Bloomberg News

SEC Backs Lehman Brokerage in Barclays Dispute After Shortfall

December 29, 2011

Dec. 26 (Bloomberg) -- The U.S. Securities and Exchange Commission sided with the bankrupt Lehman Brothers Inc. brokerage in a $3 billion dispute with Barclays Plc over assets, saying the defunct brokerage didn’t have enough money to pay customers.

The trustee liquidating the Lehman brokerage said he identified about a $5 billion shortfall in customer reserve accounts. As long as there is a shortfall, Barclays has only a conditional claim on as much as $1.3 billion reserved for customers, the SEC said in a Dec. 23 filing in U.S. District Court in Manhattan.

“The commission wishes to ensure that assets held in the special reserve bank account for the exclusive benefit of customers, as well as other assets required to be held for the benefit of customers, are properly administered in the event a broker-dealer is liquidated,” the SEC said.

In October, Barclays and brokerage trustee, James Giddens, both appealed U.S. Bankruptcy Judge James Peck’s ruling that gave Barclays “only a conditional right” to $769 million in the reserve account, unless Giddens had enough to pay customers. In addition to the $769 million, reserves include $507 million in margin for customer transactions at the Options Clearing Corp., the SEC said.

Michael O’Looney, a Barclays spokesman, declined to comment Dec. 23 on the SEC filing.

Miscoding Accounts

Lehman’s past “compliance failures” -- including a failure to set aside enough securities for customers, miscoding of accounts and underreported credits -- caused the deficiency, Giddens has said in court papers.

Giddens is liquidating the remnants of the Lehman brokerage to pay hedge funds and institutional investors after Barclays took over most of the brokerage clients, with some $43 billion in assets, and some of the trading businesses.

Giddens said earlier this month he would start distributing some of the $23.7 billion in assets he’d gathered, to customers with approved claims of about $18.3 billion. He proposes to pay them with the brokerage estate’s property if there’s a shortfall of customer assets, he said. Giddens, who also is trustee of the MF Global Inc. brokerage, has said he may consign estate property to its customers too.

Both Parties

SEC staff members told both parties in 2008, when Barclays bought Lehman’s North American business, that they might violate a customer-protection rule if Barclays took the assets in customer reserve accounts, according to its filing.

In his ruling Peck also told Barclays to return $2 billion in margin assets to the bankrupt brokerage. He told Giddens to give Barclays at least $1.1 billion.

The duel between Barclays and Giddens follows a bankruptcy court trial held in 2010 before Peck in Manhattan. Both sides filed Dec. 23 court papers in support of their appeals.

Appealing Peck’s order to return $2 billion in margin, Barclays said in October that his ruling was “commercially absurd” because the bank would never have taken on Lehman’s trading assets without the margin backing them. As for the $769 million in reserve assets, Barclays said that the deal documents promised the U.K. bank similar assets if those weren’t available.

Giddens said in his appeal that Peck erred in awarding Barclays the $1.1 billion in so-called clearance box assets held to clear trades. Peck should have focused on which party they belonged to, Giddens said.

The court case is Giddens v. Barclays Capital Inc., 11-cv- 06052, U.S. District Court, Southern District of New York (Manhattan).

--Editors: Mary Romano, Charles Carter

To contact the reporter on this story: Linda Sandler in New York at

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

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