remain in LBI on the closing date which will not be the
sameastheassetsonthe12th.).
7888Email from Martin Kelly, Lehman, to Ian T. Lowitt, Lehman, et al. (Sept.16, 2008) [LBEXDOCID
132844].WhenKellywasaskedinhisdepositionwhathemeantwhenhewroteinhisemailapprox
$5ballineconomiclossversusourmarks,hetestifiedthatherecall[ed]thatthe5billionrepresentsthe
differencebetweenthenegotiatedpriceandthevaluesofthoseassetsonLehmansbooks.Transcriptof
depositiontestimonyofMartinKelly,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,
Aug.18,2009,atpp.46;seealsoid.atpp.66,14344,156,15859.

2141

atafixeddiscountontheassetsthatremaintoreflectthebulksizeofthepurchase.7889
Some of the Lehman participants in the negotiations testified that it was their
understanding that Barclays was going to purchase the securities positions from
LehmanatanegotiatedpricethatwaslessthanLehmansbookvalue.7890
Otherparticipantsinthenegotiations,however,describedaprocessinwhichthe
negotiated price of the securities reflected an adjustment from Lehman marks from
Friday, September12, which were outdated. For example, McDade testified that the

7889EmailfromGerardM.Reilly,Lehman,toMartinKelly,Lehman,etal.(Sept.17,2008)[LBEXDOCID

464049]; email from Gerard M. Reilly, Lehman, to Ian T. Lowitt, Lehman (Sept.17, 2008)
[LBHI_SEC07940_383258](referringtopricehaircut,andnotingthat[i]fwewantconservativemarks
to reflect block nature we need to know how much and then we can allocate to most logical assets);
Martin Kelly, Lehman, Handwritten Notes (Sept.17, 2008) [BCIEX00115169]; transcript of deposition
testimonyofMartinKelly,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.18,
2009, at pp. 22129 (testifying that $5.25 billion figure in his handwritten notes likely refers to the
differencebetweenthebookvalueofthesecuritiesandthenegotiatedprice);emailfromDirkHaseruck,
Lehman, to Eric Felder, Lehman, et al. (Sept.18, 2008) [LBEXDOCID 182777] (referencing the gap
between current MV and purchase price); email from Charles Spero, Lehman, to Michael Gelband,
Lehman,etal.(Sept.18,2008)[LBHI_SEC07940_732682](statingthat,Ithinktheycategorizedmortgage
asallabs,cdo,privatelabel,etc.Theyviewthebulk/liquiditydiscountasroughly1.5blnonthathalfof
thetotalbook.);emailfromArthurBruhmuller,Lazard,toDanielFlores,Lazard,etal.(Sept.17,2008)
[LAZC00048526](stating,[w]earetryingtogetasenseforhowthemarkshaveevolvedsinceFriday.I
thinkthefirstprioritywouldbetoseetheinventoryofwhatsbeingsold,howthemarkshaveevolved
and info on the buyer discount.); Net Asset and Funding Estimates (Sept. 2008) [BCIEX00166340]
(documentfromJohnVarleysfiles,whichincludesanapparentreferencetoanegotiateddiscountof
$5billion);transcriptofdepositiontestimonyofJohnVarley,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Sept.11,2009,atpp.15557.
7890SeetranscriptofdepositiontestimonyofIanT.Lowitt,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.20,2009,atpp.4142;transcriptofdepositiontestimonyofMartinKelly,In
re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 18, 2009, at p. 66; transcript of
deposition testimony of PaoloR. Tonucci, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr.
S.D.N.Y.,Aug.14,2009,atpp.2728.

2142

agreed upon price was different from Lehmans book value because Lehman hadnt
markedthebookssinceFriday,September12.7891
(4) NegotiationsRegardingContractCureandEmployee
CompensationLiabilities
Duringthenegotiations,LehmanandBarclaysalsoaddressedwhetherBarclays
would assume (a) cure cost liabilities relating to contracts assigned to Barclays
pursuant to Section 365 of the Bankruptcy Code; and (b) compensation liabilities
associatedwiththeLehmanemployeesofferedemploymentatBarclays.
(a) ContractCureCosts
ShapiroofLehmanaddressedtheissueofcontractcurecostswithCoxandKlein
of Barclays.7892 Shapiro insisted that, with respect to contracts that Barclays would
designatetobeassumedandassignedtoit,theAPAmustprovidethatBarclayswould
beresponsibleforcurecosts.7893

7891Transcript of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case

No. 0813555, Bankr. S.D.N.Y., Sept. 2, 2009, at pp. 3031; see also transcript of deposition testimony of
BarryW. Ridings, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Jan. 15, 2010, at
p.29; transcript of deposition testimony of Stephen King, In re Lehman Bros. Holdings Inc., Case No. 08
13555,Bankr.S.D.N.Y.,Sept.10,2009,atp.153(testifyingthatLehmanmarkswereold,theywerewhat
wecallstale);Id.atpp.2833(describingprocessusedbyBarclaystoestimaterevisedvaluesforLehman
securities); transcript of deposition testimony of Michael Keegan, In re Lehman Bros. Holdings Inc., Case
No.0813555,Bankr.S.D.N.Y.,Aug.28,2009,atpp.2526(describingprocessinwhich,whereBarclays
team determined that assets were materially mismarked on Lehmans books, Barclays would present
Lehmanwithproposedrevisedmark).
7892TranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.7,2009,atpp.5557.
7893Id.

2143

CoxandKleinaskedforanestimateofcurecosts.7894ShapiroaskedGeorgeMack
andothersatLehmantodevelopanestimateofcurecosts.7895Themethodtheyusedto
develop an estimate was to look at a snapshot of Lehmans ordinary payables run,
and then exclude compensationrelated payables in order to develop an estimate.7896
Shapirorecalledthattheprocessproducedanestimateof$1.5billion.7897
In the Sale Motion filed on September 17, the Debtors represented that, in
connection with the proposed transaction, Barclays would assume an estimated $1.5
billionofliabilitiesunderassumedcontracts.7898Duringthesaleprocedureshearingon
Wednesday, September 17, the Court noted that Barclays was taking on 1.5 billion
dollarsincureamounts.7899
The summary schedule of assets and liabilities dated September 16 discussed
aboveincludeda$2.25billionestimateforcurecosts.7900Shapirodidnotrecallwhythe

7894Id.atp.59.
7895Id.atpp.6265.
7896Id.; see also transcript of deposition testimony of James P. Seery, Jr., In re Lehman Bros. Holdings Inc.,

CaseNo.0813555,Bankr.S.D.N.Y.,Sept.3,2009,atpp.6364(describinghowthecureestimategrewout
ofworkdonetoestimateamountofDIPfinancingLehmanwouldneed).
7897TranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.7,2009,atpp.15355.
7898DebtorsMotionto(A)ScheduleaSaleHearing;(B)EstablishSalesProcedures;(C)ApproveaBreak
up Fee; and (D) Approve the Sale of the Purchased Assets and the Assumption and Assignment of
ContractsRelatingtothePurchasedAssets,atp.6,DocketNo.60,InreLehmanBros.HoldingsInc.,No.08
13555(Bankr.S.D.N.Y.Sept.17,2008).
7899Transcript of hearing, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.17,
2008,atp.23.
7900Lehman,FinalBalanceSheet(Sept.16,2008)[BCICG00033742]transcriptofdepositiontestimonyof
RichRicci,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.8,2009,atpp.92,282
(explainingthattheestimateforcureliabilitycamefromLehman).AccordingtoThomasA.Roberts,the

2144

summary schedule reflected $2.25 billion in those costs, rather than the $1.5 billion
estimate.7901
TheAPAprovided:
For a period of 60 days after the Closing, the Purchaser shall have the
right upon notice to Seller to designate any contract related to the assets
purchased from the Seller by Purchaser or its Affiliates (the Related
Contracts) as either (1) a Purchased Contract or (2) a Contract not
designated as a Purchase[d] Contract (a Rejected Contract). Until a
RelatedContractissodesignated,Buyershallbeobligatedtopayorcause
to be paid ordinary course amounts due under such contracts in
accordancewiththetermsthereof.IfaRelatedContractisdesignatedasa
Purchased Contract, such Purchased Contract shall be assigned to the
PurchaseranduponsuchassignmentPurchasershallbeobligatedtopay
orcausetobepaidthecureamountinrespectofsuchPurchasedContract.
IfaRelatedContractisdesignatedasaRejectedContract,Purchasershall
havenofurtherobligationsinrespectthereof....7902

Thus,theactualamountofcureliabilityforwhichBarclayswouldberesponsible
was dictated by Barclays decisions about which of Lehmans contracts Barclays
determinedtoassumeandassign.

cure amount of the Sept.16 balance sheet was calculated by Martin Kelly, and McDade and Lowitt
confirmedthecureamount.ExaminersInterviewofThomasA.Roberts,Apr.28,2009.
7901TranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.7,2009,atpp.14849;seealsotranscriptofdepositiontestimonyofJamesP.
Seery,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.3,2009,atpp.6364
(testifyingthatthecurecostestimateherecalledwasintheneighborhoodofthefigureinthesummary
schedule).
7902APA,atp.13(2.5).

2145

ShapirodoesnotknowwhetheranyoneatLehmandevelopedabetterestimate
ofBarclayscurecostliabilitybetweenSeptember17(thedateoftheSaleMotion)and
theSeptember22closing.7903
Barclaysdidnotexpecttoincurcurecostliabilityofthemagnitude($1.5billion)
estimated in the Sale Motion. In an internal Barclays email onFriday, September 19,
Clacksonstated,Curepaymentsareoptionaland[though]somewillbeincurred,most
will be covered by our ongoing supplier relationships and fall into monthly
expenses[.]7904ClacksonlatertestifiedthatBarclayscalculationsofitsanticipatedcure
cost liability during the week of September 14 reflected little to no liability because
Clackson thought at the time that many of the potential cure liabilities would be
minimized through negotiations with Barclays current suppliers and the synergies
fromcombiningBarclaysandLehman.7905

7903TranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBros.HoldingsInc.,CaseNo.08

13555,Bankr.S.D.N.Y.,Aug.7,2009,atpp.6768.
7904EmailfromPatrickClackson,Barclays,toRichRicci,Barclays(Sept.19,2008)[BCIEX(S)00024271].
7905TranscriptofdepositiontestimonyofPatrickClackson,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Sept.4,2009,atp.101;seealsoBarclays,LongIslandAcquisitionSummary[Draft]
(Sept.22,2008)[BCIEX00079341],attachedtoemailfromGaryRomain,Barclays,toRichRicci,Barclays,
et.al(Sept.22,2008)[BCIEX00079340](listingthebonusaccrualat$1.7billionandthecurepaymentat
$800 million); see also Barclays, Synopsis of Barclays Synergy and Integration Assumptions (Sept.18,
2008) [BCIEX(S)0002460], attached to email from Syal Vivek, Barclays, to Rich Ricci, Barclays, et al.
(Sept.18, 2008) [BCIEX(S)00024689]. But see Barclays Synopsis of Barclays Synergy and Integration
Assumptions (Sept. 18, 2008) [BC1EX(S)00024129], attached to email from Syal Vivek, Barclays, to
RichRicci,Barclays,etal.(Sept.18,2008)[BCIEX(S)00024128].

2146

TheCourtwasnotprovidedwitharevisedestimateofBarclaysanticipatedcure
cost liability before the September 19 sale hearing, or before the September 22 sale
hearing.
As of July 2009, Barclays had made approximately $220 to $240 million in cure
payments.7906 As explained above, in light of the litigation arising from the sale
transaction, the Examiner is not reaching a conclusion regarding whether the Court
shouldhavebeenprovidedwitharevisedcurecostestimate.
(b) CompensationLiabilities
UndertheAPA,Barclaysagreedtoofferemploymenttoeachactiveemployee
employedprimarilyinconnectionwiththeBusiness.7907Barclaysfurtheragreedthat,
with respect to each Lehman employee who accepted Barclays offer of employment,
Barclayswould:
. . . pay each Transferred Employee an annual bonus (08 Annual
Bonuses), in respect of the 2008 Fiscal Year that, in the aggregate, are

7906Barclays,AggregateCurePayments(July14,2009)[BCIEX00077272](listingatotalof$238millionin

curepayments),attachedtoletterfromJackG.Stern,BoiesSchiller,toRobertW.Gaffey,JonesDay,re:
CompensationAmountsforTransferredEmployeesandAggregateCurePayments(July16,2009);Gary
Romain, Barclays, Lehman Acquisition Accounting Interim 2009 Update [Draft] (July23, 2009), at p.2
[BCIEX00218490](estimatingBarclaystotalcurepaymentsatapproximately$226millionasofMay29,
2009),attachedtoemailfromGaryRomain,Barclays,toMichaelGuarnuccio,PriceWaterhouseCoopers,
et al. (July 23, 2009) [BCIEX00218489]; cf. transcript of deposition testimony of Gary Romain, In re
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.10,2009,atpp.13334(explainingthe
cureaccrualwasapproximately$224million);transcriptofdepositiontestimonyofPatrickClackson,In
reLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.4,2009,atp.141(explainingthe
totalcurepaymentswereapproximately$220million).
7907APA,atp.34(9.1(a)).BusinesswasdefinedastheU.S.andCanadianinvestmentbankingand
capital markets businesses of Seller including the fixed income and equities cash trading, brokerage,
dealing,tradingandadvisorybusinesses,investmentbankingoperationsandLBIsbusinessasafutures
commissionmerchant.Id.atp.2(1.1).

2147

equal in amount to 100 percent of the bonus pool amounts accrued in

respect of amounts payable for incentive compensation (but not base
salary) and reflected on the financial schedule delivered to Purchaser on
September 16, 2008 and initialed by an officer of each of Holdings and
Purchaser(theAccrued08FYLiability)....7908
Section9.1(c)oftheAPAreferstoafinancialscheduledeliveredtoPurchaseron
September16,2008andinitialedbyanofficerofeachofHoldingsandPurchaser.7909In
connection with litigation arising from the sale transaction, Barclays has asserted that
[t]herewasinfactnoversionofanyfinancialschedulethatwasinitialedbyanofficer
ofBarclays,asreferencedinSection9.1(c)oftheAPA.7910Priortotheclosingofthesale
transaction, however, Lehmans and Barclays counsel identified the final schedule
initialedbyBerkenfeldasthedocumentreferencedinSection9.1(c)oftheAPA.7911That
final schedule, which is reproduced in Section III.C.6.c.3.a above, includes a line item
statingComp2.0[billion].
McDadeandKellytestifiedthatthe$2billioncompensationaccrualforLehman
employeeswhowouldbemovingtoBarclayswasanegotiatednumber.7912According

7908APA,atp.35(9.1(c)).
7909Id.
7910MemorandumofBarclaysCapitalInc.inOppositiontotheRule60MotionsandinSupportofMotion

ofBarclaysCapitalInc.toEnforcetheSaleOrderandSecureDeliveryofAllUndeliveredAssets,atp.37
(92),DocketNo.6815,InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Jan.29,2010).
7911BalanceSheet(Sep.16,2008)[STBLEH0000682],attachedtoemailfromElizabethCooper,Simpson
Thacher,toDavidLeinwand,ClearyGottlieb,etal.(Sept.19,2008)[STBLEH0000679].
7912TranscriptofdepositiontestimonyofMartinKelly,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Aug.18,2009,atpp.8283;transcriptofdepositiontestimonyofHerbertH.McDade,III,
In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.2, 2009, at pp. 44, 47, 72, 101
(accordingtoMcDade,LehmanscompensationaccrualbyAug.1,2008,was$1billion,andBarclaysused
Lehmans compensation data to estimate its compensation liability for the transferred employees and
derived$2billion.).

2148

to McDade and Kelly, that negotiated figure was the result of Barclays adding an
additional $1 billion of compensation liability to a $1 billion estimate provided by
Lehman, and was reflected in the September 16 summary schedule initialed by
Berkenfeld.7913ClacksonandRicci,however,testifiedthatitwasLehmanthatprovided
the$2billioncompensationfigure.7914
IntheSaleMotion,theDebtorsstatedthatBarclayswouldassumeanestimated
$2.5 billion in compensation liability by offering employment to approximately ten
thousandplus U.S.based employees of LBI for a period of 90 days and providing
such employees severance benefits equal to what would have been received under

7913TranscriptofdepositiontestimonyofHerbertH.McDade,III,InreLehmanBros.HoldingsInc.,No.08

13555, Bankr. S.D.N.Y., Sept.2, 2009, at pp. 100, 10405; email from Martin Kelly, Lehman, to Ian T.
Lowitt,Lehman,etal.(Sept.16,2008)[LBEXDOCID132844](Wellittookallnightandlotsofbackand
forthbutthedealisdoneandreadyfortheBoard.Also,anextra$1bofcompbeyondouraccrual....);
transcript of deposition testimony of Martin Kelly, In re Lehman Bros. Holdings Inc., Case No. 0813555,
Bankr. S.D.N.Y., Aug. 18, 2009, at p. 56 ([T]he liability that Barclays would recognize for all forms of
compensationwouldbeabilliondollarsmorethanwhatLehmanhadreflectedonitsbooksforcertain
components of compensation.); transcript of deposition testimony of Philip Kruse, In re Lehman Bros.
HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Dec.17,2009,atpp.20304(explainingthattherewas
realconfusionintherecord...astowhether[thecompensationnumber]wasderivedbyLehmanpeople
...orwhetheritwasanegotiatedamount).McDadeandLowitttestifiedthatLehmans$1billionfigure
wasanestimateofonlythecashportionofLehmansbonusaccrual.Transcriptofdepositiontestimony
of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y.,Sept.2,
2009,atp.286;transcriptofdepositiontestimonyofIanT.Lowitt,InreLehmanBros.HoldingsInc.,Case
No.0813555,Bankr.S.D.N.Y.,Aug.20,2009,atpp.5354.AccordingtoMcDadeandLowitt,Lehman
paid bonuses through a mix of cash and equity. Transcript of deposition testimony of Herbert H.
McDade,III,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atp.286;
transcript of deposition testimony of Ian T. Lowitt, In re Lehman Bros. Holdings Inc., Case No. 0813555,
Bankr.S.D.N.Y.,Aug.20,2009,atp.54.
7914TranscriptofdepositiontestimonyofPatrickClackson,InreLehmanBros.HoldingsInc.,CaseNo.08
13555, Bankr. S.D.N.Y., Sept.4, 2009, at pp. 7577 (stating that Lehman presented Barclays with the $2
billioncompensationliabilitynumber);transcriptofdepositiontestimonyofRichRicci,InreLehmanBros.
Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.8, 2009, at pp. 37, 282 (stating that Lehman
presentedthe$2billionfigure).

