Lehman Settles Derivatives Dispute Over Putnam Swaps

Lehman Brothers Holdings Inc. settled a multimillion-dollar derivatives dispute involving mutual-fund giant Putnam Investments, ending litigation over a series of swap agreements.

In a Monday filing with U.S. Bankruptcy Court in Manhattan, Lehman said a unit of U.S. Bancorp, the trustee for the Putnam swaps, would pay the failed investment bank an undisclosed sum to settle the matter. The dispute was over a series of swap agreements that defaulted when Lehman collapsed into bankruptcy nearly seven years ago.

Lehman said when the trustee for the swaps terminated them, it paid Putnam investors more than $20 million but didn't pay what Lehman calls a "very significant" early termination payment to the collapsed bank. Lehman contends Putnam investors got nearly $16 million too much.

"Although the plan administrator believes that [Lehman's] claims against the Putnam issuer are valid and meritorious, the plan administrator has determined in its informed business judgment that the terms of the settlement agreement are in the best interest of [Lehman's] estate," Lehman said in the filing. Lehman cited the avoidance of a costly and lengthy legal battle as a reason to end the dispute now.

The two sides had a mediation session over the dispute earlier this year, Lehman said in the filing. Lehman will ask a judge to approve the compromise at an Aug. 4 hearing.

The dispute was one of hundreds Lehman had over derivatives contracts in the aftermath of its bankruptcy filing. The swaps involved were part of a series of suits Lehman filed in September 2010 against the big banks and other investors involved in the swap agreements. Many of the defendants in those suits have already settled with Lehman.

Derivatives counterparties have long argued that Lehman's bankruptcy constituted a default under their swaps agreements. But in 2010, Judge James Peck, the judge then overseeing Lehman's chapter 11 case, said those clauses were so-called ipso facto provisions that deprived Lehman of the benefit of its in-the-money position under the swaps, which is the case with the Putnam agreements. Provisions terminating a contract solely because of a bankruptcy filing are known as ipso facto clauses and are generally prohibited under U.S. bankruptcy law.

Lehman, once the world's fourth-largest investment bank, collapsed into the largest bankruptcy ever in September 2008. Since then, the estate has recovered billions of dollars in cash for the benefit of creditors.

Bankruptcy professionals under the direction of Alvarez & Marsal Inc. managed the New York holding company's assets until Lehman's exit from chapter 11 more than three years ago, when a reorganized company, overseen by a new board of directors, emerged. Lehman Holdings and its subsidiaries have already returned about $100 billion to creditors.

Write to Joseph Checkler at [e-mail]

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