New York: A US judge on Thursday approved bid procedures for Lehman Brothers Holdings Inc to sell its investment management division, including Neuberger Berman, in a bankruptcy auction.
“Allowing this to proceed represents the principal stabilizing force for the business,” Judge James Peck said at a hearing in US Bankruptcy Court in Manhattan.
During the hearing, Peck also approved the sale of Lehman’s 45% stake in hedge fund R3 Capital Partners, Lehman’s lawyers detailed how, since its collapse last month, it has been sorting out its affairs amid thousands of information requests from creditors and three grand jury probes.
Lehman, which filed the largest US bankruptcy case ever on 15 September, has been in the process of unwinding its business.
Private equity groups Bain Capital LLC and Hellman & Friedman LLC agreed last month to purchase Lehman’s prized asset management unit for $2.15 billion, and will now be the lead bidder at an auction for the unit in December.
The auction is expected to take place in 45 days with a sale hearing 15 days after the auction, a lawyer for Lehman said at the hearing.
The approved sale procedures include certain bid protections for Bain and Hellman, such as a $52.5 million break-up fee, the ability to make certain price adjustments if there is a sharp decline in the markets, and the ability to solicit consent from the firm’s clients prior to the auction.
An attorney for private equity group Carlyle said at the hearing that it would also be interested in bidding for the asset management unit at auction, but that it believes the client consent solicitation gives Bain and Hellman an unfair advantage that may prevent the rival firm from bidding.
While Judge Peck said he had some concerns about the client consent process, ultimately he accepted the condition, saying he believes there is no better alternative at the moment.
“There would have to be a remarkably better bid ... to assume the risk that a resolicitation of these various consents would be a risk worth taking,” Peck said.
Under US law, asset management clients are required to give consent for a transfer of their assets to a new holder, a process which could take about 3 months for the Lehman unit to complete, lawyers said on Thursday.
In a status update prior to the judge’s ruling, Lehman’s lead attorney Harvey Miller told the court that prosecutors have opened three grand jury investigations into the collapse of Lehman.
The US attorney’s offices in the Eastern and Southern districts of New York and in the district of New Jersey are handling the probes and some 12 people are already subpoenaed, Miller said. He did not specify the nature of the investigations.
Miller also disputed a claim from the administrator of Lehman’s European unit that $8 billion was transferred out of the Lehman Brothers International (Europe) unit to the US unit on the eve of Lehman’s bankruptcy filing.
He said that when the bankruptcy and administration proceedings began on 15 September, the firm’s accounts went into lock-down, and transactions scheduled to be completed could not take place. Lehman’s books now show that the US unit owes the European unit $2 billion to $3 billion and the European unit owes the US unit more than $8 billion, Miller said.
Sorting out chaos and derivatives
The dispute over the $8 billion illustrates how Lehman’s bankrupt parent company is working to reconstruct the pieces of its business.
“This is really an atypical case, a case without any pre-planning, a case with a high level of chaos in the first week,” Miller told the court.
Lehman sold its core US assets to Barclays PLC last month, and Japan’s largest broker Nomura Holdings has said it would buy the Indian back office units of the collapsed investment bank, as well as the company’s franchises in the Asia Pacific region, among other operations.
Miller said 164 original Lehman employees were now working at the legacy company, primarily in the legal and treasury departments.
The firm has hired restructuring company Alvarez & Marsal, which has more than 100 employees working on the case. That number is expected to swell to more than 400, Miller said, with many of the additions expected to focus on unwinding the firm’s derivatives contracts.
Miller said the firm was working to unwind approximately 1.5 million derivative transactions involving about 8,000 counterparties.
Lehman has received thousands of information requests from trading counterparties, but is still working to locate and sort through data related to many of those trades, Miller said.