2149

LBIs severance policy.7915 During the September 17 hearing, the Court noted that
Barclays was taking on as much as $2.5 billion dollars in certain employee related
severanceexpenseswhichmayormaynotbetriggered.7916
On Tuesday, September 16, Barclays created various estimates of its assumed
compensationliabilityinconnectionwiththesale,whichrangedbetween$1billionand
$1.3 billion based on the percentage of LBI employees assumed to transfer to
Barclays.7917ThatTuesday,ClacksonsentanemailtoEvansandRicci,stating:[t]hisis
a problem, they have $2bn in the agreement, I was relying on you guys telling me I

7915DebtorsMotionto(A)ScheduleaSaleHearing;(B)EstablishSalesProcedures;(C)ApproveaBreak

up Fee; and (D) Approve the Sale of the Purchased Assets and the Assumption and Assignment of
ContractsRelatingtothePurchasedAssets,atp.6,DocketNo.60,InreLehmanBros.HoldingsInc.,No.08
13555(Bankr.S.D.N.Y.Sept.17,2008).
7916Transcript of hearing, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.17,
2008,atp.23.
7917Email from Mark Kurman, Barclays, to Michael Evans, Barclays (Sept.16, 2008) [BCIEX(S)
00029672];emailfromMarkKurman,Barclays,toMichaelEvans,Barclays,etal.(Sept.16,2008)[BCIEX
(S)00029682].OnWednesday,Barclaysestimatesforthecompensationliabilityrangedfrom$1.3billion
to$1.5billion.EmailfromPatrickClackson,Barclays,toMichaelEvans,Barclays,etal.(Sept.17,2008)
[BCIEX00077621] (listing $1.35 billion for the compensation liability); email from Michael Evans,
Barclays, to Patrick Clackson, Barclays, et al. (Sept.17, 2008) [BCIEX00077621] (listing an accrued
compensationliabilityof$1.5billion);Barclays,LongIslandAcquisitionSummary[BCIEX(S)00023999]
(listingacompensationliabilityof$1.3billion),attachedtoemailfromGaryRomain,Barclays,toPatrick
Clackson,Barclays,etal.(Sept.17,2008)[BCIEX(S)00023997].OnThursday,aBarclayssynopsisoftheir
synergy and integration assumptions for the Sale listed its required compensation liability at $1.5
billion,providinga$500milliongain.Barclays,SynopsisofSynergyandIntegrationAssumptions(Sept.
18,2008)[BCIEX(S)00024129],attachedtoemailfromSyalVivek,Barclays,toRichRicci,Barclays,etal.
(Sept. 18, 2008) [BCIEX(S)00024128]. In an email on Friday by Clackson, Barclays estimated its
compensation liability at $1.35 billion. Email from Patrick Clackson, Barclays, to Rich Ricci, Barclays
(Sept.19,2008)[BCIEX(S)00024707].

2150

needed$1.35bnwhichgaveme$650mofthegoodwillbutthepara[graph]belowsays
wehavetopayittothem/cantuse[.])7918
On Friday, September 19, Clackson in an email to Ricci explained Barclays
official line regarding compensation amounts.7919 According to Clackson, the
differencebetweenBarclaysestimatesofitscompensationliabilityandthe$2billionin
compensationliabilitylistedintheSept.16,2008balancesheetwas[s]omeofthecomp
related to deferred plans so [some compensation] is accounted for over the deferral
period.7920
At the sale hearing on Friday, September 19, Debtors counsel explained the
changes to the transaction since the September 17 hearing.7921 Among other things,
Debtors counsel noted that Barclays is . . . agreeing to the same employee
compensation arrangements.7922 The McDade testimony proffered at the hearing
represented that Barclays [would] also assume exposure for the employees that

7918Email from Patrick Clackson, Barclays, to Michael Evans, Barclays, et al. (Sept.17, 2008) [BCIEX

00077621]; see also email from Rich Ricci, Barclays, to Patrick Clackson, Barclays, et al. (Sept.17, 2008)
[BCIEX00077651](referringtoSection9.1(c)oftheAPA,andstating,[n]everagreedtoit.Archiethisis
theproblem.WecanthavethisclauseIdontthink.);emailfromMichaelEvans,Barclays,toPatrick
Clackson,Barclays,etal.(Sept.17,2008)[BCIEX000077621].
7919EmailfromPatrickClackson,Barclays,toRichRicci,Barclays(Sept.19,2008)[BCIEX(S)00024271].
7920Id. But see email from Patrick Clackson, Barclays, to Rich Ricci, Barclays (Sept.18, 2008) [BCIEX
00077466](statingsoitlookslikewehavetopaythem$2bnminbonuses).AlsoonFriday,Ricciasked
Clackson whether they could increase comp accrual because another 300 employees were coming to
Barclays. Email from Rich Ricci, Barclays, to Patrick Clackson, Barclays (Sept.19, 2008) [BCIEX(S)
00024707].ClacksonrespondedthatifBarclaysget[s]the2.25andthe2andtherealbonusesare1.35[,]I
can spare some but otherwise I cant[.] Email from Patrick Clackson, Barclays, to RichRicci, Barclays
(Sept.19,2008)[BCIEX(S)00024707].
7921Transcript of hearing, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.19,
2008,atpp.4546.
7922Id.atp.47.

2151

accept[ed] offers of employment, which [was] estimated to [be] . . . an exposure of

approximatelytwobilliondollars.7923
By the time of the closing on September 22, Barclays was estimating that it
neededtoaccrue$1.7billionforbonuspayments.7924Clacksontestifiedthattheestimate
waslowerthanthe$2billionCompentryintheSeptember16scheduleofassetsand
liabilitiesbecausethe$2billionfigureincludedallcompensation,andthatinitsbonus
accrual Barclays was attempting to estimate only the bonus portion of Barclays $2
billionincompensationliability.7925
The use of the $2 billion Comp figure in the September 16 schedule, and
whether, following the closing, Barclays satisfied its obligations with respect to
employee compensation under the APA, are disputed issues in the litigation arising
from the sale transaction. In light of the sale litigation pending before this Court, the
Examinerisnotreachingaconclusionregardingthoseissues.

7923Id.atp.99.
7924Barclays,

Long Island Acquisition Summary [BCIEX00079341] (listing the bonus accrual at $1.7
billion),attachedtoemailfromGaryRomain,Barclays,toRichRicci,Barclays,etal.(Sept.22,2008)[BCI
EX00079340];seealsoLongIslandAcquisitionSummary[BCIEX(S)00024690](listingthebonusaccrual
at $1.7 billion), attached to email from Gary Romain, Barclays, to Patrick Clackson, Barclays (Sept.24,
2008)[BCIEX(S)00024689].
7925TranscriptofdepositiontestimonyofPatrickClackson,InreLehmanBrosHoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Sept.4,2009,atpp.75,7879.

2152

d) ConsiderationandApprovalofTransactionDescribedinAPAby
LBHIandLBIBoardsofDirectors
Atajointtelephonicboardmeetingheldbeginningat6:00a.m.onSeptember16,
2008,theboardsofdirectorsofLBIandLBHIapprovedthetermsoftheAPAandthe
saleofassetstoBarclays.7926
The LBHI board members attending the board meeting included MichaelL.
Ainslie,JohnF.Akers,RogerBerlind,ThomasCruikshank(alsoanLBIboardmember),
MarshaJohnsonEvans,RichardS.Fuld,Jr.(alsoanLBIboardmember),SirChristopher
Gent, JerryA. Grundhofer, RolandA. Hernandez, Dr.Henry Kaufman, and JohnD.
Macomber. The LBI board members in attendance (in addition to Cruikshank and
Fuld) included Howard Clark, Jr. and Frederick Frank. Lehman personnel who were
presentincludedIanT.Lowitt,HerbertH.McDade,III,HughE.McGee,III,ThomasA.
Russo, Mark Shafir, and JeffreyA. Welikson. MichaelE. Lubowitz and ThomasA.
Roberts of Weil attended the board meeting, as did three Simpson Thacher lawyers:
AlvinH. Brown, JohnG. Finley, and AndrewR. Keller. Also in attendance were
AndrewJ.LevanderofDechertandBarryRidingsofLazard.7927
Roberts and Shafir advised the board members that the proposed transaction
wouldinvolve:

7926LehmanBrothersHoldingsInc.andLehmanBrothersInc.,MinutesofMeetingofBoardsofDirectors

(Sept.16,2008),atpp.25,67[LBEXAM003940].
7927Id.

2153

The sale to Barclays of the Lehman headquarters building at 745 Seventh

AvenueinManhattanforitsappraisedvalueestimatedat$1billion;

The sale to Barclays of two Lehman data centers in New Jersey for their
appraisedvalueestimatedat$450million;

Thetransferofapproximately10,000LehmanemployeestoBarclays;

ThepaymentbyBarclaysof$250millionforthegoodwillofLehman;

The transfer of most assets of the U.S. broker dealer LBI to Barclays;
and

TheassumptionbyBarclaysofliabilities,includingemployeeliabilitiesand
contract cure amounts, basically equivalent to the assets being transferred
toBarclays.7928

Roberts also explained that the transaction required that (1)eight specified
LehmanemployeeswouldenterintoemploymentagreementswithBarclays;and(2)a
minimumpercentage(around75percent)ofLehmanstop200employeeswouldagree
tostayatBarclayspostsale.7929
The board members were advised that this transaction would benefit the
creditorsofLehman,wouldsavethefranchiseandmanyjobsandthatLBIwould
notbeabletofunditselfthatdaywithoutthisdeal.7930
Ridingsexplainedthattheapplicablestandardsforthissale(underSection363
oftheBankruptcyCode)aretoobtainthehighestandbestpriceandapricegreaterthan

7928Id.atpp.24.
7929Id.atp.3.
7930Id.atp.2.

2154

liquidation value.7931 According to Ridings, it [would] be a close decision for the

BankruptcyCourtjudge.7932
TheboardmemberswereadvisedthattheAPAwouldbesignedthatmorning,
followedbyapublicannouncementofthetransaction.7933Thatafternoon,Weilexpected
to seek Bankruptcy Court approval of the sale procedures.7934 The sale hearing was
expectedtooccureitherthatFridayorthefollowingMonday.7935
Attheendofthemeeting,theLBHIandLBIboardsapprovedtheAPA.7936
e) TransactionDescribedtotheCourtonSeptember17
(1) SaleMotion
On Wednesday, September17, the Debtor filed a motion (the Sale Motion)
requesting that the Court, among other things, schedule a sale hearing for Friday,
September19,establishsaleproceduresandapproveaproposedbreakupfee.7937
In the Sale Motion, the Debtor described the circumstances that led to the
proposed sale, including significant liquidity problems, heavily depressed financial

7931Id.atp.4.
7932Id.AccordExaminersInterviewofBarryW.Ridings,Oct.1,2009,atp.4(explainingthathisconcern

was with the process rather than the sale itself, and whether the Court would approve such a massive
saletransactiononlessthanfivedaysnotice).
7933LehmanBrothersHoldingsInc.andLehmanBrothersInc.,MinutesofMeetingofBoardsofDirectors
(Sept.16,2008),atp.4[LBEXAM003940].
7934Id.atpp.34.
7935Id.atp.2.
7936Id.atpp.68.
7937DebtorsMotionto(A)ScheduleaSaleHearing;(B)EstablishSalesProcedures;(C)ApproveaBreak
Up Fee; and (D) Approve the Sale of the Purchased Assets and the Assumption and Assignment of
ContractsRelatingtothePurchasedAssets,atp.1,DocketNo.60,InreLehmanBros.HoldingsInc.,No.08
13555(Bankr.S.D.N.Y.Sept.17,2008).

2155

asset prices and credit downgrades,7938 all of which led to Lehman being unable to
maintain normal business operations.7939 The Debtor stated: [A]ttempts to pursue
strategic alternatives were thwarted by [Lehmans] financial deterioration and lack of
supportfromotherentities.7940
LBHI and LB745 represented in the Sale Motion that Barclays would pay
approximately $1.7 billion in cash for the Purchased Assets plus assume other
obligations and expenses.7941 The purchased assets would include designated assets
relating to LBIs business, which [were] owned by LBI as well as certain assets which
[were]ownedbyLBHIandrelatedtothebusinessofLBI.7942Barclayswouldassume
ownershipofsubstantiallyalloperationsofLBI,including...performanceunder[the
Sellers] obligations as to securities and other transactions.7943 In addition, [a]ll
remaining customer accounts [would be] transferred to [Barclays].7944 The purchased
assets would include Lehmans headquarters building in Manhattan, two New Jersey
datacenters,andtheLehmannameandassociatedtrademarks.7945
TheSaleMotionstatedthatBarclayswould,inadditiontothecashpaymentof
$1.7billion,assumeanestimated$1.5billionofliabilitiesunderassumedcontracts,an

7938Id.atp.4.
7939Id.
7940Id.
7941Id.
7942Id.atpp.45.
7943Id.atp.5.
7944Id.
7945Id.atpp.56.

2156

estimated $2.5 billion in compensation liability relating to LBIs employees, and other
liabilities such as transfer taxes and accounts payable in the ordinary course of
business.7946
LBHI and LB745 asserted in the Sale Motion that the proposed sale [would]
resultinthehighestandbestrecoveryfortheDebtors.7947TheDebtoralsostatedthat,
althoughthefinancialcommunity[was]wellawarethatthePurchasedAssetswerefor
sale[,] the only serious offeror was Barclays.7948 LBHI and LB745 contended that
Barclays was a goodfaith purchaser because [t]he terms and conditions of the
PurchaseAgreementwerenegotiatedbytheDebtorsandPurchaseratarmslengthand
ingoodfaith,and[e]achpartywasrepresentedbysophisticatedcounsel.7949
(2) September17SaleProceduresHearing
An initial hearing on the Sale Motion took place on the afternoon of
September17.7950
Debtors counsel explained that, during the preceding months, Lehman had
focusedonstrategicalternativestoprotectthepubliccustomers,preservevalues,and
assistinavoidingthedeteriorationofthefinancialmarkets.7951TheDebtorsnotedthat

7946Id.
7947Id.atp.11.
7948Id.
7949Id.atp.17.
7950Transcript of hearing, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.17,

2008,atp.1.
7951Id.atp.18.

2157

the market had known for months that Lehman was for sale (in parts and in its
entirety),yetonlyBarclayshadmadeabid.7952
DebtorscounselexplainedthatthegoaloftheBarclaystransactionwastosave
the value of the franchise, protect the public customers and interest and employees,
andprovidecontinuedemploymentfor10,000to12,000Lehmanemployeesforalength
oftime.7953
The Debtors emphasized the importance of quick approval of the proposed
transaction.7954 Lehman was a wasting asset, and if the transaction is not
consummated the notional cost in connection with the transaction will be in the
trillions.7955 Debtors counsel advised the Court that witnesses would testify that if
thistransactionisnotapproved,Fridaynighttherewillbenobodyinthebuilding.And
itwilljustdisappear.7956
Therewasadisputeatthehearingovertheamountoftheproposedbreakupfee.
The Debtors argued that the proposed breakup fee should be evaluated against a
transactionwithafairvalueof$5.7billion,consistingof:(1)the$1.7billionofcashthat

7952Id.atp.25.
7953Id.atpp.1920.
7954Id.atpp.1921.
7955Id.
7956Id.atp.26.

2158

waspaidtoLehman;(2)Barclaysassumptionof$2.5billionincompensationliability;
and(3)Barclaysassumptionof$1.5billionincontractcureliability.7957
The SEC advised the Court that it strongly supported the proposed
transaction,7958 and emphasized the importance that the deal be completed by weeks
end.7959TheFRBNYurgedthatitwasvitalforthetransactiontogoforwardasquickly
aspossibleinordertopreservefinancialstability.7960
TheCreditorsCommitteeobjectedtothetimingandsoughtacontinuanceofthe
SaleHearing.Earlierinthehearing,theCourthadexpressedsomeconcernastothe
adequacy of notice as to the substance of the transaction for purposes of basic
constitutionaldueprocess....7961Inresponse,theDebtorsreiteratedthatLehmanwas
aquicklywastingasset,7962whichwouldhavelittlevalueremainingifanormalsale
process was followed.7963 Debtors counsel advised the Court that [t]he consensus
amongallthebusinesspeople...andtheprofessionalswastherewouldbenothingto
sellintwoweeks.7964

7957Id.atpp.2324.
7958Id.atpp.6566.
7959Id.atp.67.
7960Id.atp.65.TheCommodityFuturesTradingCommissionsupportedthepositionsoftheSECandthe

FRBNY.Id.atp.69.TheUnitedStatesTrusteeexpressedhersupportforthepositionoftheDebtorsand
theregulatoryagencies.Id.atp.67.
7961Id.atp.27.
7962Id.atp.29.
7963Id.
7964Id.

