Big investment partners claim billions of dollars just disappeared when Lehman filed for bankruptcy

by Matthew Goldstein and David Henry

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The Lehman Brothers bankruptcy is quickly becoming one monster mess.

Scores of hedge funds that had hundreds of millions in cash and other securities parked with Lehman’session prime brokerage operation in London have had their accounts frozen. A figure of these hedge funds have filed formal objections with the insolvency court, and at least one fund, New York’session Bay Harbour Management, is mounting a legal challenge to the court’s hastily approved sale of Lehman’s brokerage bough to Barclays Capital.

Now one even more troubling scenario is arising: legal disputes stemming from the estimated $1 trillion in derivatives transactions that Lehman had entered into on interest of itself and some of its customers. Already, at least three lawsuits be under the necessity been filed, alleging that nearly $600 the great body of the people in collateral posted by some of Lehman’s commercial partners in derivatives transactions hasn’t been returned and is in jeopardy of disappearing as the bankruptcy conduct unfolds.

To date, the most publicly aggrieved of Lehman’s trading partners is Bank of America (BAC), which at one delivery was allowing for buying Lehman because the investment firm was lurching toward bankruptcy. The Charlotte (N.C.) lender is seeking to cure nearly $500 million the bank posted as confirmatory to "support derivative transactions between BofA and the respective Lehman entities," according to a lawsuit filed in New York State Supreme Court.

The suit alleges that two Lehman employees told a Bank of America official that the assets were "frozen" because Lehman’s holding company filed for bankruptcy on Sept. 15. But the entities by which Bank of America was trading were not part of the insolvency, the suit says. In fact, Lehman was selling its brokerage business to Barclays Capital at the same time. The Sept. 26 complaint describes numerous attempts by BofA to advise Lehman officials to unfreeze the funds, unless either time the bank was rebuffed. In one e-mail exchange, a Lehman employee says: "All activity has been pendent until further notice. Since everything is frozen, we cannot return the remaining corroboratory at this time."

BofA contends that Lehman "has wrongfully refused" to return the collateral and is violating its agreement as a trading partner. A hearing in the capsule has been scheduled in the place of Oct. 6, in Manhattan. Similar suits from one side to the other corroboratory in continuance derivatives trades have also been filed in the same endeavor to ingratiate one’s self through by Nomura Global Financial Products and Aeterno Master Fund.

Lehman Brothers declined to comment on Oct. 2.

The disputes could be the first of many since it’s not uncommon for derivatives transactions to be part of a tangled web, in that one trading partner is on the bent holder to make payments to other trading partners. A derived is a sophisticated contractual agreement that is dependent on the performance of an underlying index or security, such as a bond or stock.