Bloomberg News

Paulson Disclosure Plan ‘Intimidates’ Lehman Creditors

June 10, 2011

(Updates with total objectors in third paragraph.)

June 10 (Bloomberg) -- Hedge fund Paulson & Co.’s bid to force Lehman Brothers Holdings Inc. creditors to disclose trades in the defunct firm’s debt is designed to “intimidate,” said debt holders such as Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Germany’s central bank.

Paulson is part of a creditor group including the California Public Employees’ Retirement System that wants to control the disposal of Lehman’s $61 billion in assets. Its liquidation plan will compete for votes with Lehman’s proposal, and another from a group including Goldman Sachs.

Paulson and Calpers want their rivals to disclose how much Lehman debt they hold and how much they paid for it before they can vote and speak out in court as a plan is chosen. Paulson itself was ordered by a bankruptcy judge in April to reveal that it paid as little as 9 cents on the dollar for some of its $4 billion in Lehman bonds. More than three dozen banks and hedge funds filed objections this week to the Paulson proposal.

It’s an “impermissible fishing expedition” for trading information, said Citigroup, Silver Point Capital LP and TPG Capital, in a court filing. It’s “nothing more than a litigation tactic designed to attempt to intimidate parties in interest into abandoning any efforts to oppose” Paulson- Calpers’s plan, said Bank of America, the biggest U.S. bank, in a filing.

The proposal has “no legal basis” so the judge can’t approve it, Goldman Sachs said in a court filing. Goldman Sachs is part of a group of 23 creditors who seek higher payments for derivatives claim holders, it said.


Other Lehman creditors that may have to disclose details of their holdings include JPMorgan Chase & Co., Barclays Plc, Morgan Stanley, Deutsche Bank AG and Credit Suisse Group AG. Lehman failed in 2008 with assets of $639 billion, the biggest bankruptcy in U.S. history.

“There may be some of that sense that people will go away if they have to put their cards on the table,” said Stephen Lubben, a bankruptcy professor at Seton Hall University School of Law in Newark, New Jersey. “Maybe people will be embarrassed to have that disclosed.”

The Paulson group said in a court filing last month that it was seeking the disclosures “to promote greater transparency” as creditors fight over Lehman’s assets.

Conflicting Motives

“The prospect of conflicting motives arising during plan negotiations and later plan-related litigation is considerable,” the group said.

Paulson’s group, which holds about $16 billion in Lehman bonds, would pay bondholders about 25.4 cents on the dollar, while the Goldman Sachs group would pay bondholders about 16 cents. Goldman Sachs’s group hasn’t yet been ordered to disclose its holdings and the prices paid, although Lehman wants such information from anyone with a rival plan, lawyer Harvey Miller said this week.

The Goldman Sachs group today denied it had an obligation to disclose its holdings. Consisting of “23 individual creditors, which are represented by multiple law firms,” it isn’t really a group, said Goldman Sachs, Morgan Stanley, Silver Point and other creditors in the group.

“Had the drafters of Rule 2019 intended for all plan proponents to be subject to the rule, as the debtors urge, they would have written the rule to say so,” they said in a filing.

Bankruptcy Law

Rule 2019 of U.S. bankruptcy law calls for groups or committees that are influencing a bankruptcy plan to show, among other things, what stakes they hold and what they paid for them. Paulson-Calpers wants trading data even from individual creditors and anyone who is gathering information about Lehman ahead of a vote, said Citigroup’s distressed debt trading desk, which filed its protest with TPG, Silver Point and six other parties on June 8.

Bank of America, also with an active distressed debt trading desk, said it would be “enormously burdensome” to disclose all trades in Lehman debt, and such disclosure would reveal “highly sensitive trading information.”

Bank of America and its Merrill Lynch unit, which hold derivative claims against Lehman, are among 13 “big bank” claim holders identified by Lehman. On the same list are Goldman Sachs, Citigroup, JPMorgan Chase, London-based Barclays, Morgan Stanley, Frankfurt-based Deutsche Bank and Zurich-based Credit Suisse, according to a filing. The other banks on the list are based in New York.

Holds Claims

Citigroup also holds claims on Lehman Brothers Treasury Co., which is being liquidated in the Netherlands. Its group members shouldn’t have to reveal their trades, as every one of them “acts individually and does not, and does not purport to, speak for any other participant,” they said in the filing.

Barclays, the third-biggest U.K. bank, which in January defeated an $11 billion lawsuit by Lehman over its purchase of the defunct firm’s North American business, said it isn’t “acting in concert” with anyone in Lehman’s Chapter 11 cases, so it need not disclose its trades either.

The Paulson group’s demands “are so vague and overbroad that it is not even clear who exactly would be subject to them,” Barclays said in its filing.

Collective Action

Expanding disclosure rules to those not involved in “collective action” is “not only without a legal basis but may also ultimately diminish the integrity of the plan process itself by discouraging active participation,” the Deutsche Bundesbank said in a filing. As a creditor, the central bank said it wants to be free to participate in the information- gathering process Lehman will hold before rival plans are put to a vote.

Germany’s central bank filed a $12.2 billion claim on Lehman, based on a guarantee of debt of its German affiliate, Lehman Brothers Bankhaus AG, according to claims records.

Gerard Uzzi, a lawyer for the Paulson-Calpers group, declined to comment about the objections.

“I think the court can get part of the way Paulson wants it to go, but not all the way,” Lubben said.

Paulson paid 9 cents on the dollar for $5.1 million of Lehman’s senior bonds on Dec. 1, 2008, according to its April disclosure. Starting out, Paulson paid 34 cents to 35 cents on the dollar for the bonds when Lehman filed bankruptcy on Sept. 15, 2008. Calpers paid 86 cents to $1.04 on the dollar for $90.1 million of Lehman’s senior bonds from July 2006 to December 2007, according to the April 22 filing.

Senior Bondholders

Paulson and other senior bondholders are being offered 21.4 cents on the dollar in Lehman’s liquidation plan, and as much as 25.4 cents in the Paulson-Calpers proposal. The plan backed by Goldman, Morgan Stanley, Silver Point and other derivatives creditors would pay themselves as much as 40 cents, and give 16 cents to bondholders.

Derivatives creditors hold $22 billion in claims on Lehman, which Lehman would cut in half under its plan.

The Paulson hedge fund is headed by John Paulson, whose estimated earnings of $4.9 billion in 2010 made him the highest- paid hedge-fund manager for the year, according to AR Magazine. Lehman was once the fourth-largest investment bank.

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

--Editors: John Pickering, Steve Farr

To contact the reporters on this story: Linda Sandler in New York at and David McLaughlin in New York at

To contact the editor responsible for this story: John Pickering at

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