2159

After taking judicial notice of the packed courtroom, the experience and
sophisticationofcounselandtheavailabilityofmanyoftheproposeddealstermsand
conditionsinthemedia,theCourtconcludedthatdueprocesswassatisfied.7965
The Court, recognizing the critical timing imperative, approved the bid
procedures and the breakup fee, subject to adjustments needed to harmonize the
bidding procedures with changes announced during the hearing.7966 The Court
explained that Barclays appeared to be the logical purchaser for the assets and
expresseddoubtthatanotherbidderwouldemerge.7967
f)

BetweenSeptember17and19,theSecuritiesPositionsBeing
AcquiredbyBarclaysChange
(1) TheReplacementTransaction

As described above in Section III.C.6.b.2, on Sunday, September14, the FRBNY

agreed to provide LBI with financing through the PDCF in order to facilitate an
orderly unwind of [LBIs] trading positions.7968 Although the FRBNY advised
Lehman that it was willing to fund the broker/dealer for up to two weeks following
LBHIsbankruptcy,theFRBNYwasconcernedaboutitsexposuretoLBIasaresultof
theextensionofovernightfinancing.7969

7965Id.atpp.3132.
7966Id.atp.72.
7967Id.atp.73.
7968Leventhal Decl. 6. At that time, LBI already was receiving financing through two other FRBNY

programs,theTSLFandOMO.A&MsInterviewofJamesW.Hraska,Oct.8,2008,atp.1.
7969ExaminersInterviewofShariD.Leventhal,Apr.30,2009,atp.5.

2160

On Tuesday, September16, the FRBNY contacted Barclays to request that

Barclays step into the shoes of the FRBNY with respect to overnight financing of
LBI.7970 The FRBNY advised Barclays that the FRBNYs September14 agreement to
allow LBI to access the PDCF to obtain overnight financing had been based on the
assumption that the FRBNY was facilitating an orderly winddown of the broker
dealer.7971 The FRBNY explained that, if Barclays wanted the FRBNY to continue
funding LBI during the week of September15 to facilitate an orderly transition of the
broker/dealerassetstoBarclays,theFRBNYneededBarclaystotakeouttheFRBNYs
exposuretoLBIpriortotheclosingofthetransaction.7972
Tuesdayevening,September16,BarclaysandLehmanrepresentativesmetatthe
FRBNY to discuss how Barclays would step into the shoes of the FRBNY.7973 The
FRBNY advised Barclays that it could use the PDCF to finance the LBI securities that

7970Id.;transcriptofdepositiontestimonyofRichRicci,InreLehmanBros.HoldingsInc.,CaseNo.0813555,

Bankr. S.D.N.Y., Sept.8, 2009, at pp. 13334 (testifying that Barclays received a call from ThomasC.
Baxter,Jr.,GeneralCounseloftheFRBNY);LeventhalDecl.7;seetranscriptofdepositiontestimonyof
Gerard LaRocca, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 19, 2009, at
pp.2829(testifyingthatJonathanHughes,GlobalGeneralCounselforBarclaysCapital,hadadvisedhim
onMonday,September15thattheFRBNYhadcontactedBarclaystoadvisethattheFRBNYwantedto
have Barclays help with LBIs financing with the FRBNYs financing of LBI); transcript of deposition
testimonyofDavidPetrie,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.26,
2009,atpp.53,6768;transcriptofdepositiontestimonyofMichaelKeegan,InreLehmanBros.Holdings
Inc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.28,2009,atpp.33.
7971LeventhalDecl.6.
7972Id.
7973TranscriptofdepositiontestimonyofGerardLaRocca,InreLehmanBros.HoldingsInc.,CaseNo.08
13555, Bankr. S.D.N.Y., Aug. 19, 2009, at p. 30; transcript of deposition testimony of David Petrie, In re
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.26,2009,atpp.8088;seealsoid.at
p.53;DavidPetrie,Barclays,HandwrittenNotesofDavidPetrie(Sept.16,2008)[BCIEX00115847](notes
ofmeetingatFRBNY).

2161

Barclayswouldreceiveascollateralinthetransaction,becausetheFRBNYanticipated
that it would take Barclays time to find third party financing sources.7974 Barclays
advised the FRBNY that Barclays believed it could finance the collateral through the
tripartyrepomarketwithintwoweeks.7975
BarclaysandtheFRBNY,andtheirrespectivecounsel,workedTuesdayevening
and the following morning to document an agreement under which Barclays would
step into the shoes of the FRBNY (the Replacement Transaction).7976 On
Wednesday, September17, Barclays and the FRBNY signed a letter agreement
governingtheirrespectiveobligationsundertheReplacementTransaction.7977Theletter
agreementprovided,amongotherthings,that:
BynotlaterthantheopeningofbusinessonMonday,September22,2008
(or, if the Court extends the date of the Sale Hearing beyond

7974TranscriptofdepositiontestimonyofGerardLaRocca,InreLehmanBros.HoldingsInc.,CaseNo.08

13555,Bankr.S.D.N.Y.,Aug.19,2009,atpp.3132;transcriptofdepositiontestimonyofDavidPetrie,In
reLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.26,2009,atpp.8889;emailfrom
LucindaM.Brickler,FRBNY,toBillDudley,FRBNY,etal.(Sept.17,2008)[FRBNYtoExam.003415].
7975TranscriptofdepositiontestimonyofDavidPetrie,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Aug.26,2009,atpp.8486.
7976E.g., email from Hydee R. Feldstein, Sullivan & Cromwell, to Jay W. Clayton III, Sullivan &
Cromwell, et al. (Sept.17, 2008) [BCISC00009285] (referencing conference call at 9:30 a.m. on
September17 regarding letter agreement, and forwarding email attaching draft of letter agreement);
letter agreement [Draft] [BCIEX0078810], attached to email from David Aman, Cleary Gottlieb, to
HydeeR.Feldstein,Sullivan&Cromwell,etal.(Sept.17,2008)[BCIEX00078818];emailfromHydeeR.
Feldstein, Sullivan& Cromwell, to James Bergin, FRBNY, et al. (Sept.17, 2008) [BCIEX00078990]
(indicatingthatBarclayswasinprocessofexecutingletteragreementasof1:49p.m.);seealsotranscriptof
deposition testimony of Gerard LaRocca, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr.
S.D.N.Y.,Aug.19,2009,atp.32.AfterthemeetingwiththeFRBNY,BarclaysalsometwiththeDTCCto
discuss the transfer of assets under the Replacement Transaction that would require use of the DTCC
wire.SeeTranscriptofdepositiontestimonyofDavidPetrie,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.26,2009,atpp.8487.
7977See letter agreement among Barclays and the FRBNY (Sept.17, 2008) [FRBNY to Exam 000043];
LeventhalDecl.7.

2162

September19,2008,theearlierofSeptember29,2008(orsuchlaterdateas
maybedesignatedbytheFRBNYinitssolediscretion)andthebusiness
day following the date on which an order (which has not been stayed)
approving a Successful Bidder has been entered (the TakeOut Date),
Barclays agrees (i) to purchase from the FRBNY, without recourse, the
entirety of the FRBNYs position under all of the Agreements [under
which the FRBNY had been providing financing to LBI] . . . and
(ii)simultaneously cause the release or termination of the FRBNYs
obligations under all Agreements. Upon receiving such purchase price
and release or termination, the FRBNY shall deliver all LBI Collateral to
Barclays. Alternatively, at Barclays option, each of the Agreements
outstandingimmediatelypriortothefilingofanypetitionunderTitle11
of the United States Code with respect to LBI shall be novated to
substitute Barclays (or one of its affiliates) in place of the FRBNY
thereunder.7978
The letter agreement thus provided that, in return for taking over FRBNYs
financing position with respect to LBI, Barclays would receive the LBI securities that
had been pledged to the FRBNY.7979 Those pledged LBI securities, however, included

7978LetteragreementbetweenBarclaysandtheFRBNY(Sept.17,2008)[FRBNYtoExam000043]atp.2.

The letter agreement also provided that, [a]t the hearing before the Court on the [Sale] Motion, the
FRBNYshallsupporttheMotion.
7979Seeid.;seealsoDeclarationofGerardLaRoccainSupportoftheTrusteesMotionforEntryofanOrder
Approving a Settlement Agreement, 9, In re Lehman Bros. Inc., No. 0801420 (Bankr. S.D.N.Y. Dec.5,
2008)(theLaRoccaDecl.),attachedtoMotionUnder11U.S.C.105and363Fed.R.Bankr.P.9019(a)
forEntryofanOrderApprovingSettlementAgreement,DocketNo.387,InreLehmanBros.Inc.,No.08
01420 (Bankr. S.D.N.Y. Dec.5, 2008); email from John N. Palchynsky, Lehman, to JamesW. Hraska,
Lehman, et al. (Sept.18, 2008) [LBEXDOCID 459816]; email from LucindaM. Brickler, FRBNY, to Bill
Dudley,FRBNY,etal.(Sept.17,2008)[FRBNYtoExam.017511];emailfromIanT.Lowitt,Lehman,to
PaoloR.Tonucci,Lehman,etal.(Sept.17,2008)[LBEXDOCID70146];emailfromJohnN.Palchynsky,
Lehman,toSindyAprigliano,Lehman,etal.(Sept.18,2008)[LBEXDOCID77086];emailfromMichael
Keegan, Barclays, to Archibald Cox, Jr., Barclays (Sept.19, 2008) [BCIEX00077814]; transcript of
depositiontestimonyofDavidPetrie,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,
Aug. 26, 2009, at pp. 3941, 6768, 93, 132; transcript of deposition testimony of John Rodefeld, In re
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.27,2009,atp.24.

2163

residential mortgagebacked securities (RMBS) that Barclays was not purchasing

undertheAPA.7980
Wednesday evening, September17, Barclays, Lehman, JPMorgan, BNYM and
FRBNY representatives met to prepare for implementation of the Replacement
Transaction on Thursday, September18.7981 Shortly after midnight on Thursday,
September18, Lehman sent an email to Barclays, BNYM and JPMorgan that
outlined...the key tasks necessary to move the collateral currently being used to
supportthethreeFedprograms(TSLF,OMO,andPDCF)fromLehmantoBarclayson
Thursday,9/18.7982TheLehmanemailstatedthat[t]heendofdaycollateralfilesfor
eachoftheabovementionedprogramsarebeingprovidedonWednesdaynight,9/17,
tobothBarclaysandBNYM...[t]hecollateralfileswillbecrossreferencedversusthe
listofexcludedcusipsthatwasprovidedbyBarclaystoremovepositionsnotintended

7980SeeAPA,atp.6(1.1)(definition(e)ofPurchasedAssets)(definingPurchasedAssetstoinclude

50%ofeachpositionintheresidentialmortgagesecurities);ExcludedMortgageAssets09172008.xls
[BCIEX00000735], attached to email from David Aronow, Lehman, to Richard Policke, Lehman, et al.
(Sept. 17, 2008) [BCIEX0000732] (email body addressed to Lehman, BNYM and Barclays stating that
[a]ttachedarethecusipsassociatedwiththebookthatweweretoldonthecallwillbeexcludedfromthe
movements tomorrow. These cusip[s] should not be part of the pledge to [BNYM] according to our
earlierconversation).
7981SeeemailfromLucindaM.Brickler,FRBNY,toBillDudley,FRBNY,etal.(Sept.17,2008)[FRBNYto
Exam.003416];emailfromDavidAronow,Lehman,toJohnHaley,Barclays,etal.(Sept.18,2008)[BCI
EX(S)00037617] (referring to meeting); transcript of deposition testimony of James W. Hraska, In re
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.14,2009,atpp.6263(discussionsof
themechanicsoftheReplacementTransactionstartedonSept.17andcontinuedintotheearlymorning
onSept.18).
7982Email from David Aronow, Lehman, to John Haley, Barclays, et al. (Sept.18, 2008) [BCIEX(S)
00037617].

2164

tobetransferred.7983TheLehmanemaildidnotaddresswhetherthepartiesintended
tosubstituteanycollateralthathadbeenpledgedtotheFRBNY,butwhichappearedon
Barclayslistofexcludedcollateral.7984
To effect the Replacement Transaction, on Thursday morning, September18,
JPMorgan advanced cash to the FRBNY, and the FRBNYs financing of LBI under the
three FRBNY programs was unwound.7985 JPMorgan advanced $46.22 billion to the
FRBNY, and the LBI collateral was delivered by the FRBNY to LBIs clearance box at
JPMorgan.7986
The parties then began to implement the second stage of the Replacement
Transaction,arepotransactionbetweenLBIandBarclaysunderwhichBarclayswould
send$45billionincashtoJPMorganforthebenefitofLBI,andLehmanwouldpledge
securitiestoBarclays.7987Barclaysplannedtowirethe$45billioncashtoJPMorganin$5
billioncomponents,7988andBarclays(actually,Barclaystripartycustodianbank,BNYM)
wouldreceivecollateraltosecureeach$5billioncashtransfer.7989

7983Email

from Richard Policke, Lehman, to David Aronow, Lehman, et al. (Sept.18,2008) [BCIEX
00007640] (forwarding, shortly after midnight on Sept.18, lists identifying the LBI securities that had
beenpledgedtotheFRBNY).
7984Id.
7985SeeemailfromChristopherR.Burke,FRBNY,toLucindaM.Brickler,FRBNY,etal.(Sept.18,2008)
[FRBNYtoExam.017484];LeventhalDecl.10.
7986LeventhalDecl.910.
7987SeeemailfromLucindaM.Brickler,FRBNY,toBillDudley,FRBNY,etal.(Sept.17,2008)[FRBNYto
Exam. 017569]; email from Ian T. Lowitt, Lehman, to PaoloR. Tonucci, Lehman, et al. (Sept.17, 2008)
[LBEXDOCID70146].
7988SeeemailfromLucindaM.Brickler,FRBNY,toChristopherR.Burke,FRBNY,etal.(Sept.18,2008)
[FRBNY to Exam. 017483]; email from Gerard LaRocca, Barclays, to Stephanie A. Heller, FRBNY, et al.

2165

Shortly after noon on Thursday, Barclays wired the initial $5 billion of cash to
JPMorgan for the benefit of LBI.7990 LBI then released collateral to be transferred to
Barclays,7991 but only approximately $1.5 billion of that collateral initially made it to
BNYM for the benefit of Barclays.7992 Barclays advised Lehman that Barclays was
unwillingtosendadditionalcashuntilitreceivedsufficientcollateraltosecurethe$5
billionalreadywiredtoJPMorgan.7993AdisputearosebetweenBarclaysandJPMorgan
overwhetherJPMorganwoulddeliverrepocollateralwithamarkedvalueequivalent
to the cash Barclays had advanced, or would send that collateral plus additional

(Sept.26, 2008) [BCIEX00082581]; transcript of deposition testimony of JamesW. Hraska, In re Lehman

Bros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.14,2009,atpp.7778;transcriptofdeposition
testimonyofJohnRodefeld,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.27,
2009,atp.28.
7989See email from Neal Ullman, Lehman, to David Aronow, Lehman, et al. (Sept.18, 2008) [LBEX
DOCID 091226]; email from James W. Hraska, Lehman, to DanielJ. Fleming, Lehman, et al. (Sept.18,
2008) [LBEXDOCID 459816]; transcript of deposition testimony of John Rodefeld, In re Lehman Bros.
HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.27,2009,atpp.2728.
7990See Fedwire Transfer Receipt (Sept.18, 2008) [FRBNY to Exam. 021198]; see also email from Gerard
LaRocca, Barclays, to Stephanie A. Heller, FRBNY, et al. (Sept.26, 2008) [BCIEX0082581]; transcript of
depositiontestimonyofDavidPetrie,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,
Aug.26,2009,atp.100;transcriptofdepositiontestimonyofJohnRodefeld,InreLehmanBros.Holdings
Inc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.27,2009,atp.28.
7991 See email from Neal Ullman, Lehman, to Alastair Blackwell, Lehman, et al. (Sept. 18, 2008) [LBEX
DOCID077879](stating,at12:22p.m.,thatReleasesfor5bareloaded).
7992SeeemailfromGerardLaRocca,Barclays,toStephanieA.Heller,FRBNY,etal.(Sept.26,2008)[BCI
EX0082581]; email from Lucinda M. Brickler, FRBNY, to Bill Dudley, FRBNY, et al. (Sept.18, 2008)
[FRBNYtoExam.017510];transcriptofdepositiontestimonyofDavidPetrie,InreLehmanBros.Holdings
Inc.,No.0813555,Bankr.S.D.N.Y.,Aug.26,2009,atpp.99100;transcriptofdepositiontestimonyofJohn
Rodefeld,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.27,2009,atpp.2829.
7993See email from David Aronow, Lehman, to Peter Hadington, Lehman, et al. (Sept.18, 2008) [LBEX
DOCID 091226]; email from James W. Hraska, Lehman, to DanielJ. Fleming, Lehman, et al. (Sept.18,
2008)[LBEXDOCID459816];transcriptofdepositiontestimonyofJamesW.Hraska,InreLehmanBros.
HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.14,2009,atp.80.

