Trader Wrestles Lehman Estate Over Big Bonus

   (FROM THE WALL STREET JOURNAL 5/18/15) 
   By James Sterngold 

When Lehman Brothers Holdings Inc. abruptly filed for bankruptcy in September 2008, many stunned employees walked away with little more than boxes filled with desktop knickknacks. A little-known bond trader, Jonathan Hoffman, took something else: an IOU for $83 million in unpaid bonuses.

More than six years later, Mr. Hoffman is still trying to collect.

As part of a continuing bankruptcy-court battle in Manhattan with the Lehman bankruptcy trustee, both sides agree that Mr. Hoffman earned profits of more than $750 million for the bank in the turmoil of 2007 and 2008 while trading government bonds as a self-described "lone wolf" in a Miami office. He is one of a handful of former Lehman employees still fighting for bonuses, though his claim is the largest.

The trustee says Mr. Hoffman was paid his $83 million by Barclays PLC, which acquired some Lehman assets and hired the star trader, and that he is trying to "double dip."

Mr. Hoffman, 42 years old, denies this, arguing that the tens of millions of dollars he received from the bank was entirely for his success after Lehman closed. He said in interviews and emails that his legal fight has become a quest to recover profits he rightfully earned and that did a lot to help Lehman. "I did a job for Lehman Brothers and was incredibly loyal to the firm," he said in an email. "If I am owed money by the estate, it's not clear to me why I would not collect it."

Mr. Hoffman's lawsuit provides a window into a disappearing era on Wall Street, in which anonymous traders could earn tens of millions of dollars annually by placing bets that leveraged the massive balance sheets of their employers. Since the financial crisis, regulators have driven much of that type of trading from banks, and the firms have dialed back the risk taking that once generated massive profits -- and occasionally large losses as well.

To some, including Lehman bankruptcy trustee James W. Giddens, Mr. Hoffman personifies the sort of Wall Street greed that led to the financial crisis. "It is no coincidence that Mr. Hoffman asked Barclays for the very same amount he was owed" by Lehman, said a spokesman for Mr. Giddens. "This attempt to double dip is neither fair nor consistent with the law."

Mr. Hoffman doesn't deny the payment from Barclays, but he and his lawyers say it was purely a special bonus to lure a star who would go on to produce $1.25 billion in profit for the bank and not related to the profit he had delivered at Lehman.

Barclays declined to comment, but the testimony of a bank executive only added to the ambiguity of whether Mr. Hoffman was a victim of the bankruptcy or is being greedy. In a deposition, Michael Keegan, a Barclays managing director, recalled thinking Mr. Hoffman was a "sneaky bastard" for seeking payment from the Lehman estate. "I thought he was paid for it" by Barclays, Mr. Keegan said. But then under questioning from Mr. Hoffman's lawyer Mr. Keegan conceded that, in fact, Barclays chose to pay Mr. Hoffman and "we were under no obligation that I know to do that."

Mr. Hoffman grew up in Philadelphia, part of a family that owned and ran a confectionary business, Frankford Candy, started by his grandfather. It manufactures sweets like lollipops, chocolates, candy canes and gummies, some of them branded with characters such as SpongeBob SquarePants and Dora the Explorer. At one time, he expected to work there, too.

He went to the University of Pennsylvania, majoring in economics, but ran into a delay, he said, when his acceptance to the Wharton School for an M.B.A. was deferred for a year. He took a job in 1994 at Lehman in New York. "I had thought I would end up taking a brief detour on Wall Street and end up in the candy business, but the detour got longer," he said.

At Lehman, he became a specialist in trading government bonds, one of the largest and most liquid markets. Mr. Hoffman said his trading style had "quite a bit of gut in it" and was based largely on reading trading data and understanding trade flows. He paid almost no attention to traditional market forces such as economic growth rates and monetary policies.

"I have no view on interest rates, no view on the curve," he said. "I never speak to clients. I don't know who is on the other side of the trade. I guess I am a lone wolf."

According to traders who worked with him, Mr. Hoffman -- known as "Johnny H" -- developed a reputation as astute, successful and somewhat secretive. He frequently worked longer hours than his colleagues, often staying late on trades that involved the Japanese markets.

Kaushik Amin, who supervised Mr. Hoffman at Lehman, testified last month that Mr. Hoffman was the most profitable member of his group and "was viewed as one of the best proprietary traders in the market."

When the Sept. 11, 2001, terrorist attacks damaged Lehman Brothers's New York headquarters, bond traders were told they could set up elsewhere as the firm arranged for new quarters.

Mr. Hoffman seized the opportunity to move to a home on exclusive Palm Island, just off Miami Beach. Working out of Lehman's much smaller Miami office, occupied only by salespeople, he sat behind banks of computer screens and didn't communicate regularly with other traders in New York or elsewhere. "I found that all that talk didn't make us trade any better. There's too much groupthink," he said.

Mr. Hoffman earned $14.8 million in bonuses 2005 and $20 million in 2006 before taking in $31 million in 2007 and about $77 million in 2008, according to records released after the Lehman bankruptcy. His contract at both Lehman and Barclays allowed him to collect as much as 14% of the profits he generated. In 2008, he was the firm's highest-paid employee.

"I never had a losing quarter, never had a losing year," he said. He said he typically was allocated $200 million to $400 million of the firm's capital to trade with.

In 2008, Lehman's tumbling real-estate and mortgage holdings forced the firm into the largest bankruptcy in history. The firm's customers have received all their money back, but unsecured creditors -- which will include Mr. Hoffman if he wins -- have so far gotten 27 cents on the dollar.

At Barclays, he was paid a total of about $183 million between 2009 and 2013 and then left, he said, as regulations reducing risk and proprietary trading at banks cut his role. Closing arguments in the Lehman case are scheduled for July, with a decision expected shortly after.

Mr. Hoffman lives with his wife, three children and a pug at his estate, behind a gate and a fountain, in Wynnewood, Pa., near Philadelphia. After taking off most of 2014, he said, he has started trading at home with his own money, occasionally with a child on his lap. He said he may join a hedge fund but not until he is ready.

"I enjoy watching the markets, watching the screens," he said. "But I'm hoping to do this at my own pace. . .right now this is more fun. When the phone rings you don't have to pick it up."

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