July 10, 2012 / 11:17 PM / 8 years ago

Lehman judge rules for trustee in "soft dollar" battle

* Soft dollar claims are contractual, unsecured—judge

* Hedge funds, money managers sought customer treatment

* Lehman brokerage trustee said no customer status warranted

By Jonathan Stempel

July 10 (Reuters) - The federal judge overseeing the liquidation of Lehman Brothers Holdings Inc’s brokerage unit said nearly two dozen hedge funds and money managers were not entitled to be repaid before other creditors because of their “soft-dollar” arrangements.

Calling the case the first of its kind, U.S. Bankruptcy Judge James Peck in Manhattan said the arrangements did not give the hedge funds and money managers “customer” status under federal law, allowing them to be repaid first.

The decision is a victory for James Giddens, the trustee liquidating the Lehman Brothers Inc (“LBI”) brokerage unit. He is also the trustee handling the liquidation of MF Global Holdings Ltd’s smaller brokerage unit.

Soft dollars are credits that a brokerage gives clients, which may use them to obtain research and other brokerage services. Peck likened them to frequent flyer miles, in that they are a special form of currency, and are not cash that can be spent on stocks, bonds and other investments.

While soft dollars may have real value to clients, Peck said customers who have them could raise claims only for breach of contract. This would allow them to be treated as unsecured creditors rather than customers, who rank higher in the pecking order for repayment.

“This determination is correct both because the soft dollar accounts do not hold any customer property and because the soft dollar claims are based on a breach of the contractual obligation of LBI to provide research services to its customers,” Peck wrote.

The hedge funds and money managers, including Columbia Management Investment Advisors, had sought protection under the Securities Investor Protection Act, which covers losses of brokerage customers up to $500,000.

A lawyer for Columbia did not immediately respond to a request for comment.

The Securities Investor Protection Corp, which helps customers of failed brokerages, supported Giddens’ interpretation of the law.

Lehman Brothers Holdings Inc had been the fourth-largest U.S. investment bank prior to its Sept. 15, 2008 bankruptcy, by far the largest bankruptcy in U.S. history.

It emerged from Chapter 11 this year, and is expected to distribute billions of dollars to creditors over the next few years.

The case is In re: Lehman Brothers Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-01420.

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