2166

collateral sufficient to provide Barclays a margin.7994 Ricci testified that a senior

executivefromJPMorganthencontactedDiamond,andaskedBarclaystosendthe$40
billionincashallatoncetoexpeditetheprocess.7995AccordingtoRicci,theJPMorgan
executive provided Diamond with assurances that, if Barclays sent the $40 billion in
cash, JPMorgan would follow up promptly in delivering the remaining collateral.7996
EarlyThursdayevening,Barclayswiredtheremaining$40billionincash.7997
Barclays did not receive $49.6 billion in securities that evening. Although both
theFRBNYandDTCCkepttheirsecuritiestransferfacilitiesopenlongaftertheirusual
closing times,7998 by 11:00 p.m. on Thursday evening, September18, Barclays had
receivedcollateralwithamarkedvalueofonlyapproximately$42billion.7999

7994ExaminersInterviewofStephanieA.Heller,July8,2009.
7995TranscriptofdepositiontestimonyofRichRicci,InreLehmanBros.HoldingsInc.,CaseNo.0813555,

Bankr.S.D.N.Y.,Sept.8,2009,atpp.13536.
7996Id.; see email from Gerard LaRocca, Barclays, to Stephanie A. Heller, FRBNY, et al. (Sept.26, 2008)
[BCIEX0082581](assertingthatseniorexecutivesat[Barclays]askforandreceiveanoralcommitment
from[JPMorgan]that$49.6billionofcollateralwouldbedeliveredtoBarclays).
7997SeeemailfromGerardLaRocca,Barclays,toStephanieA.Heller,FRBNY,etal.(Sept.26,2008)[BCI
EX0082581];FedwireTransferReceipts(Sept.18,2008)[FRBNYtoExam.021198];seealsoLeventhalDecl.
11 (stating that [b]y early evening, the entire sum of $45 billion in cash had been transferred by
BarclaystoLBI);emailfromJohnHaley,Barclays,toJaiWestwood,Barclays(Sept.18,2008)[BCIEX
(S)00088051]; transcript of deposition testimony of David Petrie, In re Lehman Bros. Holdings Inc., Case
No. 0813555, Bankr. S.D.N.Y., Aug.26, 2009, at pp. 10304; transcript of deposition testimony of John
Rodefeld,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.27,2009,atpp.2930,
8081.
7998See email from Lawrence P. Servidio, Lehman, to James W. Hraska, Lehman, et al. (Sept.18, 2008)
[LBEXDOCID 110339]; transcript of deposition testimony of David Petrie, In re Lehman Bros. Holdings
Inc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.26,2009,atpp.10305;transcriptofdepositiontestimonyof
JohnRodefeld,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.27,2009,atpp.
2930; transcript of deposition testimony ofNancyDenig,In reLehman Bros.Holdings Inc., CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.21,2009,atpp.5455.
7999EmailfromGerardLaRocca,Barclays,toStephanieA.Heller,FRBNY,etal.(Sept.26,2008)[BCIEX
0082581];emailfromJonathanHughes,Barclays,toStephanieA.Heller,FRBNY(Oct.1,2008)[FRBNYto

2167

ThereappeartobeanumberofreasonswhyBarclaysdidnotreceiveallofthe
collateral that LBI had pledged to the FRBNY. First, some of the securities LBI had
pledgedtotheFRBNYhadbeenobtainedbyLehmanthroughtheGCFRepodealerto
dealer triparty repo program. As a result of daily settlement activity, a significant
portionofthesecuritiesthatLBIhadpledgedtotheFRBNYwastransferredoutofLBIs
clearanceboxesatJPMorgan.8000
Second,someoftheRMBSthatwereExcludedAssetsundertheAPA(andthat
Barclays also had requested be excluded from the Replacement Transaction), were
includedinthesecuritiesthattheFRBNYhadbeenfinancingthenightbefore,andwere
delivered to Barclays on Thursday.8001 By 7:40p.m. on Thursday evening, BNYM had
identified and returned to Lehman $371 million of RMBS that Barclays had identified

Exam.015344];emailfromPaoloR.Tonucci,Lehman,toGerardM.Reilly,Lehman,etal.(Sept.20,2008)
[LBEXDOCID69255];emailfromDanielJ.Fleming,Lehman,toDavidAronow,Lehman(Sept.21,2008)
[LBEXDOCID77821];emailfromJohnHaley,Barclays,toTeriScott,Barclays(Sept.19,2008)[BCIEX
(S)00088070](statingthatcollateralwasstillmovingtoBarclays);emailfromGerardLaRocca,Barclays,
toStephanieA.Heller,FRBNY,etal.(Sept.26,2008)[BCIEX0082581];LeventhalDecl.14(notingthat
although the DTC and FRBNY remained open for several hours past their normal closing times . . .
operational issues interfered with the ability to transfer all of the intended securities to Barclays);
transcript of deposition testimony of David Petrie, In re Lehman Bros. Holdings Inc., Case No. 0813555,
Bankr.S.D.N.Y.,Aug.26,2009,atp.105;transcriptofdepositiontestimonyofJohnRodefeld,InreLehman
Bros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.27,2009,atpp.2930;transcriptofdeposition
testimony of James W. Hraska, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y.,
Aug.14, 2009, at pp. 4041, 46; transcript of deposition testimony of Nancy Denig, In re Lehman Bros.
Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 21, 2009, at p. 54; transcript of deposition
testimony of Alastair Blackwell, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y.,
Aug.7,2009,atp.59.
8000TranscriptofdepositiontestimonyofJamesW.Hraska,InreLehmanBros.HoldingsInc.,CaseNo.08
13555, Bankr. S.D.N.Y., Aug. 14, 2009, at pp. 7173; email from Alastair Blackwell, Lehman, to Ian T.
Lowitt,Lehman(Sept.18,2008)[LBEXDOCID77882].
8001TranscriptofdepositiontestimonyofMichaelKeegan,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.28,2009,atpp.3233,107.

2168

forexclusion,$366millionofwhichhadbeenpledgedtotheFRBNYWednesdaynight
andreturnedtoLBIsclearanceboxatJPMorganonThursdaymorning.8002By9:15p.m.
thatevening,BNYMidentifiedanadditional$289.4millioninRMBSthatBarclayshad
identified for exclusion, and which had been included in the securities it received;
although some were sent back, Barclays retained $289 million of those RMBS.8003 $75
millionofthatcollateralhadbeenpledgedtotheFRBNYWednesdaynight.8004
Third, a large volume of pending securities orders were in queue, including
ordersfromcustomerswhohaddirectedthatLBImovetheiraccountstootherfirms.8005
When the LBI securities that had been pledged to the FRBNY were delivered to LBIs
clearance boxes at JPMorgan, or attempted to be delivered to Barclays through DTCC
clearing entities, some of those securities were automatically used to satisfy pending
ordersornettedagainstoffsettingpositions.8006
Theendresultwasthat,whenthesecuritiestransferandclearingfacilitiesshut
down on late Thursday evening, Barclays had delivered $45 billion in cash for LBIs
benefit, but had received securities with a marked value of only $42 billion. Barclays
requestedthatLehmandeliver$7billiontoBarclaysuntiltheremainingsecuritiescould

8002SeeemailfromJohnHaley,Barclays,toGerardLaRocca,Barclays,etal.(Sept.29,2008)[BCIEX(S)

00034913].
8003See email from John Haley, Barclays, to Gerard LaRocca, Barclays, et al. (Sept.29, 2008) [BCIEX
00080299].
8004SeeemailfromJohnHaley,Barclays,toGerardLaRocca,Barclays,etal.(Sept.29,2008)[BCIEX(S)
00034913].
8005 See transcript of deposition testimony of James W. Hraska, In re Lehman Bros. Holdings Inc., Case
No.0813555,Bankr.S.D.N.Y.,Aug.14,2009,atpp.7576.
8006Id.

2169

bedelivered.8007ShortlyaftermidnightonFriday,September19,JPMorgancreditedan
accountwith$7billionforthebenefitofBarclays,andrecordedanLBIboxloanfor
thatamount.8008
(2) $15.8BillionRepo
In addition to the overnight financing LBI received from the FRBNY, from
Monday, September15, through Wednesday, September17, Barclays also provided
overnightfundingtoLehmanviaatripartyrepo,withJPMorganactingasthetriparty
agent.8009MichaelKeeganofBarclaystestifiedthatBarclaysextendedthetripartyrepo
financing to LBI at the request of JPMorgan.8010 According to Keegan, on Monday,
September15,JPMorganaskedBarclaystoprovideovernightfinancingforaportionof

8007Seeid.atpp.5960;transcriptofdepositiontestimonyofGerardLaRocca,InreLehmanBros.Holdings

Inc.,No.0813555,Bankr.S.D.N.Y.,Aug.19,2009,atpp.4243;transcriptofdepositiontestimonyofRich
Ricci,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.8,2009,atpp.13637.
8008See email from James W. Hraska, Lehman, to Alastair Blackwell, Lehman (Sept.18, 2008) [LBEX
DOCID077930];emailfromJohnHaley,Barclays,toTeriScott,Barclays,etal.(Sept.19,2008)[BCIEX
(S)00038010];emailfromRobertAzerad,Lehman,toMartinKelly,Lehman,etal.(Sept.20,2008)[LBEX
DOCID069255];transcriptofdepositiontestimonyofJamesW.Hraska,InreLehmanBros.HoldingsInc.,
CaseNo.0813555,Bankr.S.D.N.Y.,Aug.14,2009,atpp.5253;LeventhalDecl.1516;LaRoccaDecl.
8.OnFriday,September19,Barclayssentanoticeofterminationoftherepoagreementrelatingtothe
ReplacementTransaction.LetterfromMichaelMontgomery,Barclays,toRobertH.Bing,Lehman,etal.,
re:NoticeofTermination(Sept.19,2008)[BCIEX00109164].Thelegaleffectofthisnoticeisindisputein
theBarclayssalelitigation.
8009See email from Teri Scott, Barclays, to Jonathan Stone, Barclays, et al. (Sept. 18, 2008) [BCIEX(S)
00038010]; transcript of deposition testimony of David Petrie, In reLehmanBros. HoldingsInc., CaseNo.
0813555,Bankr.S.D.N.Y.,Aug.26,2009,atpp.5355;transcriptofdepositiontestimonyofNancyDenig,
In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 21, 2009, at pp. 13536;
transcriptofdepositiontestimonyofJamesW.Hraska,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Aug.14,2009,atpp.9697;transcriptofdepositiontestimonyofMichaelKeegan,Inre
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.28,2009,atpp.4445.
8010TranscriptofdepositiontestimonyofMichaelKeegan,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.28,2008,atpp.4445.

2170

thesecuritiesthatBarclayswouldbepurchasingfromLehman,andBarclaysagreedto
doso.8011
Thursday morning, September18, the Barclays repo with Lehman from
Wednesday night under which Barclays had advanced $15.8 billion unwound.
JPMorgan wired $15.8 billion in cash to BNYM Barclays, and Barclays returned the
securitiesthathadbeenpledgedundertherepotoLBIsclearanceboxatJPMorgan.8012
When the $15.8 billion repo unwound on Thursday morning, JPMorgan
understood that Barclays would renew the repo Thursday evening. On Thursday
morning,inanemail to JPMorgan regardingtheunwinding ofthe $15.8billion repo,
JimBeckenhauptofBarclaysstated:[Can]wegetthesefundsreturnedASAPandwell
let you know what the new amount is going to be for today.8013 JPMorgan emailed
BarclayswireinstructionstorenewthetripartyrepowithLehmanThursdayevening.8014
Lehman also was assuming that Barclays would renew the $15.8 billion repo that
evening,andwasconsideringincreasestotheamountoftherepo.8015

8011Id.
8012SeeemailfromMarcoBrandimarte,JPMorgan,toKeithKochie,Barclays,etal.(Sept.18,2008)[JPM

EXAMINER00000669](emailexchangereflecting(1)Barclaysrequestforthe$15.8billiontripartyrepo
to be unwound, with Barclays funds wired to Barclays account at BNYM and (2) JPMorgans
acknowledgmentthatBarclaysfundshadbeenreleased).
8013See email from Jim Beckenhaupt, Barclays, to Keith Kochie, Barclays, et al. (Sept.18, 2008) [JPM
EXAMINER00000669].
8014SeeemailfromMarcoBrandimarte,JPMorgan,toKeithKochie,Barclays,etal.(Sept.18,2008)[JPM
EXAMINER00000669].
8015SeeemailfromIanT.Lowitt,Lehman,toAlastairBlackwell,Lehman(Sept.18,2008)[LBEXDOCID
077881];seealsotranscriptofdepositiontestimonyofJamesW.Hraska,InreLehmanBros.HoldingsInc.,

2171

LateThursdayafternoon,however,Barclaysmadethedecisionnottorenewthe
$15.8 billion repo. At 4:00 p.m., Teri Scott of Barclays circulated an email within
Barclaysregardingthe$15.8billionrepothatstated:[W]hoismakingthedecisionon
whether we would extend financing? Is there a move to ensuring that what we are
financingiscollateralthatwehaveagreed,asapartoftheassetpurchase,tobuy?8016
Keegantestifiedthat,onThursdayafternoonataround4:00p.m.,RichRicciaskedhim
tocomeovertoLehmantoreviewthesecuritiespositionsthatBarclayswasreceivingin
connectionwiththeReplacementTransaction.8017AccordingtoKeegan,afterhearrived,
Jerry del Missier asked him to review the securities associated with the $15.8 billion
repo,andrecommendwhetherBarclaysshouldrenewtherepo.8018Keegantestifiedthat
hegotthelistofcollateralthatwasinrepoandtherewasa$5billionsecurity.Ihave
noideawhatitwasbutIknowwedidntpurchaseany$5billionnotionalamountof
security. So I advised Jerry this is not what we agreed on Monday night. It was not
whatwepurchased...[a]nd...myrecommendationwouldbenottorollarepowith
JPMorgan.8019

CaseNo.0813555,Bankr.S.D.N.Y.,Aug.14,2009,atpp.9899(statingthatLehmanbelievedatthetime
that[therepo]wasalsorolling).
8016 Email from Teri Scott, Barclays, to Kevin Walker, Barclays, et al. (Sept. 18, 2008) [BCIEX(S)
00037993].
8017TranscriptofdepositiontestimonyofMichaelKeegan,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.28,2008,atpp.2122.
8018Id.atp.45.
8019 Id. Barclays had received the list of securities associated with the $15.8 billion repo shortly after
midnight on Thursday, September 18. See email from Richard Policke, Lehman, to David Aronow,
Lehman,etal.(Sept.18,2008)[BCIEX00007640].

2172

At5:38p.m.,LaRoccasentanemailtoRiccithatstated(inthesubjectline):JPM
willBEANNOYEDwithseveralbillionofcollateraltonightthatwewillnotfinance.8020
At5:48p.m.,LaRoccasentanemailtoDiamondandRiccithatsaid(inthesubjectline):
UrgentWENEEDTOTALK,JPMISGOINGTOBEMOREANNOYEDWITHWHAT
IHAVEPLANNEDTHATWILLSAVEBARCLAYSSIZE.8021
Thursday night, Barclays did not wire the funds to renew the $15.8 billion
repo.8022LateThursdayeveningandintoFridaymorning,JPMorganbookedaholdin
custody(HIC)repotransactionforLehman.8023Fridaymorning,JPMorganchangedthe
beneficiary of the HIC transaction to itself, essentially providing Lehman with a box
loantocovertheoverdraft.8024

8020EmailfromGerardLaRocca,Barclays,toRichRicci,Barclays(Sept.18,2008)[BCIEX00077444].
8021EmailfromGerardLaRocca,Barclays,toRobertE.Diamond,Barclays,etal.(Sept.18,2008)[BCIEX

00077441].
8022TranscriptofdepositiontestimonyofJamesW.Hraska,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.14,2009,atpp.9799;transcriptofdepositiontestimonyofNancyDenig,In
reLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.21,2009,atpp.13536;transcript
of deposition testimony of Michael Keegan, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr.
S.D.N.Y.,Aug.28,2009atpp.4547.
8023TranscriptofdepositiontestimonyofJamesW.Hraska,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.14,2009,atpp.98100.SeeemailfromAngeloGabriele,Lehman,toJohn
Feraca, Lehman (Sept.19, 2008) [LBEXDOCID 53093] (explaining that a $15.8 billion HIC trade was
conducted Thursday night); transcript of deposition testimony of DanielJ. Fleming, In re Lehman Bros.
HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.28,2009,atpp.17779(explainingthatJPMorgan
bookedaHICrepotocovertheoverdraft);transcriptofdepositiontestimonyofAlastairBlackwell,Inre
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.7,2009,atp.260.
8024TranscriptofdepositiontestimonyofJamesW.Hraska,InreLehmanBros.HoldingsInc.,CaseNo.08
13555, Bankr. S.D.N.Y., Aug. 14, 2009, at pp. 98102; email from John N. Palchynsky, Lehman, to Neal
Ullman, Lehman, et al. (Sept.19, 2008) [LBEXDOCID 3331072]; transcript of deposition testimony of
Nancy Denig, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 21, 2009, at
pp.14344; transcript of deposition testimony of DanielJ. Fleming, In re Lehman Bros. Holdings Inc.,
CaseNo.0813555,Bankr.S.D.N.Y.,Aug.28,2009,atpp.17879.

