Lehman financial arrangement party sues to recover $37.5 million of investment equity

By Caroline Salls

Pittsburgh, March 6 - Lehman Brothers Holdings, Inc. financial arrangement party Millennium International, Ltd. filed a lawsuit Friday in an effort to recover $37.5 million of investment equity, according to a filing with the U.S. Bankruptcy Court for the Southern District of New York.

According to the complaint, Millennium entered into a financial arrangement with Lehman Brothers Finance SA designed to provide a three-times leveraged return on an investment of $37.5 million of the Millennium fund's money. Millennium said Lehman Brothers Finance's role in the investment was to provide $75 million worth of leverage in exchange for interest on the loan.

Millennium said the investment was implemented through a derivative contract structured as a call option under an ISDA master agreement and a subscription for shares in the fund.

In exchange for Lehman Brothers Finance's obligations under the ISDA contract and the payment of $75 million in cash, Millennium issued $112.5 million worth of shares in the fund to the Lehman entity. As a result, of the $112.5 million total investment, $75 million was invested by Lehman Brothers Finance and $37.5 million was invested by Millennium.

Upon termination of the ISDA contract, Millennium is alleging that Lehman Brothers Finance became obligated to pay the current value of the total investment in the fund, minus a strike price that represented the $75 million of leverage contributed by the Lehman entity, plus interest on the loan.

As a result, Millennium said it should recover its $37.5 million equity contribution, plus any return or minus any loss on the investment as a whole in two installments, with the first installment representing the leverage provided by Lehman Brothers Finance and the second representing Millennium's initial equity contribution.

In the spring of 2008, Millennium said Lehman Brothers Finance entered into an arrangement with a third party under which it sought to transfer ownership of the investment shares to KBC Investments Cayman Islands V Ltd., KBC Investments Ltd., KBC Financial Products USA, Inc. and KBC Financial Products UK Ltd., through KBC designee Somers Dublin Ltd.

Lehman did not obtain Millennium's consent, so the shares were not transferred then.

However, when Millennium tried to unwind the investment and secure the return of its equity in September, Lehman Brothers Finance said its books showed that the investment shares had already been transferred, without Millennium's consent.

In addition, Lehman Brothers Finance told Millennium that KBC would only cooperate in the unwinding if the fund gave final consent to the transfer, which it did.

Before the unwinding documents had been signed, Lehman filed for bankruptcy and Lehman Brothers Finance and KBC both allegedly refused to take any further steps to complete the unwinding.

New York-based Lehman Brothers Holdings is the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15. Its Chapter 11 case number is 08-13555.

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