The federal judge supervising the liquidation of Lehman Brothers Holdings Inc’s. (PINK:LEHMQ) brokerage unit has favored the trustees’ side citing that the ‘soft dollar’ arrangements did not warrant the prioritization of payments to money managers and hedge funds.
James Peck, the federal judge, insists that the creditors were supposed to come first before the money managers and the hedge funds. Peck also remarked that this particular case introduced unprecedented dynamics mentioning that it was the first of its kind. This is the not surprising since Lehman was the largest bankruptcy in US history. The bankruptcy is not over close to four years after the firm filled chapter 11.
Judge Peck’s main point of argument was the fact that federal law does not give money managers’ ‘customer’ status. As such, it would be out of order to give them top priority with regards to repayments.
To understand, it would be in order to recall what soft dollars are minus the difficult financial jargon.
Soft dollars are simply credits offered to clients by brokerage units and are primarily used in research and acquiring of other brokering services. They are pretty much like a special form of currency. Nonetheless, they cannot be used to conduct conventional transactions like buying bonds and stocks.
The court document describes the claims as follows:
Judge Forrest, in the June 5, 2012 ruling, rejected Barclays PLC (NYSE:BCS) claim to $769 million in LBI’s Rule 15c3-3 customer reserve accounts and $507 million that is considered part of LBI’s required Reserve Bank Account. Judge Forrest also ruled that the LBI estate is not entitled to approximately $3.5 billion in margin and other assets used to support LBI’s derivatives trading and roughly $2 billion in certain assets in LBI’s clearance boxes at Depository Trust & Clearing Corporation.
Peck’s decision to favor the trustees was welcome news to James Gidden. It comes as a victory to the trustee who is currently overseeing the liquidation of the Lehman brokering unit. In addition to Lehman, Gidden is also extending his supervision to the liquidation of MF Global Holdings Ltd (PINK:MFGLQ). Brokerage unit.
Interestingly, Gidden is not the only one getting ‘employment’ from the fall of an industry big wig. The managers and hedge funds are also in the ‘payroll’ and this perhaps merits their aggression in the soft dollar scandal.
Among other money managers and hedge funds around, four hedge funds have been previously noted for their expected bulging profit projections in light of the Lehman collapse. These hedge funds namely –King Street, CarVal, Baupost Group and Elliot Associates- have snaffled big chunks of Lehman’s debt at bargain prices. John Paulson bought a large amount of Lehman debt, but in some (finally) good news for the firm, Paulson sold much of it in 2011.
Every coin has two sides, goes the age-old adage. This byword has come to see the light of day. While Wall Street was rambling about the fall of Lehman brothers and the subsequent financial crisis back in 2008, some clever hedge funds had spotted an opportunity to make a fortune.
Unfortunately, James Peck’s decision seems to have changed the tide. Nonetheless, there is a high chance of further legal battles as both trustees and money managers seek to look for loopholes in the law that could work in their best interests.