2173

Rather than financing approximately $58 billion of LBI securities ($42 billion in
securities under the Replacement Transaction plus a $15.8 billion repo), by not
renewing the repo Barclays limited its LBI securities financing exposure to
approximately$42billioninLBIssecurities.Thiswassignificantbecause,withaSIPA
proceeding looming for LBI, the parties that financed LBI collateral on Thursday
eveningwouldverylikelyendupowningthefinancedsecuritiesafterLBIcommenced
aSIPAproceeding.
On Friday morning, September19, JPMorgan froze LBIs clearing accounts and
preventedLBIfromaccessingJPMorgansdealersecuritiestradingsystemsbecauseof
theoverdraftsinLBIsaccounts.8025Untilthesituationwasresolved,LBIwasunableto
access its clearing accounts at JPMorgan, or to settle outstanding trades and collateral
movements.8026 JPMorgans actions also eliminated LBIs visibility into the JPMorgan

8025Email

from EdwardJ. Corral, JPMorgan, to Murray Pozmanter, DTCC (Sept.19, 2008) [JPM
EXAMINER00000493] (explaining that JPMorgan shut Lehman out of JPMorgans system because of a
$15.8 billion overdraft by Lehman); email from Daniel J. Fleming, Lehman, to Alastair Blackwell,
Lehman,etal.(Sept.19,2008)[LBEXDOCID077808](Chasewillnotdoanythinguntilweresolvethe
15.8bn problem from last night); transcript of deposition testimony of James W. Hraska, In re Lehman
Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 14, 2009, at p. 52; email from JohnN.
Palchynsky,Lehman,toNealUllman,Lehman,etal.(Sept.19,2008)[LBEXDOCID3331072];transcriptof
deposition testimony of Alex Kirk, In re Lehman Bros. Holdings Inc., Case No.0813555, Bankr.S.D.N.Y.,
Aug.31,2009,atpp.5455,63.
8026EmailfromDanielJ.Fleming,Lehman,toAlastairBlackwell,Lehman,etal.(Sept.19,2008)[LBEX
DOCID 077808] (explaining that JPMorgans action prevented Lehman from funding the DTC
settlements); email from John N. Palchynsky, Lehman, to Neal Ullman, Lehman, et al. (Sept.19, 2008)
[LBEXDOCID 3331072] (describing the impact of JPMorgans decision to freeze LBI); transcript of
deposition testimony of James W. Hraska, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr.
S.D.N.Y.,Aug.14,2009,atp.52.

2174

BDAS system usedby LBI,8027 and prevented LBI from reconciling its trades and bank
accounts.
Between Friday, September 19 and Monday, September 22, Barclays believed
thatthe$7billionincashthatJPMorganhadadvancedtoprovideBarclaysadditional
collateralundertheReplacementTransactionwasinaBarclaysaccountatJPMorgan.8028
Atsomepoint,however,JPMorgan,withoutadvisingBarclays,removedthe$7billion
from the account, and transferred it to LBIs clearance account at JPMorgan, where it
wasappliedagainstJPMorgansoutstandingboxloantoLBI.8029
(3) September19AgreementtoTransferAdditionalAssets
On Friday morning, September 19, Rich Ricci instructed Michael Klein to
investigate whether additional unencumbered Lehman assets existed, and to demand

8027JPMorgans counsel represented to the Examiner that the only way to limit LBIs ability to transfer

securities was to eliminate LBIs access to the BDAS system. While readonly access was feasible,
JPMorgans counsel represented that it would have taken an estimated two days to establish. Email
fromAmyWolfe,Wachtell,toVincentE.Lazar,ExaminersCounsel,et.al.(Jan.28,2010).
8028SeeLeventhalDecl.1921(statingthatBarclaysfirstlearnedthatitdidnothavethe$7billioncash
onoraboutSeptember23);emailfromJonathanHughes,Barclays,toStephanieA.Heller,FRBNY(Oct.
1,2008)[FRBNYtoExam.015346];emailfromGerardLaRocca,Barclays,toStephanieA.Heller,FRBNY,
etal.(Sept.26,2008)[BCIEX0082581];transcriptofdepositiontestimonyofGerardLaRocca,InreLehman
Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 19, 2009, at p. 79; transcript of deposition
testimonyofJohnRodefeld,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.27,
2009, at pp. 7374 (testifying that Barclays received statements on Friday, September 19 and Monday,
September22indicatingthatthe$7billionremainedinaBarclaysaccountatJPMorgan).
8029ExaminersInterviewofShariLeventhal,Apr.30,2009,atp.6;LeventhalDecl.16(statingthatthe
$7billionincashwastransferredtoanLBIaccountatJPMorgan);LaRoccaDecl.1112;emailfrom
JamesW.Hraska,Lehman,toJohnN.Palchynsky,Lehman,etal.(Sept.19,2008)[LBEXDOCID77721];e
mail from Jonathan Hughes, Barclays, to Stephanie A. Heller, FRBNY (Oct. 1, 2008) [FRBNY to Exam.
015346].

2175

those assets for Barclays in order to provide what Ricci described as a sufficient
cushion[forBarclays]giventheuncertaintiesinthemarket.8030
Thatmorning,Klein,Cox,RicciandKeeganmetwithMcDade,Kirk,Lowittand
Tonucci.8031 The Barclays team expressed discomfort with the assets Barclays had
receivedinconnectionwiththe$45billionReplacementTransaction,assertedthatthey
were concerned that Barclays might be undercollateralized, and demanded additional
assets.8032 McDade concluded that Lehman needed to provide more value in order to
closethedeal,anddirectedKirk,LowittandTonuccitoleadanefforttoidentifymore
assetsforBarclays.8033

8030TranscriptofdepositiontestimonyofRichRicci,InreLehmanBros.HoldingsInc.,CaseNo.0813555,

Bankr.S.D.N.Y.,Sept.8,2009,atp.155.
8031Transcript of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case
No.0813555, Bankr. S.D.N.Y., Sept.2, 2009, at pp. 16567; transcript of deposition testimony of IanT.
Lowitt,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.20,2009,atp.102.
8032Transcript of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case
No.0813555, Bankr. S.D.N.Y., Sept.2, 2009, at pp. 16265; transcript of deposition testimony of IanT.
Lowitt, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 20, 2009, at p. 60;
transcript of deposition testimony of Rich Ricci, In re Lehman Bros. Holdings Inc., No. 0813555, Bankr.
S.D.N.Y.,Sept.8,2009,atp.165;transcriptofdepositiontestimonyofPaoloR.Tonucci,InreLehmanBros.
HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.14,2009,atp.55.
8033TranscriptofdepositiontestimonyofHerbertH.McDade,III,InreLehmanBros.HoldingsInc.,No.08
13555, Bankr. S.D.N.Y., Sept.2, 2009, at pp. 16566, 16970; transcript of deposition testimony of Ian T.
Lowitt, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 20, 2009, at p. 60;
transcriptofdepositiontestimonyofPaoloR.Tonucci,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Aug.14,2009,atpp.5051,55(explainingthathisinstructionscamefromIanT.Lowitt);
transcriptofdepositiontestimonyofJamesW.Hraska,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Jan.15,2010,atpp.6769(explainingthatTonuccirequestedviaAlastairBlackwellthat
Hraska and others find additional assets that could be delivered to Barclays); see email from IanT.
Lowitt,Lehman,toHerbertH.McDade,III,Lehman(Sept.19,2008)[LBEXDOCID138017](reportingthe
resultsofhissearchforadditionalassetstoMcDade).

2176

Several Lehman witnesses stated that a specified amount of additional assets

were needed.8034 Barclays witnesses, however, testified that Barclays did not seek
particularadditionalassetsorspecifytheamountofadditionalassets.8035Accordingto
Ricci, he felt [he] needed as much as [he] could get to protect the firm and wasnt
surewhatLehmanhadleft.8036
At a second meeting on the afternoon of September 19 among Ricci, Keegan,
McDadeandKirk,Barclaysexplainedthat,withoutadditionalassetsfromLehman,the
transaction could not take place.8037 Lehman then identified two additional assets:

8034TranscriptofdepositiontestimonyofAlexKirk,InreLehmanBros.HoldingsInc.,CaseNo.0813555,

Bankr. S.D.N.Y., Aug. 31, 2009, at p. 103 (explaining that the amount of additional assets needed was
between $2 and $5 billion); transcript of deposition testimony of James P. Seery, Jr., In re Lehman Bros.
Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.3, 2009, at pp. 18889 (explaining that Barclays
was looking for a particular amount of additional assets although he could not recall the specific
amount);transcriptofdepositiontestimonyofIanT.Lowitt,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Aug.20,2009,atpp.6263(explainingthatMcDadegavehimatargetof$3to$4
billioninadditionvalue);transcriptofdepositiontestimonyofNancyDenig,InreLehmanBros.Holdings
Inc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.21,2009,atpp.6465(explainingthatHraskasaidthegoal
was$1.9billioninunencumberedcollateral);transcriptofdepositiontestimonyofJamesW.Hraska,Inre
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Jan.15,2010,atpp.6869(explainingthat
Tonucciwasresponsiblefortheinstructiontofindatleast$1.9billionofclearanceboxassets);transcript
of deposition testimony of Alastair Blackwell, In re Lehman Bros. Holdings Inc., No. 0813555, Bankr.
S.D.N.Y.,Aug.7,2009,atp.144.
8035TranscriptofdepositiontestimonyofRichRicci,InreLehmanBros.HoldingsInc.,No.0813555,Bankr.
S.D.N.Y., Sept.8, 2009, at pp. 15657; transcript of deposition testimony of Michael Klein, In re Lehman
Bros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.12,2009,atpp.9798;transcriptofdeposition
testimony of Michael Keegan, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y.,
Aug.28,2009,atpp.3536.
8036TranscriptofdepositiontestimonyofRichRicci,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Sept.8,2009,atpp.15657.
8037Transcript of deposition testimony of Michael Klein, In re Lehman Bros. Holdings Inc., Case No. 08
13555, Bankr. S.D.N.Y., Sept.12, 2009, at p. 95; transcript of deposition testimony of Alex Kirk, In re
Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 31, 2009, at p. 100 (explaining
Barclaysviewthat,withoutadditionalassetsthetransactioncouldnottakeplace).InRiccisdeposition,
hecouldnotrecallifhesaidthetransactionwouldnotgothroughwithoutadditionalassets,althoughhe
certainly [had] those thoughts. Transcript of deposition testimony of Rich Ricci, In re Lehman Bros.

2177

(1)excess amounts in 15c33 customer reserve accounts, estimated to have a value of

approximately $750 million, and (2)certain unencumbered securities (sometimes
referredtoasthebagofhammers)estimatedtohaveavalueof$1.9billion.8038
(a) Excess15c33Assets
As explained above, after Barclays met with Lehman on Friday morning,
September 19, McDade directed Kirk, Lowitt and Tonucci to lead an effort to identify
moreassetsthatmightbeavailablefortransfertoBarclays.8039Aspartofthatprocess,
LowittandhisteamworkedtoquantifytheamountofassetsinLBIs15c33accounts
(over and above the amounts required to be held for the benefit of customers) that

Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y.,Sept.8,2009,at p. 157. McDade understood that in
ordertotransactthedeal,wehadtofindmoreinthewayofideasthatwouldprovidevalue....bothof
whichIvejustmentionedtoyou,[unencumberedassetsintheclearanceboxesandthe15c3].Transcript
of deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., Case No. 0813555,
Bankr.S.D.N.Y.,Sept.2,2009,atp.165.
8038TranscriptofdepositiontestimonyofAlexKirk,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr. S.D.N.Y., Aug. 31, 2009, at pp. 10513; transcript of deposition testimony of Ian T. Lowitt, In re
Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 20, 2009, at p. 60; transcript of
deposition testimony of Michael Klein, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr.
S.D.N.Y.,Sept.12,2009,atpp.10709;transcriptofdepositiontestimonyofRichRicci,InreLehmanBros.
Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.8, 2009, at pp. 16465; transcript of deposition
testimony of PaoloR. Tonucci, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y.,
Aug.14, 2009, at pp. 5457; transcript of deposition testimony of Herbert H. McDade, III, In re Lehman
Bros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atp.175.
8039See email from Ian T. Lowitt, Lehman, to Herbert H. McDade, III, Lehman (Sept.19, 2008) [LBEX
DOCID 138017] (reporting the results of his search for additional assets to McDade); transcript of
deposition testimony of Herbert H. McDade, III, In re Lehman Bros. Holdings Inc., No. 0813555, Bankr.
S.D.N.Y., Sept.2, 2009, at pp. 16566, 16970; transcript of deposition testimony of Ian T. Lowitt, In re
Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Aug. 20, 2009, at p. 60; transcript of
deposition testimony of PaoloR. Tonucci, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr.
S.D.N.Y., Aug. 14, 2009, at pp. 5051, 55 (explaining that his instructions came from Ian T. Lowitt);
transcriptofdepositiontestimonyofJamesW.Hraska,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Jan.15,2010,atpp.6769(explainingthatTonuccirequestedviaAlastairBlackwellthat
HraskaandothersfindadditionalassetsthatcouldbedeliveredtoBarclays).

2178

mightbeavailabletotransfertoBarclays.8040LBIhaddifficulty,however,determining
thepreciseamountofexcessassetsinits15c33accounts.LBIsestimatesoftheexcess
assets varied with the changing market conditions, customer withdrawals and the
identificationofnumerousbreaksincustomerclearingtransactions.8041
The first emails reflecting LBIs efforts to determine the amount and
transferabilityofexcess15c33assetsweresentshortlyaftertheSeptember19meeting
discussing additional assets to be transferred to Barclays. At approximately 10:15 am
on September19, Anna Yu of Lehman emailed Tonucci and Kelly, among others, to
reportthat[t]he15c31segcashremainingiscurrently$1bn.Tonyiswaitingonthe
answerbackfromtheSECregardingthetransferabilityofsegcashfundsfromLehman
toBarclays.8042Laterthatday,at2:27p.m.,LowittreportedtoMcDadethatover$1.3
billionin15c33assetswereavailable.8043
That afternoon and evening, the parties appeared before the Court for the
hearingontheSaleMotion.Atthehearing,DebtorscounseltoldtheCourtthat,since

8040SECRule15c33,knownintheindustryastheCustomerSegregationRuleortheCustomerProtection

Rule, requires brokerdealers to maintain a reserve account for the exclusive benefit of customers (also
knownasanEBOCAccount)thatisusedtoholdassetsforthebenefitofcustomers.Astheamountof
customerassetsfluctuates,sodoestheamountthebrokermustholdinthatreserveaccount.See17C.F.R.
240.15c33(e); see also Affidavit of Daniel McIsaac, at p. 5 ( 14), Docket No. 1867, In re Lehman Bros.
HoldingsInc.,No.0801420(Bankr.S.D.N.Y.Oct.5,2009).
8041See transcript of deposition testimony of Daniel J. Fleming, In re Lehman Bros. Holdings Inc., Case
No.0813555,S.D.N.Y.,Aug.28,2009,atpp.18990.
8042Email from Ann Yu, Lehman, to Kristie Y. Wong, Lehman, et al. (Sept.19, 2008) [LBEXDOCID
4572388].
8043EmailfromIanT.Lowitt,Lehman,toHerbertH.McDade,III,Lehman(Sept.19,2008)[LBEXDOCID
138017].

2179

theinitialpresentationoftheAPAtotheCourtonWednesday,thereha[d]beensome
major changes in the transaction.8044 Debtors counsel told the Court that the
agreement had been finalized only about 30 minutes before the hearing began, and a
letteragreementwasbeingdraftedtomemorializethenewagreement.8045Therewasno
mentionatthehearingthatBarclayswastoreceiveanyexcesscashorsecuritiesheldin
LBIs15c33accounts.
Duringtheweekend,Lehmanemployeescontinuedtoattempttoidentifyexcess
15c33 assets that might be available for transfer. An estimate from Saturday,
September20,placedtheexcess15c33assetsatbetween$700and$800million.8046By
thatevening,Lehmanhadrevertedtoitsearlierestimatethat$1billioninexcess15c33
assetswereavailablefortransfertoBarclays.8047
OnSundayevening,AzeradsentKelly,TonucciandChristopherM.OMearaa
PowerPointpresentationdescribingLBIsavailable,excess15c33assetsfortransferto
Barclays,asfollows:
We last calculated the 15c3 lockup on Wednesday, September 17. The
amountssegregatedonthatdatewere$1.769billionforthecustomersand
$492 million for the PAIB. During this weekend, we recalculated the
lockup as of Friday, September 19. The amounts to be segregated as of

8044Id.
8045Transcript of hearing, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.19,

2008,atp.43.
8046Transcript of deposition testimony of Robert Azerad, In re Lehman Bros. Holdings Inc., Case No. 08
13555,Bankr.S.D.N.Y.,Aug.17,2009,atpp.10104.
8047SeeemailfromBrettBeldner,Lehman,toMartinKelly,Lehman,etal.(Sept.21,2008)[LBEXDOCID
456031].

