“SET it down for hearing. The plaintiff will lose. They’ve proved no damages because they haven’t even tried.”
That was Robert Newlinds SC, acting for PPB, the liquidator of Lehman Brothers Australia, in a directions hearing in October 2009.
The plaintiffs did win, though. On Friday, Federal Court judge Steven Rares ruled against Lehman Australia in an action brought by three New South Wales councils on behalf of 72 Australian councils, charities and church groups.
Despite the calamity in toxic derivatives which engulfed Wall Street in 2008 and its profound ramifications for the world economy, this is the first judgment of its kind – the maiden court finding of misleading and deceptive conduct by investment bankers. And it is a precedent for a host of other actions.
Yet the not-for-profit groups duped into spending more than $1 billion on these synthetic CDOs (collateralised debt obligations) by Lehman Australia are not the big winners.
That distinction goes to the lawyers and liquidators. Their orgy of fees is partially disclosed in a creditors’ report from last week. The liquidation has cost at least $55 million so far, of which $28 million went in legal fees.
The councils say a good deal of this was simply squandered as Lehman took them all the way to the High Court to fend off their demand for a liquidation.
PPB had pushed for a Deed of Company Arrangement from the start, though critics of the DOCA say it could be just another way for liquidators to drag out proceedings – like a doctor keeping the patient ill in order to charge more for extra medical procedures.
Had PPB adjudicated on Lehman’s proof of debt the liquidator could have saved two years and $20 million in legal fees (PPB’s lawyers cost about $12 million and the plaintiffs’ may be up to $8 million).
PPB contends it had to establish the value of the creditors’ claims via the courts. Moreover, they just recovered $46 million from insurers overseas and stand to claw back as much as $300 million from the Dante notes dispute in the US relating to another toxic product sold by Lehman.
Indeed, the four-year imbroglio over the Lehman estate brings the usual questions over exorbitant fees, waste and conflict of interest.
As world stock-markets crumpled, Lehman Brothers Inc filed for liquidation on September 14, 2008. Five days later, PPB made a presentation to the board of Lehman Brothers Australia.
The CEO of Lehman Australia was Glenn Willis. Willis founded Grange Securities, the boutique bank which had the bright idea of flogging CDOs to gullible government agencies.
In 2007, near the height of the boom, Wall Street’s fourth biggest bank splashed $120 million to acquire Grange.
Sensibly, Grange chairman Tony Berg took Lehman’s cash for his stake but Glenn Willis took scrip and was locked in with reams of shares which were worthless a year later.
When Lehman’s local operation hit the wall then, Steve Parbery and Neil Singleton of PPB were appointed administrators. Willis was engaged by PPB a few days later. Signing on a former executive is not uncommon in bust-ups. After all, the board of the collapsed company has just made the appointment of the administrator and the administrator needs somebody who “knows where the bodies are buried”.
It’s a sensitive thing for PPB, especially as Willis then worked out of PPB offices for the next year while hostilities with the creditors escalated.
What is also sensitive is the ‘circle of corporate friends’ surrounding the administration. Willis is a good mate of former Macquarie Banker Bill Moss who was also out to build his next fortune.
Moss had forged the $25 billion Macbank real estate empire which was rapidly falling apart. He had a relationship with Tony Sims, the liquidator who had just merged his Sims Partners with PPB.
Willis was also close to Sims, and one of the administrators appointed to Lehman Australia, Singleton, had been a partner of Sims.
In December 2008, Sims and Parbery were appointed directors of MW Capital together with Moss.
It wasn’t until a year later, in a creditor’s report of September 2009, that the liquidator disclosed Willis had been appointed a director of another company, Moss Willis Capital, on June 4, 2009. Other connections involving MW Capital and an MC Realty were also disclosed.
By that time, the councils and other contingent creditors were at war with PPB and Lehman. They claimed the administrator was not acting properly for all creditors but, instead, doing the bidding of the banks, Lehman Asia in particular. It is not an uncommon accusation, and one PPB naturally denies.
In March 2009, the administrators were already warming up creditors for a big splash on lawyers, telling them they had advice from Clayton Utz that liquidation would result in high legal fees.
Then at a second meeting on May 27 a revised DOCA was proposed by Lehman Asia, the parent and major creditor. In it, Clayton Utz was admitted as a creditor for $747,871, perhaps because the firm had done some work for Lehman before it collapsed.
The creditors voted and the DOCA was approved, but only because nine creditors were related parties of Lehman, including Lehman Granica whose proof of debt for $87 million was admitted. Parbery and Singleton were also administrators of Lehman Granica, which had substantial voting rights in the liquidation of Lehman Australia.
Working with dead companies, it seems, is a far better lurk than working with live ones.