Citi to pay back $1.74bn to Lehman to end 10-year dispute

Citigroup and the wreckage of Lehman Brothers have resolved a fight over $2.1bn that dates to the financial crisis.

Citigroup has agreed to give back $1.74bn to the estate of the failed investment bank. It had kept $2.1bn that Lehman had on deposit with it for trades on everything from interest rates to corporate and sovereign debt at the time of the 2008 bankruptcy. That will be a boon for Lehman’s unsecured creditors in the 10-year-old bankruptcy case.

The settlement came 40 days into an epic trial in New York that began in April. It shed new light on the frenzied weekend before Lehman’s bankruptcy filing on September 15 2008.

Lehman brought up messages from Citigroup traders, saying comments such as “ringing the register, homey” showed how the bank tried to feast on Lehman’s carcass. Citigroup said it was following accepted standards on closing out trades.

“Citi is pleased to have reached a settlement with Lehman that resolves all of the parties’ outstanding disputes,” a Citigroup spokeswoman said.

The pact “furthers management’s goals of resolving legacy matters stemming from the financial crisis and focusing on Citi’s strategic business objectives”, she said.

In court papers, Lehman MD Steven Mullaney said the pact was “reasonable in light of the complexities of the litigation” and the cost of fighting on.

The dispute arose because Citigroup said it was owed $2bn as a result of Lehman’s bankruptcy. Lehman argued that was not so and that the money should go to its creditors.

It accused Citigroup of concocting the claim, which it thought it could make because it already had access to $2bn through the deposit. Citigroup made up prices and used other methods, such as “phantom transaction costs” to try and justify its claim, Lehman said.

Citigroup said that was not true and it had acted appropriately throughout the matter.

The lawsuit was closely watched by the derivatives industry, said Peter Niculescu, a partner at Capital Market Risk Advisors, which advises financial institutions and law firms on the termination of derivatives deals and has represented 15 parties with regard to their Lehman exposure.