2180

Fridaywere$1.011billionforthecustomersand$97millionforthePAIB
i.e.,areductionof$1.123billion,whichcanbeimmediatelytransferredto
Barclays.8048

OnSunday,Barclaysestimateditwouldreceive$1billionofexcess15c33assets.8049
As explained in Section III.C.6.h.2 of this Report, the transfer of excess 15c33
assets to Barclays was the subject of negotiations with the Creditors Committee on
Sunday, September21. The Clarification Letter executed on the morning of the sale
closing provided that Barclays was to receive, to the extent permitted by applicable
law, $769 million in excess 15c33 securities, or securities of substantially the same
natureandvalue,8050whileLBIretainedanestimated$1billioninexcess15c33cashas
a compromise.8051 The $1 billion in estimated excess 15c33 cash and $769 million in
excesssecuritiesspecifiedintheClarificationLettermatchedLehmansFridayestimate
oftheamountinitsreservelockupasofWednesdaythe17th.8052
The eventual transfer of excess 15c33 securities required SEC approval.8053 On
September20,TonucciemailedMichaelA.MacchiarolioftheSECregardingtheneed
forquickSECapprovalforthetransferof15c33securities:

8048LehmanBrothers:The15c3Lockup(Sept.21,2008),atp.1[LBEXDOCID57002],attachedtoemail

fromRobertAzerad,Lehman,toMartinKelly,Lehman,etal.(Sept.21,2008)[LBEXDOCID69281].
8049See Long Island Acquisition Summary [Draft] [BCIEX(S)00052479], attached to email from
SamanthaJ.King,Barclays,toIainMackinnon,Barclays(Sept.21,2008)[BCIEX(S)00052478].
8050ClarificationLetter,atp.4(8).
8051ExaminersInterviewofSaulBurian,Sept.29,2009,atp.6;transcriptofdepositiontestimonyofSaul
Burian,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Dec.17,2009,atpp.30709.
8052EmailfromJoelPotenciano,Lehman,toJosephAbate,Lehman(Sept.19,2008)[BCICG00033812].
8053Email from PaoloR. Tonucci, Lehman, to DanielJ. Fleming, Lehman, et. al. (Sept.20, 2008)
[LBHI_SEC07940_562928]; email from William Burke, Lehman, to Anthony Stucchio, Lehman, et al.

2181

Wemayneedyourquickresponsetoarerunofthe15c3calcasofFriday.
We expect that there will be a further reduction in the requirement
because of the transfer of clients and continued reduction in client
exposures.
Consequentlywehopetoreleasesomecashwhichwouldbecomepartof
thesale.Thishasbeendocumentedinthebankruptcyfiling.
. . . It would be great if you could review, or have your team review,
quicklywhenthecalciscompleted.8054
TheSECultimatelygaveitsapprovalforthetransferofthe15c33securities.8055
Theproprietyofthetransferofexcess15c33securitiestoBarclaysisthesubject
ofpendinglitigationinvolvingtheDebtors,theSIPATrustee,theCreditorsCommittee
and Barclays. Because this issue is the subject of active, pending litigation before this
Court with respect to which discovery is not complete, the Examiner has limited this
sectionoftheReporttosettingoutashortrecordofthefactshehasdevelopedonthis
issue.
(b) AdditionalSecurities
Inadditiontotheexcess15c33assets,onFridayLehmanalsoidentifiedamixof
additional securities that could be transferred to Barclays. Barclays asserted that it
believedthatthetruevalueoftheadditionalassets,andinparticulartheunencumbered

(Sept.23,2008)[LBEXDOCID056115];transcriptofdepositiontestimonyofHerbertH.McDade,III,Inre
LehmanBros.HoldingsInc.,CaseNo.0813555,S.D.N.Y.,Sept.2,2009,atpp.28283.
8054EmailfromPaoloR.Tonucci,Lehman,toMichaelA.Macchiaroli,SEC(Sept.20,2008)[LBEXDOCID
457721].
8055Email from PaoloR. Tonucci, Lehman, to DanielJ. Fleming, Lehman, et. al (Sept.20, 2008)
[LBHI_SEC07940_562928];seetranscriptofdepositiontestimonyofDanielJ.Fleming,InreLehmanBros.
HoldingsInc.,CaseNo.0813555,S.D.N.Y.,Aug.28,2009,atpp.16768.

2182

assets, was questionable.8056 Ricci expressed his discomfort with the amount
available.8057 Kirk explained that there was nothing left to give Barclays,8058 and Ricci
responded that he did not want to be a pig.8059 With the additional assets, Ricci
acknowledgedthatBarclayswaswillingtoproceedwiththetransaction.8060
That weekend, Lehman continued to identify unencumbered securities that
could be transferred to Barclays, and updated its valuations of the unencumbered
securitiesthatcouldbedeliveredtoBarclays.8061OnSaturday,September20,estimates
ofthevalueoftheadditionalsecuritiesrangedfrom$1.6billion8062to$2.18billion.8063

8056TranscriptofdepositiontestimonyofAlexKirk,InreLehmanBros.HoldingsInc.,CaseNo.0813555,

Bankr.S.D.N.Y.,Aug.31,2009,atpp.10610(explainingthatMichaelKeeganconsideredtheadditional
assets even harder to value than the assets in the Replacement Transaction); transcript of deposition
testimony of Michael Keegan, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y.,
Aug.28,2009,atpp.8789.
8057TranscriptofdepositiontestimonyofRichRicci,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Sept.8,2009,atp.158.
8058Id.
8059Id.;emailfromAlexKirk,Lehman,toHerbertH.McDade,III,Lehman(Sept.19,2008)[Deposition
Exhibit326](RichRichiejusttoldmehewontblowupthistradebybeingapig).
8060Transcript of deposition testimony of Michael Klein, In re Lehman Bros. Holdings Inc., Case No. 08
13555,Bankr.S.D.N.Y.,Sept.12,2009,atpp.11011;transcriptofdepositiontestimonyofRichRicci,Inre
Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.8, 2009, at p. 158; transcript of
deposition testimony of Alex Kirk, In re Lehman Bros. Holdings Inc., No. 0813555, Bankr. S.D.N.Y.,
Aug.31, 2009, at pp.11112; transcript of deposition testimony of Herbert H.McDade, III,In reLehman
Bros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.2,2009,atpp.17778.
8061Transcript of deposition testimony of Michael Klein, In re Lehman Bros. Holdings Inc., Case No. 08
13555, Bankr. S.D.N.Y., Sept.12, 2009, at pp. 10709; transcript of deposition testimony of JamesW.
Hraska,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Aug.14,2009,atpp.21213,
22122, 22728; see email from Ian T. Lowitt, Lehman, to Monty Forrest, Lehman, et al. (Sept.20, 2008)
[LBEXDOCID77857](reflectingLehmansattemptstofindadditionalsecuritiestotransfertoBarclays).
8062SeeemailfromMontyForrest,Lehman,toAlastairBlackwell,Lehman,etal.(Sept.20,2008)[LBEX
DOCID463886].
8063Email from Monty Forrest, Lehman, to Alastair Blackwell, Lehman, et al. (Sept.20, 2008) [LBEX
DOCID463886];transcriptofdepositiontestimonyofNancyDenig,InreLehmanBros.HoldingsInc.,Case
No.0813555,Bankr.S.D.N.Y.,Aug.21,2009,atpp.19091.

2183

(c) OCCMargin
The OCC8064 requires that each of its clearing members post collateral (margin)
sufficienttosecureitsobligationstotheOCC.8065TheminimumrequiredOCCmargin
consistsofanamountequalto(1)themarktomarketvalueofthememberspositions,
plus(2)ariskcomponenttocoverroughlytwodaysofmarketmovement.8066TheOCC
also requires that clearing members post a clearing deposit based on the size of their
positions.
LBI was one of the top ten to fifteen clearing members at the OCC, typically
maintaining$23billiondollarsinnetpositionsandassociatedmargin.8067LBIusually
providedmarginsomewhatinexcessofwhattheOCCrequired.8068LBIalsomaintained
aclearingdepositattheOCC.8069
From September 15 through September 19, 2008, LBIs options positions at the
OCCwereintheaggregateshort,andthemarketgenerallydeclinedduringtheweek
following LBHIs bankruptcy, so LBIs positions at the OCC moved in LBIs favor

8064The OCC is the clearing organization for most domestic exchangetraded commodities options, as

well as futures on financial assets such as stocks and currencies. It clears options for a number of
exchanges.ExaminersInterviewofJohnFennellandJeanCawley,Dec.18,2009,atp.2.
8065Id.atpp.23.
8066In general, increased market volatility means that clearing members must post more margin
(collateral).Id.atp.2.
8067Id.
8068Id.
8069Declaration of Craig L. Jones, at p. 3 ( 7), In re Lehman Bros. Holdings Inc., No. 0813555, (Bankr.
S.D.N.Y.Jan.8,2010)(theJonesDecl.),attachedasEx.354toMemorandumofBarclaysCapitalInc.in
OppositiontotheRule60MotionsandinSupportofMotionofBarclaysCapitalInc.toEnforcetheSale
OrderandSecureDeliveryofAllUndeliveredAssets,DocketNo.6815,InreLehmanBros.HoldingsInc.,
No.0813555(Bankr.S.D.N.Y.Jan.29,2010).

2184

during this period.8070 As a result, the collateral LBI had posted at the OCC prior to
LBHIsbankruptcywassufficienttomeettheOCCstypicalmarginrequirements,and
theOCCdidnotmakeanyspecialmargincallsuponLBI.8071However,theOCCdidnot
permitLBItoaccessanyexcessmarginthatwasbeingcreatedasaresultofmarket
movements. Instead, that week the OCC insisted that all excess margin remain on
depositattheOCC.8072
Beginning on Friday, September 19, in connection with its review of whether
additionalassetsmightbeavailablefortransfertoBarclays,LBIrevieweditsexchange
traded positions. That day, Lehman estimated the amount of excess OCC margin at
$401 million.8073 On Sunday, Fleming emailed Tonucci with a higher amount: The
statementfromtheOCCreflectsalargeexcesspositioninhouseandcustomer.House
hasexcessof$444mmandcustomer$244.Idonotknowhowaccessiblethisis.8074
It is not clear whether the magnitude of the excess OCC margin was clearly
communicated to Barclays prior to the closing. As of Monday, internal Barclays
emails were complaining about the lack of information about LBIs positions at the

8070ExaminersInterviewofJohnFennellandJeanCawley,Dec.18,2009,atpp.23.
8071Id.
8072Id.
8073DeclarationofSharonBlake,Ex.1,InreLehmanBros.Inc.,No.0813555(Bankr.S.D.N.Y.Jan.8,2008),

attachedasEx.350toMemorandumofBarclaysCapitalInc.inOppositiontotheRule60Motionsandin
Support of Motion of Barclays Capital Inc. to Enforce the Sale Order and Secure Delivery of All
Undelivered Assets, Docket No. 6815, In re Lehman Bros. Holdings Inc., No. 0813555 (Bankr. S.D.N.Y.
Jan.29,2010).
8074Email from DanielJ. Fleming, Lehman, to PaoloR. Tonucci, Lehman (Sept.21, 2008) [Deposition
Exhibit161A].

2185

OCC:Itisclearlbhasabsolutelynoideawhatitsoccriskpositionis.Weknowitis
between 2bn short and 4bn long. They do not know what has been booked to what
entity. We cannot see. We are now 4 days into making zero progress on this with
them.8075
The OCC did not actively participate in negotiations between Barclays and
Lehman.8076 However, the OCC made clear that it would not continue clearing LBIs
accounts postsale unless Barclays assumed LBIs obligations to the OCC: OCCs
willingness to transfer the LBI accounts to Barclays is conditioned upon obtaining
Barclays signature on the Transfer and Assumption Agreement among OCC, the
[SIPA] Trustee and Barclays.8077 The OCC proposed to implement the transfer by
simply renaming the LBI accounts as accounts of Barclays and it would then be
Barclays obligation to make settlement in respect of those accounts on Monday
[September22,2008]morning.8078
OnMonday,September22,theOCC,theSIPATrusteeandBarclaysexecutedthe
TransferandAssumptionAgreementreferencedintheOCCsemail.8079Theagreement
provided that LBI transferred to Barclays (ii) all margin deposits held by OCC with

8075Email from Stephen King, Barclays, to Elizabeth James, Barclays, et al. (Sept.22, 2008) [BCIEX(S)

00110544].
8076ExaminersInterviewofJohnFennellandJeanCawley,Dec.18,2009,atp.7.
8077Email from James R. McDaniel, Sidley Austin, to Edward J. Rosen, Cleary Gottlieb (Sept.21, 2008)
[BCICG00064703].
8078Email from James R. McDaniel, Sidley Austin, to Ronit J. Berkovich, Weil (Sept.20, 2008) [BCI
CG00023904].
8079Transfer and Assumption Agreement among LBI, THE OCC and Barclays (Sept. 19, 2008), at p.1
(1(a)).

2186

respect to the Account; (iii) all settlement obligations with regard to transactions in
cleared contracts; and (iv) all rights and obligations in respect of exercises of option
contracts. . . .8080 In exchange, Barclays assumed and agreed to perform each
obligation arising out of or to be performed with respect to the activity in the
Account.8081Intheagreement,theSIPATrusteeauthorizedJPMorgantotransferall
rightsinsecurities,cash,andotherproperty(Collateral)pledgedbyLBIto[theOCC]
andheldforOCCsbenefitatJPMorgan.8082
AsofthecloseofbusinessonFriday,September19,theOCCsaggregatemargin
requirementsacrossallLBIaccounts(customerandhouse)was$1,693,367,422.8083The
OCC estimates that LBIs posted collateral, including the clearing fund deposit, had a
valueof$2,301,351,807,8084consistingof$1,081,685,547incash(including$80,797,001in
proceeds from letters of credit that had been drawn upon by the OCC earlier that
week);securitieswithanestimatedmarketvalueof$967,466,2598085andundrawnletters
of credit in the aggregate face amount of $252 million. Thus, the OCC calculates that
LBIs collateral at the OCC (including drawn and undrawn letters of credit) exceeded

8080Id.
8081Id.atp.2(1(b)).
8082SeeletteragreementamongBarclays,LBIandJPMorgan(Sept.19,2008)[BCICG00063905].
8083LetterfromWilliamJ.Nissen,SidleyAustin,toVincentE.Lazar,ExaminersCounsel,re:TheOptions

ClearingCorporation(Jan.13,2010);JonesDecl.Ex.1.
8084EmailfromWilliamJ.Nissen,SidleyAustin,toVincentE.Lazar,ExaminersCounsel(Feb.1,2010).
8085 OCC, Collateral Inventory by CMO: Government Securities (GS & GE) (Sept. 19, 2008) [LBEXOCC

000001].

2187

the OCCs margin requirements by $607,984,385 ($355,784,385 excluding undrawn

lettersofcredit).8086Barclaysvaluesthecollateralsomewhatdifferently.8087
The propriety of the transfer of OCC margin (including excess margin) to
Barclays and its subsequent actions, including Barclays subsequent liquidation of
options positions attributable to LBI and its affiliates,8088 is the subject of pending
litigation involving the Debtors, the SIPA Trustee, the Creditors Committee and
Barclays.Becausethisissueisthesubjectofactive,pendinglitigationbeforethisCourt
withrespecttowhichdiscoveryisnotcomplete,theExaminerhaslimitedthissectionof
theReporttosettingoutashortrecordofthefactshehasdevelopedonthisissue.
g) TheCourtsConsiderationandApprovaloftheProposed
Transaction
(1) September19,2008SaleHearing
OnSeptember19atapproximately4:30p.m.,thesalehearingcommenced.8089At
thebeginningofthehearing,Debtorscounselrequestedarecesstoexplaintothosein
attendance how the deal had changed since the APA was filed with the Court. The

8086EmailfromWilliamJ.Nissen,Austin,toVincentE.Lazar,ExaminersCounsel(Feb.1,2010).
8087JonesDecl.Ex.1.
8088

The margin deposits transferred to the OCC included margin associated with LBI positions
attributabletoatleastoneLBHIAffiliate,LOTC.TheoptionspositionsassociatedwithLOTCsaccounts
atLBIweresubsequentlyliquidatedbyBarclays.DeclarationofDanielDziemian,atpp.25(710),In
reLehmanBros.Inc.,No.0813555(Bankr.S.D.N.Y.Jan.8,2008),attachedasEx.352toMemorandumof
BarclaysCapitalInc.inOppositiontotheRule60MotionsandinSupportofMotionofBarclaysCapital
Inc. to Enforce the Sale Order and Secure Delivery of All Undelivered Assets, Docket No. 6815, In re
LehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Jan.29,2010).
8089Transcript of hearing, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.19,
2008,atp.1.

2188

Court granted the request, and Debtors counsel spent approximately an hour
describingthechangestothoseinthecourtroom.8090
When the hearing recommenced, Debtors counsel advised the Court that the
precipitous drop in the markets in the preceding days had reduced the value of the
securities that would be conveyed in the transaction;8091 and because of the LBIE
insolvency proceeding in the United Kingdom, LBI was unable to deliver to Barclays
theintendedassetspursuanttotheAPA.8092
Withrespecttothesecuritiestobetransferred,Debtorscounselstated:
[Lehmanwas]sellingassetsthathadavalueofseventyapproximately
seventybilliondollars.Andtoday,YourHonor,[Lehmanis]onlyselling
assetsthathaveavalueof47.4billiondollars.
Barclays is assuming liabilities, however, of 45.5 billion dollars in
connection with those assets. So that has not changed from the original
transaction.8093
Debtors counsel also informed the Court that: Barclays basically stepped into the
shoesoftheFederalReserveinconnectionwiththePrimaryDealerCreditFacilityasto
the45.5billiondollarsLehmanborrowedlastMondayandreceivedthecollateralthat
Lehmanhadpostedtherewith.8094

8090Id.atp.45.
8091Id.atp.46.
8092Id.atpp.6365.
8093Id.atp.47.
8094Id.atp.63.

