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* Lehman accuses Barclays of asset grab
* Matter has been appealed twice
* Outcome significant for Lehman brokerage creditors
By Nick Brown
NEW YORK, May 29 (Reuters) - Lehman Brothers' defunctbrokerage told an appeals court on Wednesday it was entitled tobillions of dollars in cash it says was wrongly included in its2008 sale to Barclays Plc.
The arguments in federal appeals court in New York renewed amurky, years-old court battle with huge implications for thebrokerage's creditors, including Lehman affiliates and hedgefunds.
"It was made very clear" in the asset purchase agreement"what was going to Barclays and what was staying behind," saidthe brokerage's lawyer, William Maguire. "The deal didn'texclude just some cash, it excluded all cash."
The dispute has its roots in the hectic sale of thebrokerage's assets to Barclays in the days following the $639billion bankruptcy of parent company Lehman Brothers HoldingsInc in September of 2008.
The brokerage contends the $250 million deal did not includethe brokerage's cash assets. But Barclays says otherwise,relying on a so-called clarification letter signed after thedeal was approved.
The disputed assets include margin to supportexchange-traded derivatives, which could top $5 billion. Theyalso include roughly $2 billion in so-called "clearance box"assets, which facilitate the clearance of securities trading.And they include $769 million promised to Barclays if Lehman'scustomers were paid in full.
U.S. Bankruptcy Judge James Peck approved the deal in 2008.Days later, the sides signed a "clarification" letter on thecash assets.
In 2011, Peck ruled that the clearance box assets should goto Barclays and the margin assets should stay with thebrokerage. Then in June 2012, Judge Katherine Forrest in federalcourt in New York partially reversed Peck's ruling, assigningboth the margin and the clearance assets to Barclays.
The focus of Wednesday's arguments was on the margin assets,over which the sides presented drastically diverging narratives.
Attorney David Boies, representing Barclays, said theclarification letter merely identified and quantified the assetsalready agreed to by the parties as a way of validating that thedeal would boost Barclays' assets.
It did not change the terms of the deal, Boies argued.
But according to Maguire, Peck's initial approval of thedeal specifically excluded cash assets. The clarificationletter, far from mere explication, represented a fundamentalchange to the deal, amounting to an asset grab by Barclays.
Barclays currently holds about $2 billion of the marginassets and $786 million of the clearance box assets, with theLehman brokerage holding the rest. The appeals court could grantboth to one party, or divvy them up. In a less likely scenario,it could unwind the sale altogether.
After the hearing, a spokesman for James Giddens, thetrustee winding down the Lehman brokerage, said the trustee's"position from day one has been that no cash was included" inthe sale.
"That means billions of dollars in cash rightfully belong tothe" brokerage's estate, spokesman Jake Sargent said.
Because customers of the brokerage are slated to get paid infull regardless of the outcome, it is general creditors whoserecoveries depend on the appeals process.
They include roughly 12,000 claims from hedge funds, formeremployees, counterparties such as pension funds, banks andLehman affiliates. Some of them were present on Wednesday in apacked courtroom on the 17th floor of a federal courthouse inNew York. Security staff asked some standing spectators to moveto an adjoining room with a video feed.
Judges Peter Hall, Gerard Lynch and Ralph Winter askedpointed questions of both lawyers. Winter suggested thatBarclays' aim - to acquire the collateral of the exchange-tradedderivatives business it bought - was only natural.
"Why would anyone expect someone to buy an ETD business andnot buy the margin assets?" Winter asked Maguire. "You must havebeen delighted to pull off that economic coup."
Maguire countered that, for Barclays to essentially pay cashto acquire cash would have been a circular transaction and thatit should have used its own assets to secure the derivativesbusiness. Including cash, he said, would have handed Lehman'sbusiness, as well as billions of dollars in cash, to Barclaysfor only $250 million.
"That would skew the economics," he said.
Boies said the no-cash provision applied only to retained orunencumbered cash, but clearly excluded margin.
Boies faced his own helping of skepticism from the panel,including from Judge Hall, who suggested that a "no-cash" ruleshould be taken at face value.
"I would have taken that to the bank," Hall said.
The case is No. 12-2322, U.S. Court of Appeals for theSecond Circuit.
