High Noon for 113 Former Lehman Employees

February 14, 2011

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.  Why?  Ahhh, now you're trying to trap me into writing a history of the Street's follies and foibles.  Not gonna do that.  Sorry. 

For now, let me try to be as even-handed in explaining how the battle lines got drawn.  

He Said, She Said

LBI, if asked, would likely say that the loans were just that - loans intended to secure the loyalty of some valued employees but always with the understanding that unearned balances had to be repaid.  In a nutshell, the employees owe us and we want our money back.

The employees, if asked, would likely say that the loans were really bonuses masquerading in fancy lawyer talk as some incomprehensible loan - regardless, the employees would add that they lost their jobs because of  management's incompetency and fraud. Consequently, those 113 would likely suggest, whatever was supposedly unearned is ours to keep.

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. 

If you listen carefully, you probably hear the swords being sharpened and the shields being  banged out.

Cases in Point

Looks like we're going to start seeing how the collection efforts pan out. In Lehman Brothers Holdings Inc., as assignee of Lehman Brothers Inc., Claimant, versus John Carson, Respondent (FINRA Arbitration 10-04316, February 8, 2011), Claimant Lehman filed a Financial Industry Regulatory Authority (FINRA) Arbitration Statement of Claim in September 2010 against its former employee John Carson. Lehman claimed breach of promissory note, breach of contract, and unjust enrichment. The claim sought $25,600.00 in principal, interest, costs of collection, forum fees, costs of any post-judgment discovery, and attorneys' fees.

Respondent Carson defaulted and did not enter an appearance.

The FINRA Arbitrator found Respondent Carson liable for and ordered him to pay to Claimant Lehman

  • $25,600.00, representing the remaining balance on the promissory note, plus interest at the prime rate, as specified in the promissory note, from June 10, 2005 until payment of the Award, and  
  • $1,000 in attorneys' fees.

In a second FINRA Arbitration Decision, In the Matter of Lehman Brothers Holdings Inc., as assignee of Lehman Brothers Inc.,Claimant vs. John David Stroud,Respondent (FINRA Arbitration 10-04368, February 3, 2011), Claimant Lehman sought $200,000 damages on a note plus $21,979.78 accrued interest, plus additional interest through payment of the award.  In this case, the Respondent former employee defaulted and the panel awarded: 

  • $221,979.78 (inclusive of pre-judgment interest), plus additional Interest at the rate of 4.72% per annum accruing from the date of service of this award until satisfaction of the award;
  • $1,000.00, representing reimbursement of the non-refundable portion of the initial claim filing fee paid by Claimant to FINRA Dispute Resolution; and
  • $33,296.96 in attorneys' fees.

Bill Singer's Comment: One thing that bothers me about these arbitrations is how a FINRA non-member firm, LBHI, got to bring a FINRA arbitration against its former employee.  While I understand that LBHI took an assignment of the note from FINRA member firm LBI, I'm not so sure that there isn't a threshold issue here concerning whether a mere assignment imbues LBHI with the right of access to a FINRA arbitration forum.  Of course, given that the Respondent in this case defaulted, we will need to wait for more cases where the Respondents have legal counsel in order to resolve that issue.

High Noon?

Gotta tell you, I'm really torn on this one. Part of me realizes that a loan is a loan and a deal is a deal. Another part of me is nearly apoplectic - doesn't anyone recall how Lehman's employees were kicked to the Street, lost their jobs, lost their careers, left without options as Wall Street was burning down around them?  Nor am I even remotely suggesting that the public customers of Lehman and the rest of the industry weren't even more savagely abused.  Nonetheless, it seems to me that firms such as LBHI/LBI aren't exactly coming before us with clean hands or pure hearts. 

Cropped screenshot of Gary Cooper from the tra...

Marshall Will Kane Left Hadleyville in Disgust

No one ever said this type of litigation is easy. When we're left to choose among the lesser of evils, it's probably best to keep in mind that whatever you choose is evil. 

It is hard to feel any empathy for the Lehman claimants - all the more so because LBHI came to the American public at the eleventh hour with its hand out seeking charity.  If ever the quality of mercy seems strained, it would be in this situation where a failed firm sends its employees into the cold streets and then adds insult to injury by suing them to recover bonuses, loans, whatever. 

Still, as much as one's heart may go out to the former Lehman employees, business is business.  The firm is a debtor with obligations to recover as many assets as possible.  Just as the firm's employees were left dazed and bleeding on the sidewalk after Lehman's fall, so were many public customers.  Perhaps it is the gestalt of Wall Street: brokerage firms, their employees, and the public customers are inextricably intertwined and co-dependent -  more so than anyone envisioned prior to the Great Recession. 

Every story doesn't end happily with the hero riding off into the sunset.  Sometimes, it's just Gary Cooper throwing his badge in the dirt and leaving town in disgust.