Bankruptcy court fee applications always make for a fun read: the hundreds of thousands of dollars in Seamless Web orders, the same analyst ordering dinner 3 times a night, the $200 car service bills (with pick up and drop off address detail), the hotel minibar and porn Payperview bills, the occasional $5,000 one way airplane trip: all your dirty underwear for the world to see. As a good example I present the most recent expense detail application filed by Lazard in connection with the firm's work done in the Lehman bankruptcy case. Of course, in this case it is merely the creditors who are footing the bill. As such the material is at best fit for Page 6.
Zero Hedge will be focused much more on the expense detail statements for firms such as Capstone and Greenhill, who are advising Chrysler and getting paid by the U.S. taxpayers, and also on whoever the financial advisors for Government Motors end up being: any transgressions will be promptly noted and disclosed for public ridicule.
And in addition to the other, more mundane and traditional expense-code violations where associates back fill a dinner at Nobu by adding on 20 different non-present people who at $30 per the maximum, comfortably allowing the staffer to impress his date with the $200 tip, the following more serious item is actually quite interesting: maybe someone can explain just what Lazard was doing on July 24 and 28th subcontracting a consulting project with E&Y called "Take Pub Bnk Private." Is there a way to get just a little more clairity on what this "project" entailed, who ordered it and, most relevantly, who shut it down?
As Zero Hedge has claimed on numerousoccasions in the past, the ultra-expedited sale of Lehman's North American Broker Dealer operations to Barclays Capital a mere 4 days after Lehman filed for bankruptcy, was likely rife with not just impropriety and judicial incompetence, stupidity and hubris (here's looking at you James "Stella" Peck), but potentially fraud. Of course, it is one thing for a tin-hat clad, conspiratorial-minded, paranoid (and recursively humorous) wannabe financial blog to make such accusations, but when the bankrupt entity itself (Lehman Brothers Holdings) does so itself (finally), it is a different story.
And indeed, the debtor did just that yesterday in bankruptcy court, in a filing demanding additional discovery from Barclays which, just like it American brethren, has been recently frothing at the mouth with glee at the phenomenal profits it has been able to muster, however, presumably as the AIG funnel was closed to Barlcays, it had to use other alternatives of "profit" generation: buying a multi-billion business for a few dollars - literally - in this case the perfectly viable broker dealer division of Lehman brothers. The filing body itself has some scathing language, and as the outcome will inevitably point to some sort of shenanigans, Barlcays better get ready to pony up several billion, either in damages or compensatory cash. We hope Barclays managed to pull off however many follow on offerings it needed in the short squeeze that its fellow banks across the Atlantic have been cavorting in. From the filing:
Since the completion of this expedited negotiation and sale of one of the largest investment banks in the world, the Debtor [Lehman Bros Holdings] has become aware of apparent material discrepancies relating to the liabilities Barclays was to assume and the benefits LBHI (or related entities) was to receive under this and related transactions. As noted below, these apparent discrepancies concern, inter alia, Barclays’ obligation to pay employee bonuses and certain contract cure amounts (both of which materially impacted the value of the sale) as well as to certain asset transfers related to repurchase transactions conducted during the week the Sale Transaction was negotiated. In the aggregate, these apparent discrepancies may have resulted in a windfall to Barclays at the expense of the estate, its creditors and other parties in interest, in an amount that could reach into the billions of dollars. As a result, the Debtor now seeks discovery from Barclays to enable the estate to properly review these issues and determine Debtor’s rights and obligations (and to assess whether it may have claims) under these transactions.
If I was Barclays I would be shaking in my boots right now. Especially if, as the filing's exhibits demonstrate, there was a perverse attempt by Barclays to mask any sort of impropriety. But all is good in the land of fish and chips and Mary Poppins - Barclays is actively studying how to dump its anti-cash cow, BGI, which, just like its East Setauket brethren, has discovered the hard way, just how much fun it is to be right when the market is wrong (for over 60 days running now).