2189

Debtors counsel informed the Court that the changes in the proposed
transaction did not fundamentally alter the basic agreement set forth in the APA,8095
pointing to the cash consideration, the $250 million payment and the sale of the
buildingat745SeventhAvenueandthetwoNewJerseydatacentersasevidenceofthe
generalcontinuityofthedeal.8096Counselnoted,however,thatthecashconsideration
wouldchangesomewhatduetonewappraisalsoftherealestateassets.8097
Following a brief description by Debtors counsel of the RMBS that were
included in the assets to be transferred to Barclays, the DTCC described how the
treatment of the $6 billion in RMBS in the proposed transaction had changed.8098 As
explainedbytheDTCC,undertheoriginalproposalLBIandBarclaysweretosplitthe
RMBS 50/508099 under the revised proposal, Barclays would take all of the RMBS and
pledgethemtotheDTCCtosecureclearing.8100DTCCscounselindicatedthatBarclays
alreadyhadpostedtheRMBSascollateraltotheDTCCthatmorning,andthatDTCC
was using the RMBS to protect itself as it settled trades to effect the transfer of LBI
accounts to Barclays.8101 According to the DTCC, trading would have stopped had

8095Id.atp.64.
8096Id.
8097Id.atpp.6465.
8098Id.atpp.4951.
8099Id.atpp.5152.
8100Id.atpp.5153.
8101Id.

at pp. 5152. During the Examiners interview of Isaac Montal from DTCC, DTCCs counsel
Sheldon Hirshon indicated that he recalled making the statement but did not recall the source of this
information,andinhindsightbelievesthathemayhavebeenincorrectandsimplyspeculatingthatthe
RMBSalreadyhadbeenmovedtoDTCC.ExaminersInterviewofIsaacMontal,May19,2009atp.2.

2190

collateralnotbeenposted.8102TheDTCCfurtherexplainedthattheFirstAmendmentto
the APA provided that after LBIs accounts at the DTCC were settled, fifty percent of
theremainingRMBSwouldbereturnedtoLBI.8103
The Creditors Committees counsel explained that the Creditors Committee
neither supported nor objected to the proposed transaction.8104 The Creditors
Committee indicated that it had insufficient time to conduct a proper due diligence
reviewoftheproposedtransaction,butdidnotseeaviablealternative.8105
The Court concluded: I have to approve the transaction because its the only
availabletransaction.8106TheCourtexplainedthatifitdidnotapprovethetransaction
[t]he harm to the debtor, its estates, the customers, creditors, generally, the national
economyandtheglobaleconomycouldprovetobeincalculable.8107TheCourtnoted
thatitsapprovalofthetransactionwouldsave9,000jobsforatleastninetydays.8108

8102Id.atp.52.
8103Id.

at pp. 5253; First Amendment to the Asset Purchase Agreement among Lehman Brothers
HoldingsInc.,LehmanBrothersInc.,LB745LLC,andBarclaysCapitalInc.(Sept.19,2008),atp.1.These
provisions in the First Amendment to the APA were deleted by the Clarification Letter. Clarification
Letter,atp.3(4(d)).
8104Transcript of hearing, In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr. S.D.N.Y., Sept.19,
2008,atp.67.
8105Id.
8106Id.atp.248.
8107Id.atp.250.
8108Id.

2191

(2) TheSaleOrder
OnSeptember20,2008,theCourtenteredtheSaleOrderauthorizingthesaleof
thePurchasedAssetstoBarclays.8109TheSaleOrderforthemostpartconformedtothe
proposedformoforderLBHIhadattachedtoitsSaleMotion.
IntheSaleOrder,theCourtfound:

LBHIanditsdebtorsubsidiarieswouldsufferirreparableharmwithoutthe
sale;8110

Good and sufficient reasons were given to satisfy the Court that the sale
wasinthebestinterestsofthedebtors;8111

The debtors demonstrated both (1) good business judgment, and

(2)compelling reasons to authorize the sale outside the ordinary course of
business under Bankruptcy Code section 363(b) (namely, that it was
necessarytomaximizethevalueofthePurchasedAssets);8112

The Purchase Agreement was negotiated at arms length and in good faith;
Barclays was not an insider of the debtors, and no party engaged in
conduct that could cause the Purchase Agreement to be avoided under
BankruptcyCodesection363(n).Specifically,thePurchaserhasnotactedin
a collusive manner with any person and the purchase price was not
controlledbyanyagreementamongbidders;8113

8109Atthetimeofthesalehearing,thefinalversionoftheClarificationLetterhadnotbeendrafted,andit

wasnotpresentedtotheCourt.
8110OrderUnder11U.S.C.105(a),363,and365andFederalRulesofBankruptcyProcedure2002,6004

and6006AuthorizingandApproving(A)theSaleofPurchasedAssetsFreeandClearofLinesandOther
Interests and (B) Assumption and Assignment of Executory Contracts and Unexpired Leases at p.3,
Docket No. 258, In re Lehman Bros. Holdings Inc., No. 0813555 (Bankr. S.D.N.Y., Sept.20, 2008) (Sale
Order).
8111Id.atp.5.
8112Id.atp.6.
8113Id.atpp.56.

2192

Barclays is a good faith Purchaser of the Purchased Assets within the

meaningofBankruptcyCodesection363(m)andis,therefore,entitledtoall
oftheprotectionsaffordedthereby;8114

The Purchase Agreement was the highest and best offer for the Purchased
Assets, and LBHIs determination of that is a valid and sound exercise of
theDebtorsbusinessjudgment;8115and

The Purchase Agreement must be consummated promptly in order to

preservetheviabilityofthebusinessessubjecttothesaleasgoingconcerns,
tomaximizethevalueoftheestates.Timeisoftheessenceinconsummating
theSale.8116

Basedonthesefindings,theCourtruled:

TheDebtorsareherebyauthorizedanddirectedto(1)executethePurchase
Agreement,8117alongwithanyadditionalinstrumentsordocumentsthatmay
be reasonably necessary or appropriate to implement the Purchase
Agreement, provided that such additional documents do not materially
changeitsterms;(2)consummatetheSaleinaccordancewiththetermsand
conditions of the Purchase Agreement and the other agreements
contemplated thereby; and (3) take all other and further actions as may be
reasonably necessary to implement the transactions contemplated by the
PurchaseAgreement.8118

ThePurchaseAgreementandanyrelatedagreements,documentsorother
instruments may be modified, amended or supplemented by the parties
thereto,inawritingsignedbysuchparties,andinaccordancewiththeterms
thereof, without further order of the Court, provided that any such
modification, amendment or supplement does not have a material adverse

8114Id.
8115Id.atp.6.
8116Id.atp.11.
8117TheSaleOrderdefinesthePurchaseAgreementasthe:AssetPurchaseAgreement,datedSept.16,

2008, among the Debtors, Lehman Brothers Inc. . . . and Barclays . . . , collectively with that First
Amendment Clarifying Asset Purchase Agreement dated September19, 2008 and that letter agreement
clarifying and supplementing the Asset Purchase Agreement dated September20, 2008 (as may be
subsequentlymodifiedoramendedorclarified....Id.atp.1.
8118Id.atp.12.

2193

effectontheDebtorsestatesandhasbeenagreedtobetweentheCommittee,
theDebtorsandthePurchaser.8119
h) TransactionClosing
(1) JPMorgan/BarclaysDisputes
Over the closing weekend, significant disputes arose between JPMorgan and
Barclays.Accordingtoseveralparties,thosedisputesconsumedmuchoftheweekend
andthreatenedtoderailthetransaction.8120
JPMorgan objected to Barclays decision on Thursday, September 18, not to
renew its $15.8 billion triparty repo with Lehman. JPMorgans position was that
Barclays had agreed to buy all of LBIs securities, including the securities associated
withthe$15.8billionrepo.8121OnSaturday,September20,JPMorganthreatenedtolock
down all of LBIs accounts at JPMorgan and apply the cash and securities in LBIs

8119Id. at p. 21. On September20, 2009, Bay Harbour, an LBIE creditor, appealed the Sale Order and a

relatedorderenteredinLBIsSIPAproceedings.BayHarbourarguedthattherewasinsufficientevidence
fortheBankruptcyCourttofindthatBarclayswasagoodfaithpurchaser,thattheBankruptcyCourts
decisionviolatedtheDueProcessClausebecauseBayHarbourwasnotaffordedasufficientopportunity
tobeheard,andthattheBankruptcyCourterredinfindingthatBarclaystookLBIsassetsfreeandclear
ofanyintereststhirdpartieshadinthoseassets.

The District Court affirmed the Sale Order, holding that there was sufficient evidence to find that
Barclayswasagoodfaithpurchaser,thatunderSection363(m)oftheBankruptcyCodeanychallengeto
thesale,otherthantoBarclaysstatusasagoodfaithpurchaser,wasmoot,andthatbecauseBayHarbour
didnotseekandreceiveastaypendingitsappeal,Section363(m)precludeditfromchallenginganything
otherthanwhetherBarclayswasagoodfaithpurchaser.SeegenerallyInreLehmanBros.HoldingsInc.,415
B.R.77,84(S.D.N.Y.2009).
8120Examiners Interview of Harvey R. Miller, Lori Fifeand Thomas Roberts, Feb.3, 2009; Examiners
InterviewofSaulBurian,Sept.29,2009,atp.5.
8121Seeletter from Jamie Dimon, JPMorgan, to John Varley, Barclays, re:Settlement Discussion (Oct.11,
2008)[BCICG00059720].

2194

accounts against LBIs obligations to JPMorgan.8122 Barclays was not yet aware that
JPMorgan had applied the $7 billion JPMorgan had advanced for Barclays benefit in
connectionwiththeReplacementTransactionagainstLBIsboxloan.
OnSunday,September21,negotiationsbetweenBarclaysandJPMorganreached
a breaking point.8123 To resolve the dispute, the FRBNY hosted a conference call
beginning around 3 p.m., which included, among others, the FRBNY, Lehman, the
Creditors Committee, DTCC, the SEC, JPMorgan and Barclays, as well as numerous
counsel and financial advisors.8124 The conference call continued onandoff through
mostofthenight.
During the call, Heidi Miller of JPMorgan spoke of a problem involving $7.4
billion.8125 Stephanie Heller of the FRBNY told the Examiner that the FRBNY and
Barclays representatives participating in the call understood that Miller was referring
tothe$7billionthatJPMorganhaddepositedintoanaccountforthebenefitofBarclays
on Friday, September 19, in connection with the Replacement Transaction.8126
AccordingtoHeller,shelaterconcludedthattherewasamisunderstanding:Millerwas

8122See email from Philip Mindlin, Wachtell, to James W. Giddens, SIPA Trustee, et al. (Sept.20, 2008)

[BCICG00025435].
8123ExaminersInterviewofStephanieA.Heller,July8,2009;seeemailfromArchibaldCox,Jr.,Barclays,
toRichRicci,Barclays,etal.(Sept.21,2008)[BCIEX00081149](statingthattherewasamajorissuewith
JPMorgan).
8124ExaminersInterviewofStephanieA.Heller,July8,2009;emailfromAlastairBlackwell,Lehman,to
JenniferBecker,Lehman(Sept.21,2008)[LBEXSIPA005309](Iaminaroomwithfed/dtc/sec/jpmorgan
and barcap. Sucks soooooo bad. This deal is coming down to clearing.); Examiners Interview of
HarveyR.Miller,Apr.23,2009,atp.14.
8125ExaminersInterviewofStephanieA.Heller,July8,2009.
8126Id.

2195

referring to a $7.4 brokered loan between JPMorgan and Lehman that JPMorgan
wanted Barclays to assume, rather than the $7.0 billion relating to the Replacement
Transaction.8127
DuringtheearlymorninghoursofMonday,BarclaysandJPMorganreachedan
apparent resolution of their disputes, which was memorialized in a Services and
SettlementAgreementdatedasofSeptember22,2008.8128TheServicesandSettlement
AgreementprovidedthatJPMorganwouldcontinuetoclearandsettletransactionsfor
LBI in order to facilitate the SIPA Trustees liquidation of the broker/dealer.8129 The
ServicesandSettlementAgreementalsoprovidedthatBarclayswouldhavenointerest
in cash, securities or other property in LBIs clearance and other accounts at
JPMorgan.8130 Earlier drafts of the Services and Settlement Agreement had provided
thatBarclayswouldpayJPMorgan$7.4billionforLBIsecuritiesthatJPMorganasserted
wereworth$8.55billion.8131ThefinalversionoftheServicesandSettlementAgreement

8127Id.;seealsoemailfromStephanieA.Heller,FRBNY,toGerardLaRocca,Barclays,etal.(Sept.25,2008)

[BCIEX00077452] (explaining her belief that there was a misunderstanding between Barclays and
JPMorgan).
8128See Services and Settlement Agreement among JPMorgan Chase Bank, N.A., Barclays Capital, Inc.,
James W. Giddens as Trustee for the Liquidation of Lehman Brothers Inc., the Securities Investor
ProtectionCorporation,andLehmanBrothersHoldingsInc.(Sept.22,2008)(theServicesandSettlement
Agreement).
8129Id.1.
8130Id.2.
8131Compare Services and Settlement Agreement [Draft] (Sept. 22, 2008) [BCICG00027059] with Services
and Settlement Agreement [Draft] (Sept. 22, 2008) [BCICG00027292] and Services and Settlement
Agreement[executed];seealsoemailfromNathanielHartley,Barclays,toStephenKing,Barclays,etal.
(Sept.22,2008)[BCIEX(S)00039229](providingdescriptionofthe$8.55billionofsecuritiesthatBarclays
wouldpurchase,whichincludedRACERS).

2196

did not include a purchase of securities by Barclays, apparently because Barclays had
determined that part of the $8.55 billion was the RACERS security position with a
markedvalueof$5billion,whichBarclaysdidnotbelievewasworth$5billion,anddid
notwant.8132
Early in the morning on September22, Don Donahue, CEO of the DTCC,
received a call from either the SEC or the FRBNY.8133 Donahue was informed that
JPMorgan and Barclays had resolved their dispute, and JPMorgan would continue to
settle LBIs trades. However, the $6 billion in RMBS were no longer available for the
DTCCtouseascollateralforitsclearingactivities.8134DonahuewastoldthattheDTCC
wouldonlyreceive$250millionincashtosecureclearing.DTCCnonethelessdecided
toclearLBIstradesthroughWednesday,September24,whichgavethepartiesenough
timetoconsummatethesaletransaction.8135
(2) TheCommitteesRole
What the Creditors Committee was told about the sale transaction and the
changes to the transaction between the APA and the sale closing, and whether the
Creditors Committee consented to the transaction that closed on Monday, September
22, are disputed issues in the ongoing litigation relating to the sale transaction. As

8132TranscriptofdepositiontestimonyofHarveyR.Miller,InreLehmanBros.HoldingsInc.,CaseNo.08

13555,Bankr.S.D.N.Y.,Jan.7,2010,atp.27.
8133ExaminersInterviewofIsaacMontal,May19,2009,atp.7.
8134Id.
8135Id.

2197

explainedabove,theExaminerisnotreachinganyconclusionsregardingthosefactual
disputes, but sets forth below facts pertinent to the Creditors Committees role in the
saletransaction.
On Thursday, September 18, Seery, Shapiro, Miller and Richard P. Krasnow (a
partner at Weil) met with Burian, Bradley Geer, Eric Siegert and Michael Fazio of
Houlihan,andMichaelC.EisenbandandotherrepresentativesofFTI,anotherfinancial
advisoryfirmretainedbytheCreditorsCommittee.8136
Seerytestifiedthat,duringthemeeting,theparticipantsdiscussedthedeal,...
[t]he risk in the market, . . . [t]he transfer of assets.8137 According to Seery, it was a
diligencemeetingontheirpartwheretheyaskedalotofquestions.8138
Burian described the September 18 meeting to the Examiner as abig picture
meeting.8139Burianstatedthathecametothemeetingwithapreparedlistofquestions
regardingthetransaction.8140AccordingtoBurian,Krasnowwalkedthegroupthrough
the transaction.8141 Burian advised the Examiner that very little explanation was
provided regarding the securities positions to be transferred, apart froma balance

8136TranscriptofdepositiontestimonyofJamesP.Seery,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.08

13555,Bankr.S.D.N.Y.,Sept.3,2009,atpp.11920;ExaminersInterviewofSaulBurian,Sept.29,2009,at
p.2;transcriptofdepositiontestimonyofSaulBurian,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Dec.17,2009,atpp.15,198.
8137TranscriptofdepositiontestimonyofJamesP.Seery,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Sept.3,2009,atp.120.
8138Id.
8139ExaminersInterviewofSaulBurian,Sept.29,2009,atp.2.
8140Id.
8141Id.

2198

sheetdocumentthatwasdistributedthatincludedtotalsof$70billionononesideand
$68billionontheother,andincludedcontractcureandemployeecostestimates.8142
BuriantestifiedthatalthoughtheHoulihanteamaskedspecificquestionsduring
the meetings, it did not receive sufficient details.8143 In addition, Burian advised the
Examiner that, during the September 18 meeting, there was no discussion of
modification of the transaction to convey securities to Barclays through a repo
transaction(i.e.,theReplacementTransaction).8144
On Friday, September19, prior to the sale hearing, Seery participated in a call
withCreditorsCommitteeadvisorsfromHoulihanandMilbank.8145Seerytestifiedthat
duringthecall,hediscussedwiththeCreditorsCommitteeadvisorsseveralaspectsof
the sale transaction, including: (1) the structure of the Replacement Transaction and
usingthetransactionasamechanismtotransferassetstoBarclays;8146(2)thattherepo
with Barclays would be terminated at the closing, leaving Barclays with the securities

8142Id.; transcript of deposition testimony of Saul Burian, In re Lehman Bros. Holdings Inc., Case. No. 08

13555,Bankr.S.D.N.Y.,Dec.17,2009,atpp.19804.Seerytestifiedthat[t]herewasdefinitelydiscussion
of assets, but did not recall specifics. Transcript of deposition testimony of James P. Seery, Jr., In re
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.3,2009,atpp.12122.
8143TranscriptofdepositiontestimonyofSaulBurian,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Dec.17,2009,atpp.20304;ExaminersInterviewofSaulBurian,Sept.29,2009,atp.3.
8144Examiners Interview of Saul Burian, Sept. 29, 2009, at p. 3. Seery testified that he did not recall
whether the Replacement Transaction was discussed during the September 18 meeting. Transcript of
deposition testimony of James P. Seery, Jr., In re Lehman Bros. Holdings Inc., Case No. 0813555, Bankr.
S.D.N.Y.,Sept.3,2009,atp.122.
8145TranscriptofdepositiontestimonyofJamesP.Seery,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Sept.3,2009,atp.126.
8146Id.atpp.126,12829.Seerytestifiedthat,asoftheconferencecallonSeptember19,theCommittee
alreadywasawarethatBarclayshadsteppedintotheshoesoftheFRBNYthrougharepo,althoughhe
didnotknowhowtheyknew.Id.atp.127.

