Creditors May Be Able to Claw Back Lehman 2007 Bonuses « naked capitalism

Monday, September 15, 2008

Creditors May Be Able to Claw Back Lehman 2007 Bonuses

This reading comes from Adam Levitin at Credit Slips:

Lehman paid out around $5.7 billion in bonuses in 2007. Are those bonuses safe? Maybe not….

Thus, the key question is whether Lehman was solvent when it paid out the bonuses? (The statute of limitations goes back past 2007, fwiw.)…..on a balance sheet basis, that might be a closer call, depending on how things like MBS and CDOs are valued.

If Lehman was not solvent when it paid the bonuses, then I think there’s a fraudulent transfer. It’s hard to see how a bonus could ever be paid in exchange for reasonably equivalent value, when an employee has already been paid a salary for their efforts. There are various defenses to FTs, but none would seem to apply here at first blush.

Of course, it takes a challenge by a creditor whose claim arose before the bonuses were paid, but per the rule of Moore v. Bay (which I am teaching tomorrow), it only takes one of them, owed a single cent, in order to challenge all the bonuses. The lack of a creditor might protect the bonuses, but as creditors look to carve up what’s left of Lehman, the thought of recovering a decent chunk of $5.7 billion is going to look very appealing.

I suggest they start with Dick Fuld.

6 Comments:

Matt Dubuque says:

September 15, 2008 at 1:30 am

Cool. More money for securities lawyers.

My belief is that those with a net worth over 25 million should ALSO share the pain that is coming as we accelerate the transition into the post-American world.

I hope these attorneys are able to reclaim these bonuses for the creditors.

All for it.

Matt Dubuque

Anonymous says:

September 15, 2008 at 1:44 am

90% was in stock-help yourself asshole

Anonymous says:

September 15, 2008 at 3:55 am

anonymous, try that defense with the IRS. It doesn’t matter if it was in soybeans — $5.7 billion of bonuses paid is $5.7 billion of value that (potentially erroneously) went out the door at the time. A clawback would expect $5.7 billion of value — most likely in cash — to come back.

Anonymous says:

September 15, 2008 at 7:08 am

anon at 2:44: So, if I get your point, you’re saying that at the when 2007 bonuses were paid, Merrill’s stock was worthless? If so, then Levitan’s argument is buttressed by your point. Merrill executives knew they were under water — and they paid themselves worthless stock as a sort of gambit to ‘fool’ the markets or something.

Fascinating.

And, of course, the corollary to your insight is also trenchant. Henceforth, we’ll put a value on stock-as-bonuses at the time that stock is transacted down the road; not, in the old fashioned way, at the time of the stock grant itself.

This powerful approach of yours means that all stock-as-bonuses become options. If, at the time of ultimate sale, the stock is worthless, then no value has been transferred. Which, of course, means that these Merrill execs deserve a tax refund. And, if, in other cases, the stock actually has value when sold, then, I suppose, we also don’t assign a tax basis until that transaction — which means there’s never any tax consequences because all such transactions are a wash.

You really should give Bernanke and Paulson a call. They need your kind of creativity in these perilous times.

Anonymous says:

September 15, 2008 at 9:01 am

for the last couple of years, most of the huge bonuses have been equity based–options, restricted stock, etc., with vesting schedules to keep the recipients from bolting (or make it more expensive for their new employer to buy them out of their existing situation).

I don’t think there is going to be much for the creditors from that angle. But, the losses to the recipients of the bonuses,and the consequences of tax elections, etc., are likely to be spectacular, in personal terms.

Unless they hedged away the risk, and if that was widely done gets out, there will be hell to pay.

Anonymous says:

September 18, 2008 at 9:47 pm

I’m a bankruptcy attorney. Without studying the issue in detail, it looks as though they’ll be plenty of problems with an FT complaint (an avoidance action under 548 of the bankruptcy code and various debtor/creditor state laws). I’m not so sure that you can wish away “reasonably equivalent value.” I know that’s hard to fathom. Also, I think collecting, assuming you’d win, would be difficult.

Not to mention, the creditors committee or ad hoc bondholders committee is likely to get the section 5 causes of action as a bone.

Collective wisdom on Lehman Bankruptcy is as follows: Quick sale tomorrow (Friday) followed by ten years of litigation over everything under the sun.

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