Lehman to settle with Australian derivatives traders

Lehman Brothers will pay investors $104 million to settle a derivatives case that has divided courts

According to Perpetual Corporate Trust, which represents the investors, Lehman will pay holders of credit-linked notes issued by Mahogany Capital Ltd. as much as 85 cents on each dollar invested in Series I notes.

The full release is below...

Perpetual: update on Mahogany Capital

Perpetual Trustee Company Limited (Perpetual) today disclosed that charities, local councils and the more than 1,000 retail investors from all states of Australia, New Zealand and Papua New Guinea for whom it acts as trustee in credit-linked notes issued by Mahogany Capital Limited (Mahogany) would receive up to approximately 85 cents in the dollar of principal invested on the Mahogany Notes Series I and 69 cents in the dollar of principal invested on the Mahogany Notes Series II following a significant settlement of litigation with Lehman Brothers Special Financing, Inc (LBSF).

Perpetual said it would be communicating with all investors in Mahogany notes to advise further details of the terms of the settlement and of the timing of the return of their funds. The vast majority of the settlement payment is expected to be made to investors later this month or early next month.

Perpetual reached agreement to settle the litigation with LBSF in late November 2010. Under the agreed settlement terms, Perpetual was obliged not to disclose key financial details of the settlement or payment amounts to Mahogany investors for a period of approximately six months. The confidentiality restriction expired today.

In May 2009, Perpetual commenced legal proceedings in the High Court of England and Wales against BNYT, a United Kingdom-based trustee and member company of the Bank of New York Mellon Corporation, on behalf of Mahogany investors. LBSF later joined the proceedings as a co-defendant. LBSF subsequently filed legal proceedings against BNYT in the United States Bankruptcy Court seeking judgment that the ‘note holder priority’ provisions were unenforceable as a matter of US law. The UK court found in favour of Perpetual and confirmed the enforceability of ‘note holder priority’ provisions in a judgment handed down in July 2009. LBSF appealed the decision in the English Court of Appeal, which again found in favour of Perpetual.

However, the US Court subsequently declared the ‘note holder priority’ provisions were unenforceable under US law. In England, LBSF again sought to appeal the decision of the English Court and BNYT sought to appeal the decision of the US Court in New York. In late 2010, Perpetual reached an agreement with LBSF to resolve the disputes.

Mr Chris Green, Group Executive Perpetual Corporate Trust, said the matter had been complex and hard fought and highlighted the need for trustees in Australia and abroad to be agile and strategic in assessing when to take appropriate action on behalf of investors.

“In this matter, we were focused at all times on what was most appropriate and achievable in terms of delivering the best outcome for Mahogany investors,” he said. “Our ability to secure a settlement was important given that it comes at a time when many creditors remain in limbo given the conflicting decisions in England and US courts on the issue of ‘note holder priority.”

Mr Green said the issues which were litigated and divergent views of the courts in the US and England remained significant, with multiple counterparties and billions of dollars worth of investors fund sitting in synthetic CDO and other derivative products globally.

“There is currently no definitive answer on the issue of ‘note holder priority’ in derivative transactions where there is counterparty default. In addition, the timing of any resolution of the issue between the international jurisdictions remains uncertain. Our aim was to secure a positive outcome for our investors and to provide them certainty in what were very difficult circumstances.”

Please refer to the ‘Summary timeline of events’ below for background on this matter.

Investors are advised to contact Perpetual’s Call Centre on 1800 022 033 or on +61 2 9229 9633 if calling from overseas.

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