DSEEY Daiwa Securities Group Inc Japan (PK)

Lehman Brothers Holdings Inc. is suing Daiwa Securities Capital Markets Co. over hundreds of soured swaps and options, claiming the Japanese investment bank shortchanged it on hundreds of derivatives contracts after Lehman's bankruptcy to reap a multimillion-dollar windfall.

In a lawsuit filed with U.S. Bankruptcy Court in New York, lawyers for Lehman say the bank was "in the money" to the tune of $75 million on 955 derivatives transactions—mainly interest rate and credit default swaps—with Daiwa at the time of Lehman's 2008 bankruptcy filing.

Daiwa used "commercially unreasonable and bad-faith valuation techniques, including deducting tens of millions of dollars of 'unwind costs' that it did not incur" from its valuations of the derivatives transactions, Lehman's lawyers claim in the suit, filed last week.

"By manufacturing fictitious charges, Daiwa sought to turn a multimillion-dollar payable it owed [Lehman] into a multimillion-dollar receivable that it was not entitled to receive, " Lehman said.

A Daiwa lawyer declined to comment.

Lehman is asking U.S. Bankruptcy Judge Shelley C. Chapman for the $75 million it says it was owed at the time the swaps were terminated, plus interest. It is also asking the judge to toss Daiwa's $46 million claims against Lehman.

Although Lehman officially exited bankruptcy protection in 2012, its derivatives team is still wrangling with creditors over billions of dollars in disputed claims. Swaps and other derivatives represent a significant source of cash for Lehman creditors waiting to be paid more than six years after the investment bank filed for bankruptcy protection.

Derivatives counterparties have argued that Lehman's bankruptcy constituted a default under their swaps agreements.

In a key ruling in 2010, Judge James Peck, the judge then overseeing Lehman's chapter 11 case, said those clauses were so-called ipso facto provisions that deprived Lehman of the benefit of its in-the-money position under the swaps. Provisions terminating a contract solely because of a bankruptcy filing are known as ipso facto clauses and are generally prohibited under U.S. bankruptcy law.

Lehman, once the world's fourth-largest investment bank, was a party to or had guaranteed more than 10,000 derivative contracts representing more than 1.7 million transactions at the time of its collapse, according to court documents. The team working on unwinding the deals has so far recovered billions in cash for the benefit of creditors.

Bankruptcy professionals under the direction of Alvarez & Marsal Inc. managed the New York holding company's assets until Lehman's exit from chapter 11 more than three years ago, when a reorganized company, overseen by a new board of directors, emerged. Lehman Holdings and its subsidiaries have already returned about $100 billion to creditors.

Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com

(END) Dow Jones Newswires

December 29, 2015 09:25 ET (14:25 GMT)

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