CS Credit Suisse Group

By Patrick Fitzgerald 

The remnant of Lehman Brothers Holdings Inc. has settled a $1.2 billion derivatives lawsuit with Credit Suisse Group AG, wrapping up one of the last remaining big legal battles involving the failed investment bank nearly a decade after its collapse.

Creditors will recover about $280 million on Credit Suisse's derivatives claims against Lehman, according to a Wall Street Journal analysis of bankruptcy court filings. But most of that cash is earmarked for other investors because the Swiss bank doesn't own most of the claims.

Credit Suisse had claimed $1.2 billion in losses related to early termination of thousands of derivatives contracts when Lehman filed for bankruptcy in 2008. Under the terms of a settlement filed Tuesday night in U.S. Bankruptcy Court in New York, creditors will get an allowed $385 million claim against some Lehman subsidiaries and another $363 million claim against Lehman's main holding company.

That is important because Lehman treats similarly situated creditors of its subsidiaries differently than those of the parent. For example, general unsecured creditors of Lehman's special finance unit, the heart of the failed investment bank's derivatives business, have so far recovered more than 39 cents on the dollar, though they are limited to how much they can claim. Unsecured creditors of Lehman's commodities business have recovered more than 80 cents on the dollar, while unsecured creditors of the bank's Lehman Commercial Corp. subsidiary have been paid in full.

In comparison, unsecured creditors of the parent were initially slated to recover 21 cents on the dollar when Lehman's liquidation plan went into effect in 2012. However, they have since recovered nearly twice that amount as Lehman's wind down of its business has brought in more cash than expected.

Representatives for Credit Suisse and Lehman declined to comment.

The team winding down Lehman sued Credit Suisse, one of the world's largest derivatives dealers, in 2013, claiming the bank artificially inflated its losses by more than $1 billion to profit from Lehman's bankruptcy at the expense of other creditors. A trial in the derivatives dispute had been slated for October.

Lehman's lawyers said in court papers that the settlement, which slashes $789 million off Credit Suisse's claims against Lehman's holding company, is a reasonable outcome given the uncertainty of litigation and the possibility of protracted appeals.

Lehman, once the nation's fourth-largest investment bank, collapsed into the largest bankruptcy ever in September 2008 and its U.S. brokerage business was quickly sold off to Barclays PLC.

At the time of its collapse, Lehman was a party to or had guaranteed more than 10,000 derivative contracts representing more than 1.7 million transactions, according to court documents. Lehman also settled with JPMorgan Chase & Co. and Citigroup Inc. over billions of dollars in allegedly "phantom losses" designed to ensure they recovered 100% of their derivatives claims.

Lehman's postbankruptcy administrators have paid out roughly $125 billion to creditors since 2008.

A team of bankruptcy professionals under the direction of turnaround firm Alvarez & Marsal managed the New York holding company's assets until Lehman's official exit from bankruptcy in 2012, when a reorganized company emerged, overseen by a new board. The case is expected to continue for several more years as the team liquidates the estate's assets.

U.S. Bankruptcy Judge Shelley C. Chapman will consider approval of the settlement at a hearing scheduled for June 27.

Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com

(END) Dow Jones Newswires

June 13, 2018 15:45 ET (19:45 GMT)

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