However the biggest idiot in this whole affair will end up being without doubt Judge Stella himself, who vaingloriously trampled over every creditor objection to the sale motion, and conducted himself with the restraint of a horny and recently ethered-out, freshman frat brother at a TriDeltkegger, when instead he should have been delving into the millions of potential complications from the ultra rushed sale much more studiously. But what can you expect from a Judge whose career will now only culminate with the somewhat memorable punch out of his wife after she dared to be stuck in Hamptons' reverse commute traffic.
Judge Gonzalez - all eyes are looking at you next. Yes, we all know you would love to close the Chrysler case asap, but please do remember that all the dead bodies always eventually rise to the surface. Always.
All the relevant filings are presented below: some juiciness in the exhibits.
In an event that just as easily may not have occurred, Judge Gonzalez presiding over the boiling hot Chrysler bankruptcy, has sided with an objection of the Chrysler Non-TARP creditors (aka abominable hedge funds). The issue at hand was a request for a delay of the hearing on Section 363 bidding procedures from today until tomorrow at 2:30 pm. If Lehman's bankruptcy is any indication, this is the kind of objection that would have been quickly steamrolled by Judge Peck on his route to bankruptcy Superstardom (the latter has used the words "biggest bankruptcy in history" approximately 240 times to date, according to docket records). Could it be that Gonzalez is actually an adherent to due process and will give both sides in this bankruptcy a fair chance?
Either way, as Zero Hedge speculated yesterday, today's court hearing was indeed a mini drama after Tom Lauria disclosed to Judge Gonzalez that some Chrysler creditors had received death threats. While the threats have been referred to the FBI, it is obvious why Lauria is set on keeping the identities of the 20 hold outs secret at this point.
Among the other disclosures today was the statement by Robet Manzo of Capstone that not only is the U.S. government not charging interest on the Chrysler DIP but that there is a "low probability" that Chrysler would be able to repay the loan. This means that the UST could lose as much as $8 billion in this bankruptcy, an amount which includes the $4 billion already loaned in January. Also uncovered was the new projection for legal fees associated with the Chapter 11, which has grown from $20 million a week ago to a cool $30 million currently (this is not the last iteration of the number).
Lastly, Corinne Ball of Jones Day had this to say about the situation:
"The survival of Chrysler's business is at stake in these proceedings, as is the fate of hundreds of suppliers and thousands of Chrysler dealers around the country. Absent immediate action, (Chrysler) will lose the only opportunity available to them to preserve their business as a going concern and to avoid the economic devastation that will occur if Chrysler's business, and Chrysler's suppliers and dealers, are forced to shut down."
These are, almost verbatim, the same words used by Harvey Miller, Lori Fife and Shai Waisman when the Weil Gotshal legal team steamrolled through any and all objections to sell Lehman's Broker Dealer division a mere 4 days after the bankruptcy filing (and with uber-Judge Peck's blessings all the way). It is yet to be seen how quickly Gonzalez caves.
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Lehman bondholders have been reduced to selling Lehman branded merchandise, including pens, canvas bags, umbrellas, and stress balls on Ebay to generate recoveries according to Bloomberg.
Tote bags, golf umbrellas, stress balls, Tiffany paperweights and other stuff now stored in closets and warehouses from New York to Chicago will be returned to Lehman and sold to pay creditors, according to a 15-page court filing today. Lehman filed the largest bankruptcy in U.S. history in September and has about $200 billion in unsecured liabilities left to pay, Chief Executive Officer Bryan Marsal said on Jan. 28.
As part of the arrangement, Lehman is barred from trying to sell the objects to Barclays’ employees, according to court papers. Lehman may have to resort to the Internet to move the goods, said Steve Ivy, chief executive officer of Dallas-based Heritage Auction Galleries.
“EBay might be the best place to sell the merchandise,” Ivy said in a phone interview. The “trinkets” are more likely to appeal to former Lehman employees than to collectors, he said.
