Neuberger Berman Owes $5.5 Million For Sale Of Failed Lehman Products

A securities arbitration panel has ordered asset manager Neuberger Berman to pay $5.5 million to three investors for selling them Lehman Brothers' structured products just months before Lehman Brothers Holdings Inc. (LEHMQ) failed in 2008.

The investors' lawyers said their clients had been told that the principal of the structured notes was either fully protected or partially protected. Neuberger failed to adequately disclose that the investments were actually debt instruments of now-bankrupt Lehman Brothers and weren't investments in the underlying indices, the lawyers said.

A three-person Financial Industry Regulatory Authority panel, which heard the case recently in Chicago, didn't include a reason for its decision, as is typical of most Finra arbitration rulings.

Neuberger Berman had no immediate comment. Neuberger, formerly a subsidiary of Lehman, is a majority employee-owned company, with the remainder held by the estate of Lehman Brothers.

This is one of many cases to involve Lehman Brothers' structured products. In a similar ruling released in June, Finra said UBS AG's (UBS, UBSN.VX) UBS Financial Services must pay damages to former Philadelphia 76ers President Pat Croce for a $2 million personal investment he made in a note from Lehman.

Finra panels have ruled in favor of investors roughly half a dozen times since 2008 in cases involving Lehman structured notes that were sold by UBS. Neuberger didn't sell nearly as many of these as UBS did, said Nicholas Iavarone, one of the lawyers representing the investors in this latest case.

Structured products are typically notes issued by a bank that are designed to let investors place very specific bets on stocks, bonds or other assets.

Lawyers for the investors in the Neuberger case said that, in the summer of 2008, Neuberger wealth manager Brian Hahn solicited the customers to invest in the comBATS and XLF Lehman Brothers Structured Notes. Additionally, one of the customers had also invested $1 million in Libertyview Credit Select, a Neuberger Berman private-equity hedge fund that lent its assets to Lehman Brothers, said Chicago-based Iavarone and co-counsel Alan Block, who also represented the investors.

Iavarone said the notes were marketed to high-net-worth individuals as a way of raising funds for Lehman. "When Lehman Brothers declared bankruptcy, the value of the structured notes became virtually worthless," he said.

Expert witness Craig McCann of Virginia-based SLCG Securities Litigation and Consulting Group Inc. said he testified before the panel that the products were worth substantially less than the price at which they were sold because of Lehman's credit risk in 2007 and 2008.

The panel ordered Neuberger to pay $5 million in compensatory damages, $7,500 in legal fees and at least $450,000 in interest. The award represents all the money the three clients had invested in the products, their lawyers said.

-By Jennifer Hoyt Cummings, Dow Jones Newswires; 212-416-2474; jennifer.cummings@dowjones.com

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