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Lehman Brothers Cited For Repo 105 In Promissory Note Case
Written: October 3, 2012

LONDON, ENGLAND - SEPTEMBER 24:  Two employees...

In a Financial Industry Regulatory Authority (“FINRA”) Arbitration Statement of Claim filed in September 2010, Claimant Lehman Brothers Holdings Inc. (“LBHI”) alleged breach of contract; and unjust enrichment in connection with its effort to recover on a November 9, 2004 promissory note executed by Respondent Strickler. LBHI ultimately sought $457,142.00 in damages plus $63,000 in attorneys’ fees.  In the Matter of the FINRA Arbitration Between Lehman Brothers Holdings Inc., Claimant/Counter-Respondent, vs. Charles Alexander Strickler, Respondent/Counter-Claimant (FINRA Arbitration 10-04112, September 28, 2012).

Respondent Strickler generally denied the allegations and asserted various affirmative defenses. In a Counterclaim against LBHI, Strickler asserted misrepresentations, omissions, and other wrongful conduct. In his Counterclaim, Strickler sought at least $480,000, fees and costs.


In addressing its jurisdiction over this case, the FINRA Arbitration Panel stated that:

[T]he bankruptcy court supervising the dissolution of Lehman Brothers Inc. (“LBI”) assigned the note to LBHI and ordered the matter out for adjudication. LBHI chose to arbitrate the case under FINRA, whose Director accepted it. Because of the assignment, LBHI has standing to sue on behalf of LBI. The note is not an executor contract subject to rejection in bankruptcy because only one side – Strickler – has any obligation to perform at this time.

Also, the Arbitration Panel concluded that notwithstanding the recitation in the note that it was governed by New York law, California law would govern:

because of the many equitable issues involved in the matter; for example, unlike New York, California public policy favors applying equitable notions to contract cases. There are sufficient contacts in California by the parties (place of negotiation, signing, and performance) to justify this choice of law.


The FINRA Arbitration Panel found:

Strickler liable and ordered him to pay to LBHI $457,142.00 in note principle. The Panel denied Strickler’s Counterclaim for restricted stock units because they were not yet deliverable at the time of his termination. Also, the Panel denied the Counterclaim for loss of LBI stock and travel expenses.

LBHI liable and ordered it to pay to Strickler$187,269.00, derived as follows:

  • $100,000.00 in pro-rated note forgiveness for Strickler’s 10.5/12ths of a year employment immediately before termination;
  • $2,269.00 in unpaid commissions;
  • $10,000.00 in pro-rated assets under management fees for a period preceding September 19, 2008; and
  • $75,000.00 in damages to reputation and for loss of clients.

SIDE BAR: As to the $75,000 reputational damage award to Respondent Strickler, I offer the Panel’s verbatim rationale; namely, that the damages were:

caused by LBHI’s fraud in inducing Strickler to stay on with LBI while the firm engaged in the infamous Repo 105 practice, in which LBI removed from its books the liabilities to repurchase assets that had been pledged to obtain cash. The Examiner appointed by the bankruptcy judge concluded that shareholders had “colorable claims” against management for this practice.

We conclude that Strickler may also assert this claim, in equity, against LBHI. The amount of damages claimed by Strickler has been substantially cut,however, due to the generous loan (and subsequent forgiveness) he received from his next employer.

Bottom Line

In netting out the awards, the Panel ordered Respondent Strickler to pay to Claimant LBHI $457,142.00 – $187,269.00 = $269,873.00, on which net sum, Strickler was ordered to pay $53,974.00 in interest (5% per annum) from September 19, 2008, to September 19, 2012.  Also, Strickler was ordered to pay $37,170 in attorneys fees, representing 59% of the  amount requested in conformity with the same percentage as the amount of the note claim awarded to LBHI. Finally, Strickler was required to pay 10% per annum legal interest on the net award  of $361, 017 ($269,873 + $53,974 + $31,170) until paid in full.

Final Tally

Respondent Strickler owes LBHI $361,017 plus 10% per annum interest until paid.

Bill Singer‘s Comment

A standing ovation for this FINRA Arbitration Panel!  Superb recitation of facts. Excellent explanations for various rulings. A cogent rationale for its award.  FINRA should send this Decision out to its arbitrators as an example of what a proper decision should look like. You are free to agree or disagree with the Panel’s findings and/or awards but at least this decision provides you with a comprehensive enough fact pattern and rationale to permit a reasoned debate.  My hat’s off to these arbitrators. Thank you!

Once upon a time, way back when as it now seems, Lehman Brothers was one of the big four of Wall Street — alongside Goldman Sachs, Morgan Stanley, and Merrill Lynch. Then, life as we knew it, ended.  And after the lives of far too many folks were upended — folks on Main Street and Wall Street — the corporations started the dirty job of calling in the loans. “Street Sweeper” has reported on Lehman Brothers, Inc.’s attempts to collect on millions of dollars in promissory notes that it had extended to a number of its employees:

In the once halcyon days of Wall Street, Lehman Brothers Inc. (LBI), the broker-dealer subsidiary of Lehman Brothers Holding, Inc. (LBHI), gave 113 of its employees about $80 million in loans. If you look at the dates of the promissory notes involved, they go as far back as 1998 and as recently as August 2008, just before Wall Street imploded. On September 15, 2008, LBHI filed for Chapter 11 bankruptcy, which was the largest in the nation’s history. However, before that enormous blast, those 113 LBI employees managed to get about $700,000 each. . .

Comes December 2009, amidst the shards of what once was, LBHI entered into a stipulation with its debtors and LBI as part of the Securities Investors Protection Act (SIPA) liquidation of LBI. Based upon court papers, those 113 notes had a net balance due of about $51 million and were deemed to be LBHI’s to collect.  Pre- or post-Great Recession, no one is going to walk away from $51 million. ”High Noon for 113 Former Lehman Employees“ (“Street Sweeper” February 15, 2011).

Also see, “Lehman Seeks To Collect Unpaid Loans From Furious Former Employees” (“Street Sweeper”, November 19, 2010).

I have made it a point of disclosing my bias on this issue.  I don’t like Lehman’s efforts. I think it’s victimizing victims and, frankly, unsavory, to say the least. In Strickler, I was impressed by the Panel’s consideration of the firm’s abusive use of Repo 105′s and how such misconduct was a material fact that should have been disclosed to employees when the employer was seeking to retain their services.  LBHI doesn’t exactly come off as having “clean hands” when the cited accounting machinations are placed in such context.

As such, I root for those who lost their jobs to keep their loans, regardless of the legal issues involved. The likes of Lehman should be squeezing blood out of other rocks. In these days where firms such as Wachovia, Bear Stearns, Smith Barney, and others have all but vanished as we knew them, where the likes of JP Morgan, Knight Capital, and MF Global are bedeviled by a host of glitches and miscues, it irks me to see that there isn’t more of a sense of fairplay in the industry — particularly when it comes to folks who intended to go to work but for the fact that their place of work no longer existed.

Tempering that position, I am also mindful that the creditors of LBHI were also victimized and that the recovered funds from the disputed promissory notes will benefit those individuals and entities; nonetheless, when I ultimately weight the merits of the battle between these two sets of victims, my sympathies generally fall into the camp of the former employees.  Which is not to say that blood ought not be drawn from former in-house Lehman folks to restore the financial health of the firm’s creditors.  My position is go after the senior executives and board members, who were more culpable for causing the bankruptcy than the unemployed workers.

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