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Judge to Decide Whether Barclays Got a Secret $11 Billion Windfall in Lehman Deal

Lawyers from Jones Day, who are overseeing the estate of Lehman Brothers, will begin arguments today in a closely-watched case that seeks more than $11 billion from Barclays, which lawyers for the estate said the British bank received after purchasing Lehman’s assets shortly after it filed the largest bankruptcy in U.S. history.

The Lehman estate plans to argue that executives at Barclays, with the blessing of Lehman’s negotiating team, arranged for a $5 billion discount on the purchase price of Lehman’s brokerage unit while failing to inform the bankruptcy court and Lehman’s board about last-minute changes to the deal. That and other alleged changes to the deal resulted in Barclays picking up Lehman on the cheap, according to the suit.

Bankruptcy Judge James Peck, who approved the original sale transaction to Barclays, is expected to decide whether the Lehman estate's claims allow it to redraft the deal.

The details are complex, especially because of the mad scramble to close the deal before the markets opened again on September 20, 2008, a week after Lehman filed for bankruptcy. But, the estate alleges that executives on both sides deliberately placed the deal at $5 billion below Lehman’s true book value.

In pre-trial opening arguments earlier this month, Jones Day’s Robert Gaffey claims several executive at Barclays and Lehman admitted in depositions that they knew about the discount and other changes, but never told the bankruptcy court. They include: Martin Kelly, Lehman's global financial controller, Lehman’s CFO Ian Lowitt, Barclays' chief negotiators Rich Ricci and John Varley among others.

The discount hinges on a revaluation of assets in a repo deal that Lehman had made with the New York Fed. “Barclays extended to Lehman $45 billion, which was used to cancel the Fed repo. And in return, Barclays got approximately $50 billion of collateral to support the repurchase advance,” Gaffey said in pre-trial arguments.

Barclays president, Bob Diamond, has said the suit had no merit and Lehman's lawyers are trying to re-write history.

“The deal we did Monday morning was the deal that the judge approved Friday. If we got too good a deal, why did no one else bid? No one else made an inquiry. We announced the bid on Tuesday and it didn't close until Monday morning, so there was ample time for others. I find it difficult to accept they would play this game in public now," Diamond told the Sunday Telegraph in December.

But, former Lehman COO Bart McDade, who is expected to take the stand on Monday, said in a deposition that the deal had changed materially from the one presented to the court before the closing. “But nobody told the judge it was a different deal," according to the deposition.

The Lehman estate is also planning to file suit against a number of Wall Street firms who held Lehman assets before that had pressured Lehman for additional assets in the months before the bankruptcy, according to a person close to the case.

Barclays, which is represented by super-lawyer David Boies, is expected to argue that Lehman knew about the specifics of the deal and Barclays simply made a gain on the assets that it purchased, which rose in value after the deal closed. Boise is also expected to argue that the deal was never presented to Judge Peck as “a wash,” with no net gain to either side and it was far more beneficial to the Lehman estate than a full liquidation, which would have occurred had Barclays walked away from the transaction.


How Big Was Lehman's Hole?

Dick Fuld may think there was “no capital hole” at Lehman when it collapsed, but the bankruptcy examiner’s report showed a giant mega-hole in the balance sheet. Still, that report apparently doesn’t add up either.