A full itemization of the objects for sale, expected to bring untold riches to the Lehman Brothers official and ad hoc creditor committees, includes:
1,630 green canvas duffle bags with Lehman ribbon
75 Waterford Marquis Treviso crystal clocks
682 white Lehman coffee mugs
130 Swiss Army pens
an English beechwood-lined sterling silver box from 1902
200 Lehman conference pens
12 pairs of Links of London cufflinks
24 Screwpull wine openers inscribed "LB,"
24 Titleist PRO VI golf balls inscribed "‘LB,"
30 girl Teddy Bears
18 large, ivory womens’ F&G stretch snap shirts and one Tiffany shooting star.
It is good to know that Lehman at least made their teddy bears anatomically correct. That itself would be worth a couple of extra bucks for Lehman knickknack aficionados (assuming sales tax is not imposed on purchases).
Bankrupt Lehman Brothers posted a monthly operating report for January in which it disclosed a $1.8 billion increase in the cash of the bankrupt estate. At the end of January Lehman held total cash of $6.8 billion. The cash at LBHI alone is worth roughly 5 cents in recoveries to bondholders (assuming $150 billion in unsecured claims). The result does not seem to have impressed bondholders all that much, as LEH's bond are currently marketed 13-14, around the same place they were about a week ago.
For those that remember the surreal weekend before Lehman filed chapter 11, Barclays was considered an eleventh hour white knight who would swoop in and buy the bank. These rumors were squashed after Barclays pussied out, saying it would not be able to afford Lehman without the Queen's, the Fed's and Santa Claus' blessings... Nonetheless, the bank did its diligence, and 4 days after Lehman filed, Barc used the smoke and mirrors of bankruptcy court to snatch the U.S. broker dealer for metaphorically pennies on the dollar, and literally $1.75 billion. To see how grossly the division was undervalued and just how stupid wife-beating judge James Peck was for allowing this sale to occur so fast, Barclays booked a $3.2 billion gain on the Lehman purchase, implying it had managed to sneak $1.5 billion of value out the back door, while creditors were watching their bonds plummet from 90 cents on the dollar to 15 cents.
Turns out Barclays' audacity went much further. As part of the transaction, Barclays received $4.2 billion in cash from Lehman Bros Holdco (the bankrupt entity) to cover $2 billion of bonuses and $2.2 billion of other liabilities, which Barclays was more than happy to pocket. However, new disclosure from the FT indicates that highly overpaid liquidators Alvarez & Marsal has openly questioned the validity of this transfer, claiming of the $2 billion in bonuses only $700 million was actually paid out (ironically making bankrupt Lehman one of the best bonus payers for 2008), and only $200 million of the $2.25 set aside for other liabilities was used.
Barlcays, which has not been nationalized yet, of course vehemently denied this criminal allegation, saying "Alvarez & Marsal’s position is completely without merit, baseless and a serious misunderstanding of the facts," according to Simon Eaton, a spokesman for Barclays Capital. "All of these matters were approved by the New York bankruptcy court in September 2008." So Barclays now puts the onus on the administration: well, seeing how the bankruptcy court is considering replacing judge Peck, who so foolishly approved the mother of all firesales, for his recreation of Jason Kidd's wife appreciation day, things should play out so that soon there will be nobody left to point a finger to, besides bondholders themselves who allowed this daylight robbery to occur in the first place (or maybe their overpaid lawyers who stood like toothless lepers as all this occurred, merely happy to collect their $800/hour). And since $5 billion is roughly 4 points in recovery on the Lehman bonds, which today were trading at 12 cents, these same bondholders may soon get replaced by their own LP investors for allowing 25% of value to slip thru their fingers due to laziness and stupidity.
