Firms reaped windfalls in Lehman auction: examiner

By Emily Chasan and Ann Saphir

NEW YORK/CHICAGO (BestGrowthStock) – Barclays Bank and Goldman Sachs reaped windfalls from an emergency auction of Lehman Brothers’ derivatives portfolio, but the firms and the exchange that held the auction may be immune from any lawsuits, a court-appointed examiner said.

Still, a representative of the trustee for Lehman Brothers Holdings Inc in charge of liquidating customer assets said in bankruptcy court on Wednesday that the trustee may sue to recover some money lost in the auction.

An unredacted version of the examiner’s report, released on Wednesday, for the first time identified the firms that took part in the auction and concluded “an argument can be made that the transfers at issue were fraudulent transfers,” noting that Lehman lost $1.2 billion in the sale. It took place just days after the firm’s chaotic bankruptcy filing in September 2008.

Exchange operator CME Group Inc invited Barclays, Goldman, Morgan Stanley, JPMorgan Chase and Chicago-based trading firms Citadel LP and DRW Trading to take part in the auction, according to the unredacted court documents. All but Morgan Stanley took part.

On Wednesday, CME lost its bid to withhold the identities of the firms.

The auction “represented the first and only time the CME had conducted a forced transfer/liquidation of a clearing member’s positions,” the examiner’s report said.

Each winning bidder that took over a piece of the Lehman portfolio did so at a gain, the documents showed.

Lehman, the report said, “may have a colorable claim” against CME or any of the firms that bought Lehman positions “at a steep discount during the liquidation ordered by the CME” for losses sustained “as a result of the forced sale of house positions.”

Yet the examiner also noted that the CME and its officers “likely would be immune because the CME acted within its statutory role as a self-regulator of its exchanges” and that the bidders were protected by the safe-harbor provisions of the Bankruptcy Code.

Barclays was the winning bidder for Lehman’s energy positions, the unredacted documents show. The firm received collateral deposits valued at $707.4 million, in return for taking over the portfolio, in which the options positions had a negative value of $372.4 million.

DRW Trading delivered the winning bid for Lehman’s foreign exchange, interest-rate derivatives and agricultural derivatives portfolios.

Goldman won the bidding for the equity derivatives portfolio.

The ruling sparked worries in the futures industry about how to resolve future crises. CME, joined by several industry groups, had argued that revealing the names of the participants could hurt its ability to hold future auctions, because traders don’t want their competitors to know what assets they hold or how much they paid for them.

“I’m not sure what divulging the identity of the bidders adds,” said Dan Roth, president of the National Futures Association, after Judge James Peck, who is overseeing the Lehman bankruptcy in Manhattan, rejected a request from CME Group to keep certain documents about the auction secret. “It may have a chilling effect on people’s willingness to participate in these auctions in the future.”

CME conducted the September 2008 auction of Lehman’s $2 billion portfolio after it became clear the firm would seek bankruptcy protection.

Bidders were given a look at the assets and a deadline by which to place their bids under seal.

If traders knew those bids would be revealed, they might have submitted lower bids, or even declined to participate at all, industry observers said. That could complicate matters if another large firm fails and its assets need to be liquidated so as to insulate other members of a clearinghouse from the failure.

“This was the first time the CME had to conduct an auction of this kind,” CME Associate General Counsel Lisa Dunsky told the court before the ruling. “We hope that it doesn’t happen again, but if it does, whether it’s CME or any other clearing house, it is critical to have multiple qualified bidders who are willing to participate in the auction.”

Dunsky said that more than one of the bidders whose names were going to be disclosed had told CME directly that they would not have participated in the auction if they had known their trades would be made public.

“There is potential significant harm not only to CME Group but to the futures markets in general,” Dunsky said.

But Judge Peck on Wednesday disagreed and ordered the immediate publication of the full examiners’ report. He said the “public’s right to know” outweighed confidentiality concerns and that no one knows whether a similar auction would actually occur in the future.

“We are disappointed with the decision, but we will comply with the court’s ruling,” a CME spokesman said.

Representatives of Citadel, Goldman and Barclays declined to comment. Spokesmen for Morgan Stanley and JPMorgan did not immediately respond to requests for comment.

DRW appeared unfazed by the disclosures.

“DRW is proud that in its role of liquidity provider we were able to assist the CME when it determined that an emergency auction was necessary to assure the stability and continuity of the markets,” DRW CEO Don Wilson said.

The case is In re: Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555.

Stock Today

(Reporting by Ann Saphir and Emily Chasan; Editing by Steve Orlofsky, Gary Hill)

Firms reaped windfalls in Lehman auction: examiner