Lehman Brothers Holdings Inc told a U.S. bankruptcy judge on Friday that Barclays Plc should be forced to return certain assets it received in its 2008 acquisition of Lehman's core U.S. brokerage, because Barclays arranged a secret $5 billion discount.

In opening arguments at a hearing in U.S. Bankruptcy Court in Manhattan, an attorney for Lehman Brothers claimed that Lehman and Barclays employees had hidden information about the discount from their lawyers and the court, amid intense deal negotiations in the darkest days of the financial crisis.

Lehman filed the largest bankruptcy in history on September 15, 2008, selling its flagship U.S. brokerage business to Barclays for about $1.85 billion less than a week later.

But Lehman is now asking Judge James Peck to make changes to the order that authorized the deal after months of investigation revealed that the sale described to the court was not the sale actually executed.

Barclays planned on and insisted on the discount and they planned on the liability numbers being inflated, Robert Gaffey, a Jones Day attorney representing Lehman, told the court.

It was not the wash described to the (Lehman) board, it was not the net benefit described to the estate, he continued, claiming that Barclays received an $11.2 billion immediate windfall profit on the assets it acquired, while the court was told that the sale would actually give Lehman a benefit of about $4 billion in terms of reduced liabilities and cash.

Gaffey showed the court emails from Lehman employees who had been offered new jobs at Barclays, revealing the conflicts they may have had as they were working to arrange the deal.

They were on their way to new careers, they were serving their new master, Gaffey said.

He said the Lehman employees had arranged for Barclays to get a $5 billion discount on Lehman's $70 billion book of securities -- secretly reducing the values of the assets on Lehman's books, while their lawyers told the court that the markets had forced the change.

It was not because the markets dropped, it's because the Lehman traders had instructions from Barclays to reduce the values to liquidation value, Gaffey said.

Gaffey said that whether the transfer of assets was a mistake or intentional did not matter, and that Lehman is entitled to the return of assets.

In opening the hearing, Judge Peck said that this was the start of a long slog, on this dispute, and he may hear several other arguments before making any decision.


Barclays' attorney David Boies fought back against Lehman's claims later on Friday, telling the court that the deal was always intended to be immediately positive for the British investment bank.

This was a 'bet your company' investment for Barclays -- it was an enormous risk, Boies said. It was something where Barclays was the only bidder -- there wasn't anybody else.

Boies said that Barclays had been concerned, like many others on Wall Street, that Lehman had been overly aggressive with the marks on its assets, and Barclays didn't want to risk having to later take a write-down on the acquisition.

He told the court that Lehman and its creditors are trying to change the deal now that the markets have improved, noting the stark contrast with the wild swings going on in the midst of the 2008 negotiations.

Lehman attorneys also told the court that Barclays may have inflated some of the liabilities it said it would assume, such as those related to continuing employment of Lehman staff, and that a clarification letter tacked on to the deal after the court approved it materially changed the deal.

Barclays disputed Lehman's claims that their attorneys had been kept in the dark, and said that Lehman could have addressed these concerns much earlier.

Everybody accepted it because that was the deal and at the time. They knew it was the deal, Boies said. Yes, people were scrambling at the last minute. Yes, the deal was changing at the last minute, but once the clarification letter was written everybody had a copy of it.

James Giddens, the trustee in charge of liquidating Lehman's brokerage and making sure customers receive their assets, also joined the dispute against Barclays. An attorney for the trustee said that $769 million of government securities and some $4 billion in cash never should have been transferred to Barclays.

Susheel Kirpalani, an attorney for Lehman's Official Committee of Unsecured Creditors, told the court that Barclay's was making a circular argument and that Lehman was only in court now because new evidence showed the deal had gone wrong.

This is not a case about seller's remorse, Kirpalani said. There is an even greater public policy issue at play -- that is transparency.

Lehman shares closed down more than 5 percent at about 11 cents in the over-the-counter market on Friday, while Barclays shares closed at 356.5 pence on the London Stock Exchange, down 0.2 percent.

The case is In re: Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555.

(Reporting by Emily Chasan, editing by Matthew Lewis and Bernard Orr)