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Following in the footsteps of previous insider firesales (Neuberger, R3, merchant-banking) within the bankrupt estate, Lehman's former Venture Capital arm is the most recent asset to be sold to yet another Lehman insider, this time Thomas Banahan, ex-head of global venture capital with the bankrupt bank. Banahan will be joined in his purchase by Boston PE firm HarbourVest as well as two pension funds, Pennsylvania Public School Employees Retirement System and the North Carolina Department of State Treasurer, who apparently have not learned from the State of New York's painful lessons. And in continuing with the tradition of no transparency, the purchase price for this group, and how much money Lehman creditors will pocket as a consequence, has not been disclosed.
The new unit will lose the bankrupt moniker and be renamed to Tenaya Capital, and will operate with $750 million in AUM. It has stakes in 47 technology companies from web site Zappos.com, to online clothing store MyShape, to billing system Zuora Inc.
Interestingly, and separately, in yet another example of throwing good creditor money after horrendous investment mistakes, Lehman has hired Zais Group (they sure need a lot of paid professional advisors) to advise it on the management of $1 billion in CDO. Presumably, if you pay someone to try to sell something worth zero for zero, this is perceived as a more prudent thing then instead just liquidating it for its true zero worth, and saving some fees in the process.
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Law firm Sidley Austin was humiliated today, when Tribune Bankruptcy Judge Kevin Carey publicly chastised Sidley's bankruptcy practice for blatantly representing the stereotype of greedymoneygrubbing lawyers, demanding the highest known legal hourly fee ever of $1,100 per hour and limited the company to a maximum hourly compensation of $925.
Carey stated that any lawyer who tries to charge $1,000 an hour will need to prove he or she is worth that much.
"To the extent that this applicant or any other hits that mark I will require evidence in support of that rate," Carey said.
Bankruptcy law firms have been on a vulture bonanza as they seek to charge exorbitant hourly fees and participate in every bankruptcy case en masse. As we wrote, there ware roughly 513 lawyers involed in the Lehman bankruptcy case alone. In the Lehman case, advisors are expected to collect $1.4 billion, while main restructuring advisor Alvarez and Marsal had charged $400,000/day in its most recent request for compensation approval.
Restructuring consultancy firm Alvarez & Marsal has decided to take the easy way out, and simply give creditors in the Lehman's bankruptcy equity instead of trying to maximize cash recoveries. The bulk of Lehman's residual value (or lack thereof) is contained in its hard to value real estate and private equity assets. According to Bryan Marsal, cited by the Financial Times, A&M has decided to spin the asset pools into two separate companies, and instead of following through on maximizing the value of the liquidating assets and generating as much cash for these as possible, it will simply give creditors equity which may or may not be worth anything at some future point, essentially leaving bondholders to fare for themselves.
This brilliant solution did not come cheap: in a bankruptcy court filed compensation application, A&M is asking that its hard work be rewarded with the paltry sum of $400,000 per work day. A&M requests that for the period from September 15 to November 1, it be paid $14 million dollars for the 26,087 hours that the firm spent on hard liquidating work in the 35 work-day interval. A close read of the application shows just how hard various A&M team members worked: of special notice is Managing Director Daniel Ehrmann who clocked in at an impressive 545 hours for the month and a half period. As a reference, there are 840 work hours in the 35 business days between Sept 15 and Nov 1. Zero Hedge salutes these working men and women's dedication to their craft. We are also keeping our eyes peeled as the other 99 or so advisors in this liquidation submit their fee applications over the next few days, to see just how much it will cost creditors to know they will end up with potentially worthless equity.
As a point of reference, Lehman 6.675% Notes due 1/2012 closed at 11.5 on Friday. We are curious how bondholders will receive this exciting news.
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Anton Valukas, a Jenner and Block lawyer who specializes in criminal law and business litigation, was appointed the role of examiner in Lehman's bankruptcy case. Another lawyer, Martin Bienenstock said "the Lehman case needs sunshine from an independent and learned voice." And while Valukas may or may not have prior bones to pick with Dick Fuld, he will not have prosecutorial authority: his report will be compiled for the court with any evidence serving prosecutors and creditors. The notice filed in bankuptcy court can be found here.
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