2199

that had been pledged as collateral;8147 (3) the haircut on the repo collateral (the
difference between what Barclays advanced in cash and the market value of the
securities pledged under the repo);8148 and (4) that Barclays was concerned about the
value of the securities that had been received under the repo, and that Lehman was
attemptingtoidentifyadditionalassetstotransfertoBarclays.8149
Burians notes from the September 19 call appear to refer to a Collateralized
RepoofBarclaysFedLoan,andto$50.65billionAssetsandTotalextension$45.5
B.8150 Those notes, however, were crossed out.8151 Burian testified that he was told
eitheronthatcallorinafollowupcallonSeptember19,thattheinformationcontained
in that portion of his notes was incorrect.8152 Burians notes from another subsequent
callreferto45.5LongandLoan@$45.5.8153
ShortlyaftermidnightonSeptember20,theCourtenteredtheSaleOrder.8154The
SaleOrderprovided,inpart:

8147Id.atpp.13031.
8148Id.atp.131.
8149Id.atpp.114,12627,132.
8150TranscriptofdepositiontestimonyofSaulBurian,InreLehmanBros.HoldingsInc.,CaseNo.0813555,

Bankr. S.D.N.Y., Dec.17, 2009, at pp. 22640; Saul Burian, Houlihan, handwritten notes of Saul Burian
(Sept.19,2008),atp.3[DepositionExhibit472B].
8151TranscriptofdepositiontestimonyofSaulBurian,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Dec.17,2009,atpp.226,240.
8152Id.atpp.237,23942;SaulBurian,Houlihan,handwrittennotesofSaulBurian(Sept.19,2008),atp.4
[DepositionExhibit472B].
8153ExaminersInterviewofSaulBurian,Sept.29,2009,atp.4;transcriptofdepositiontestimonyofSaul
Burian,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Dec.17,2009,atpp.23942.
8154OrderUnder11U.S.C.105(a),363,and365andFederalRulesofBankruptcyProcedure2002,6004
and6006AuthorizingandApproving(A)theSaleofPurchasedAssetsFreeandClearofLiensandOther

2200

ThePurchaseAgreementandanyrelatedagreements,documentsorother
instruments may be modified, amended or supplemented by the parties
thereto, in a writing signed by such parties, and in accordance with the
termsthereof,withoutfurtherorderoftheCourt,providedthatanysuch
modification,amendmentorsupplementdoesnothaveamaterialadverse
effect on the Debtors estates and has been agreed to between the
Committee,theDebtorsandthePurchaser.8155
There were a limited number of meetings among the Creditors Committee,
LehmanandBarclaysonSaturday,September20,andtheredoesnotappeartobeany
significantdisagreementaboutanyofthecommunicationsthatoccurredthatday.
Seery testifiedthat,onSunday, September21,hespentalotoftime with the
Creditors Committee advisors and Weil.8156 According to Seery, they discussed the
marked value of the assets that were being transferred to Barclays in connection with
theReplacementTransaction,andhowthatmarkedvaluecomparedtotheamountof
cashthatBarclaysadvanced.8157Seerytestifiedthatthedifferencebetweenthemarked
valuetheydiscussedonthecallandthe$45billionBarclayspaidinconnectionwiththe
ReplacementTransactionwasasignificantamountofmoney.8158
Burian advised the Examiner that on Sunday, he was told that there was not
enoughvalueinthesecuritiesthathadbeentransferredtoBarclaysinconnectionwith
the Replacement Transaction, and that additional Blist assets therefore were being

Interests and (B) Assumption and Assignment of Executory Contracts and Unexpired Leases, Docket
No.258,InreLehmanBros.HoldingsInc.,No.0813555(Bankr.S.D.N.Y.Sept.20,2008).
8155Id.atp.21(25).
8156TranscriptofdepositiontestimonyofJamesP.Seery,Jr.,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Sept.3,2009,atpp.14749.
8157Id.
8158Id.atpp.14950.

2201

identified to fill up Barclays.8159 Burian also advised the Examiner that on Sunday
evening,hedemandedfromMilleracompletedescriptionofthetransaction.8160Miller
calledin Klein,andKleinprovided Burianwithan explanationofthedeal,inpartby
writingonamanilafolder.8161RobertsandFazioalsoparticipatedinthatdiscussion.8162
Burian advised the Examiner that Klein stated that what he sketched on the
folderwasthedeal,andthatnoneofthedetailsmattered.8163AccordingtoBurian,
Klein said that the securities and cash transferred to Barclays in connection with the
ReplacementTransactionweremarkedasofFridayat$49.9billion,butthatthemarked
value as of Sunday was between $44 billion and $45 billion, and that the $45 billion
mark was charitable. Burian also advised the Examiner that Klein stated that
additional assets totaling $1.9 billion, which were not originally contemplated to be
transferred,werenowincludedinthetransaction,andthattheadditional$1.9billionin
assets brought the total assets being transferred to about $47 billion.8164 According to
Burian, Klein said that Barclays would forgive Lehmans $45 billion in repo debt

8159ExaminersInterviewofSaulBurian,Sept.29,2009,atp.6.
8160Id.atp.7.
8161Id.; Michael Klein, consultant retained by Barclays, Manila Folder [Deposition Exhibit 3388]; see also

transcript of deposition testimony of Saul Burian, In re Lehman Bros. Holdings Inc., Case No. 0813555,
Bankr.S.D.N.Y.,Dec.17,2009,atpp.138,244;transcriptofdepositiontestimonyofMichaelKlein,Inre
LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.12,2009,atpp.16163.
8162ExaminersInterviewofSaulBurian,Sept.29,2009,atp.7;transcriptofdepositiontestimonyofSaul
Burian,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Dec.17,2009,atpp.13839,
25455.
8163ExaminersInterviewofSaulBurian,Sept.29,2009,atp.7.
8164Id.atpp.78;transcriptofdepositiontestimonyofSaulBurian,InreLehmanBros.HoldingsInc.,Case
No.0813555,Bankr.S.D.N.Y.,Dec.17,2009,atp.255.

2202

and assume $4.25 billion in additional liabilities, bringing the total liabilities to $49.75
billion.8165BurianfurtheradvisedtheExaminerthatKleinstatedthatthisdealwas$2to
$2.5billionbetterforLehmanthantheoriginaldeal.8166
OnSunday,September21,accordingtoBurian,healsolearnedthattheDebtors
planned to transfer excess 15c33 cash and securities to Barclays.8167 Burian indicated
thathewasupsetbythisinformationanddemandedthatMillerandKrasnowexplain
what, if any, excess 15c33 assets were going to Barclays.8168 During their discussion,
Krasnow told Burian that Barclays was to receive some excess 15c33 assets from
Lehman.8169 Burian indicated that he demanded to see the terms of the purchase
agreement,becamefrustratedandtoldMillerthathewouldnotsignoffonthedeal.8170
BurianexplainedthatMillerinformedhimthathewouldproposeacompromisewith
BarclaysinwhichLehmanwouldretainalltheexcess15c33cash,andBarclayswould
get the excess 15c33 securities.8171 According to Burian, he did not learn until the

8165ExaminersInterviewofSaulBurian,Sept.29,2009,atp.8;transcriptofdepositiontestimonyofSaul

Burian,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.12,2009,atpp.13537
(explaining that he was told the $7 billion in cash was included in the transaction as a substitute for
securitiesthat,forwhateverreason,didnottransfertoBarclays).
8166Transcript of deposition testimony of Michael Klein, In re Lehman Bros. Holdings Inc., Case No. 08
13555,Bankr.S.D.N.Y.,Sept.12,2009,atpp.16163.
8167ExaminersInterviewofSaulBurian,Sept.29,2009,atp.6.
8168Id.
8169Id. at p. 6; transcript of deposition testimony of Saul Burian, In re Lehman Bros. Holdings Inc., Case
No.0813555,Bankr.S.D.N.Y.,Dec.17,2009,atpp.30709.
8170ExaminersInterviewofSaulBurian,Sept.29,2009,atp.6.
8171Id.atp.6.

2203

followingmorning,afterthesalehadclosed,thatthiscompromisehadworkeditsway
intothefinalsaletransaction.8172
Dennis C. ODonnell, in his capacity as a Rule 30(b)(6) witness for Milbank,
testifiedthatMilbankwasprovidedwithadraftoftheclarificationletteronSaturday
afternoon, and while Milbank may have seen subsequent drafts on Sunday night and
earlyMondaymorning,primarily[Milbank]hadaccesstoonlythedraftprovidedon
Saturday.8173 Burian testified that he received a draft letter on Saturday night and
Sundaymorning.8174
Late Sunday and into Monday morning, the Creditors Committees advisors,
LehmanandWeildiscussedwhether(a)itwasnecessaryfortheCreditorsCommittee
toconsenttothedealassetforthinthedraftClarificationLetter;and(b)theCreditors
Committee would provide that consent. The recollections of those involved in those
communicationsdiverge.
Millertestifiedthat,inhisview,theClarificationLetterrepresentedinsubstance
thedealthattheCourtapprovedonFridayevening,September19,andthattherefore
there was no need to return to the Court for approval.8175 He stated that there was a

8172Id.atp.6.
8173Transcript of deposition testimony of Dennis C. ODonnell, In re Lehman Bros. Holdings Inc., Case

No.0813555,Bankr.S.D.N.Y.,Jan.6,2010,atp.58.
8174TranscriptofdepositiontestimonyofSaulBurian,InreLehmanBros.HoldingsInc.,CaseNo.0813555,
Bankr.S.D.N.Y.,Dec.17,2009,atp.80.
8175TranscriptofdepositiontestimonyofHarveyR.Miller,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Jan.7,2010,atp.33;seealsotranscriptofdepositiontestimonyofSaulBurian,Inre

2204

discussion among Weil lawyers either late Sunday night or Mondaymorning about
whetheritwasnecessarytotaketheletterbacktoJudgePeckforfurtherapproval,and
thattheyconcludeditwasnotnecessarytodoso,becausetheletterdidnotchangethe
dealthatwaspresentedtotheCourt.8176
Miller also testified that the Creditors Committee consented to the transaction
that closed on Monday, September 22.8177 According to Miller, as the Creditors
Committees legal and financial advisors left Weilbetween 3:00 a.m. and 5:00 a.m. on
Monday, September22, Burian advised him that: [e]verythings fine, and going
forward,ifitsokaywithyou,itsokaywithus,andDespinssaid,[i]fyouguysare
satisfiedwithit,weresatisfied.8178
BurianadvisedtheExaminerthat,followingaconferencecallwiththeCreditors
Committee late on Sunday night, the Creditors Committee advisors left Lehman.8179
Burianstatedthatastheyleft,heandDespinsapproachedMiller,andBurianadvised

LehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Dec.17,2009,atpp.32729(testifyingthat
MilleradvisedhimthathedidnotneedCreditorsCommitteeconsent).
8176TranscriptofdepositiontestimonyofHarveyR.Miller,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Jan.7,2010,atp.49;seealsotranscriptofdepositiontestimonyofJamesP.Seery,
Jr.,InreLehmanBros.HoldingsInc.,CaseNo.0813555,Bankr.S.D.N.Y.,Sept.3,2009,atp.156(testifying
thattheCreditorsCommitteesadvisorsapprovedthetransaction).
8177TranscriptofdepositiontestimonyofHarveyR.Miller,InreLehmanBros.HoldingsInc.,CaseNo.08
13555,Bankr.S.D.N.Y.,Jan.7,2010,atpp.29,10102.
8178Id.
8179ExaminersInterviewofSaulBurian,Sept.29,2009,atp.8.

2205

Miller that the Creditors Committee was not signing off on the deal, even though
everythingBurianhadheardsoundedokay.8180
Despins also advised the Examiner that the Creditors Committee never
consented to the transaction that closed on Monday.8181 According to Despins, in the
earlymorninghoursofMonday,theCreditorsCommitteelegalandfinancialadvisors
departedLehmansofficesfollowingaconferencecallwiththeCreditorsCommittee.8182
Despinsadvisedthe Examinerthat,as the CreditorsCommitteeadvisorsleftLehman,
they made it very clear toMiller and Roberts that the Creditors Committee was not
consenting to the transaction.8183 Despins explained that the advisors deliberately left
theclosingtopreventtheirpresencefrombeinginterpretedasconsent.8184
OvertheearlymorninghoursonMonday,Barclays,Lehman,JPMorganandthe
SIPA Trustee reached sufficient consensus to close the sale and finalize the remaining
saledocuments,includingtheServicesandSettlementAgreementandtheClarification
Letter.8185 The Clarification Letter modified the agreement between Barclays and
Lehman in several ways. The Clarification Letter deleted from the definition of
Purchased Assets the approximately $70 billion in Long Positions and added:

8180Id.
8181ExaminersInterviewofLucDespins,Nov.23,2009,atp.2.
8182Id.
8183Id.
8184Id.
8185Email from Michael Klein, consultant retained by Barclays, to Rich Ricci, Barclays, et al. (Sept.22,

2008)[BCIEX00080663];ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.14.

2206

(1)the securities specified on Schedule A, which were the securities that had been
transferred to Barclays in connection with the Replacement Transaction,8186
(2)$1.9billion in unencumbered assets specified on Schedule B,8187 (3) exchange
traded derivatives and collateralized short term agreements,8188 (4) LBIs customer
accountsandrelatedassets,8189(5)$769millionofLBIsexcess15c33securities,8190(5)the
equityofLehmanBrothersCanada,Inc.,LehmanBrothersSudamericaSAandLehman
Brothers Uruguay SA,8191 and (6) the prime brokerage business and accounts.8192 In
addition,theClarificationLetterterminatedtherepoagreementexecutedinconnection
withtheReplacementTransaction.8193
The sale transaction between Barclays and Lehman closed around 8:00a.m. on
Mondaymorning.8194Sometimebefore8:00a.m.,thedeedto745SeventhAvenuewas
recorded. Barclays wired the money for the buildings to Lehman, and wired
$250million to DTCC to collateralize Lehman trades that were in the process of
clearing.8195

8186ClarificationLetter,atp.1(1(a)(ii)(A)).
8187Id.atpp.12(1(a)(ii)(B)).
8188Id.atp.2(1(a)(ii)(C)).
8189Id.atp.4(8).
8190Id.
8191Id.atp.2(1(a)(iii)).
8192Id.atp.2(1(a)(iv)).
8193Id.atp.5(13).
8194ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.14;ExaminersInterviewofLindseeP.

GranfieldandRobertDavis,March3,2009,atp.4.
8195Id.

2207

(3) December2008SettlementBetweenTrustee,Barclaysand
JPMorgan
Followingtheclosingofthesaletransaction,BarclaysdiscoveredthatJPMorgan
had moved the $7 billion advanced in connection with the Replacement Transaction
and applied it against LBIs box loan. Barclays and JPMorgan engaged in an intense
seriesofdiscussions,mediatedinpartbytheFRBNY,andinDecember2008,reacheda
settlement of their disputes. That settlement was memorialized in a Settlement
Agreement among Barclays, JPMorgan and the SIPA Trustee.8196 The Settlement
Agreement provided that JPMorgan would deliver to Barclays: (1)the LBI securities
thathadbeenpledgedtotheFRBNYonWednesdayevening,September17,andwhich
JPMorganretainedwhenitlockeddownLBIsaccountsonFriday,September19(those
securities were identified on AnnexA to the Settlement Agreement); and (2)$1.25
billion in cash from LBIs account at JPMorgan to compensate it both for undelivered
FRBNY program securities that had been liquidated by JPMorgan, and the decline in
thevalueoftheundeliveredsecuritiesthatJPMorgandidnotliquidate.8197
***
To assist the parties and the Court, the Examiner has set forth this narrative of
the facts he has developed relating to the sale transaction. However, in light of the
pendinglitigationbetweentheDebtors,theSIPATrusteeandtheCreditorsCommittee,

8196SettlementAgreementamongJPMorgan,Barclays,andtheSIPATrustee,atpp.23,DocketNo.387,

InreLehmanBros.Inc.,No.0801420(Bankr.S.D.N.Y.Dec.5,2008).
8197Id.

2208

on the one hand, and Barclays on the other, relating to the sale transaction, including
theextensivediscoverystillunderway,theExaminerhasnotreachedanyconclusions
regardingwhetherLBHIorLBIhavecolorableclaimsarisingfromtheactsandevents
relatingtothesaletransaction.TheExaminerexpectsthatinthecourseofthatlitigation
thepartieswillcontinuetodevelopadditionalfactspertinenttothisnarrative.

March11,2010

ByExaminersCounsel:

RobertL.Byman
DanielR.Murray
Jenner&BlockLLP
353N.ClarkStreet
Chicago,IL606549350
3122229350

PatrickJ.Trostle
HeatherD.McArn
Jenner&BlockLLP
919ThirdAvenue
37thFloor
NewYork,NY100223908
2128911600

RespectfullySubmitted,

AntonR.Valukas

Examiner

2209