LEHMAN WANTS TO RECOVER US$2B IN ‘PHANTOM’ CITI FEES
Failed investment bank alleges former trading partner concocted inflated claims
ALMOST a decade after the global financial crisis, the fate of another US$2 billion (RM8.68 billion) from the wreckage of Lehman Brothers Holdings Inc is about to be determined.
The failed investment bank is seeking to recoup the cash from one of its old derivatives trading partners, Citigroup Inc.
In a trial that started last week in Manhattan bankruptcy court, Lehman alleged Citigroup created “phantom transaction costs” in order to justify a bankruptcy claim that would allow it to keep US$2 billion in cash Lehman had deposited on the trades.
Citigroup contended it did nothing wrong and used reasonable practices.
The trial opens a rare window into the frenzied weekend before Lehman’s bankruptcy filing on September 15, 2008.
Banks were supposed to use a Sunday trading session to mitigate damage to the financial system by reducing their exposure to the bank. Lehman, which first sued over the US$2 billion in 2012, claimed that Citigroup efficiently hedged its risks, but went on to inflate its claim by marking its books to its benefit.
The proceeding is being closely watched by the derivatives industry, which had been overhauling the way it manages counterparty risk.
There were unresolved questions about whether the market’s shift to using central clearinghouses was effective, said Peter Niculescu, a partner at Capital Market Risk Advisers.
The firm advises financial institutions and law firms on issues including the termination of derivatives agreements, and had represented around 15 parties with regards to their Lehman exposure, but not Citigroup.
“Most banks are of the opinion that the non-defaulting counterparty is entitled to the replacement cost, whether or not they do in fact replace the position” said Niculescu, adding that there was hope the Lehman and Citigroup trial would provide clarity on that point.
Proceedings that began last Tuesday will decide whether Citigroup had to return any of the money. Lawyers and witnesses would delve into how the two financial behemoths behaved on the eve of a bankruptcy that helped throw the global financial system into disarray.
At the time of the bankruptcy, it and Citigroup had entered into more than 30,000 derivatives trades tied to an estimated US$1.18 trillion of wagers on everything from interest rates to corporate and sovereign debt.
Lehman’s bankruptcy gave Citigroup the right to terminate the agreements and determine its damages.
Lehman claims that in the days, and even months after its bankruptcy, Citigroup concocted an inflated claim, which it eventually filed in September 2009.
Lawyers for Lehman said in court last Wednesday traders at Citigroup were instructed to stray from convention in valuing their positions.
Instead of pricing trades at the mid-point of bid and offer prices, the bank marked the trades on one side or the other, depending on which was to their advantage.
“Citi cherry-picked the valuation curve,” said Andrew Rossman, a lawyer for Lehman. Bloomberg
At the time of its bankruptcy, Lehman Brothers Holdings Inc and Citigroup Inc had entered into more than 30,000 derivatives trade tied to an estimated US$1.18 trillion of wagers.