Lehman collapse shows investors must control
safekeeping of securities
By Neil Behrmann
October 2008 :- The Lehman Brothers Holdings bankruptcy is a warning to investors who allow their brokers to hold their securities in nominee accounts.
Several major investors who dealt with the investment bank are suing the Receiver of Lehman because the firm hasn’t returned their securities. Estimates of the securities that were held by Lehman are anywhere between $25 billion and $50 billion. The lesson for investors is that they should demand that their brokers register any bonds and shares purchased in their own individual or corporate names. The securities should then be held in safe custody in case the broker folds. Several legal actions against Lehman, previously rated as one of the top brokers, illustrate the potential dangers.
Action of GLG hedge fund and other creditors
Staff of Lehman Brothers International Europe (LBIE) and other European creditors have vehemently protested about the transfer of an estimated US$8 billion from Lehman’s London European unit to the head office, soon before the New York holding company declared bankruptcy. Price Waterhouse Coopers, the administrator of Lehman’s European operation has demanded that the US head office repay the money. Gordon Brown, British premier has also pleaded that Lehman's foreign staff and creditors be repaid.
In an objection to Judge James Peck of the United States Bankruptcy Court, Southern District of New York, GLG, the large listed London hedge fund firm is seeking repayment of assets from Lehman Brothers. Lehman was one of the prime brokers of GLG and ironically also has an 11 per cent stake in the hedge fund company. Although Barclays Capital has purchased Lehman’s New York investment bank, GLG contends that the sale fails to protect the interests of the creditors of LBIE.
"In particular, certain assets that may be included as part of the sale to Barclays may have been misappropriated (by Lehman) in advance of their bankruptcy filing”, states GLG in the court documents. GLG states that it has filed the objection to ensure that LBIE, its administrators and LBIE's creditors can “recover the full amount of cash that may have been improperly taken”.
A "mirror image" of Enron case
Tony Lomas, who is heading the Price Waterhouse team and who also handled the administration of Enron in Britain was quoted in the London Sunday Times as saying that Lehman was “as close to a mirror image as you could get” to the Enron case.
The similarities are “the complexity of the trading transactions, the interdependencies of the group companies, and the sweeping of cash into a holding company account, leaving subsidiary companies empty of cash at the point of collapse”, he said. New York hedge funds that have taken action include Bay Harbour Management, in and Amber Capital Investment Management.
Bank of America Corp has also sued three Lehman Brothers Holdings units to recover around $469 million, including interest which was provided as collateral for derivative transactions. The lawsuit in New York State Supreme Court states that "athough the transactions were terminated on September 15, 2008…..the Lehman Entities have refused repeated demands to return the collateral to BoA”.
A Group of unsecured creditors stated in a filing in federal bankruptcy court in New York that about $17 billion in Lehman cash and securities were being held at J.P. Morgan as collateral for loans. In their claim, the creditors group alleges that J.P. Morgan "withheld $17 billion in excess assets" from Lehman Brothers "in the days just prior to the bankruptcy filing."
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