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In re Lehman Bros., Inc.

United States District Court, S.D. New York

March 17, 2015

JAMES W. GIDDENS, as Trustee for the SIPA Liquidation of Lehman Brothers Inc., Debtor MOORE CAPITAL MANAGEMENT, LP, on behalf of MOORE GLOBAL INVESTMENTS, L.P., Claimant,

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For Moore Capital Management, LP, on behalf of Moore Global Investments, L.P., Claimant: Jeffrey M. Eilender, Esq., Erik S. Groothuis, Esq., Samuel L. Butts, Esq., Schlam Stone & Dolan LLP, New York, NY; Lauren Teigland-Hunt, Esq., Teigland-Hunt LLP, New York, NY.

For CFTC, Amicus Curiae: Jonathan L. Marcus, Esq., Robert R. Wasserman, Esq., Robert A. Schwartz, Esq., Anne W. Stukes, Esq., U.S. Commodity Futures Trading Commission, Washington, D.C.

For James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers, Inc.: Michael E. Salzman, Esq., Anson B. Frelinghuysen, Esq., Marlena C. Frantzides, Esq., Hughes Hubbard & Reed LLP, New York, NY.

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Before the Court are cross-motions for summary judgment in a dispute over the status of the claims asserted by Moore Capital Management, LP, on behalf of Moore Global Investments, L.P. (" MGI" ), against the estate of Lehman Brothers Inc. (" LBI" ). In addition, the Commodity Futures Trading Commission (" CFTC" ) has filed an amicus curiae brief urging this Court to deny MGI the " customer" status it seeks.[1]

On September 19, 2008, LBI was placed into liquidation under the Securities Investor Protection Act (" SIPA" ) of 1970, and James W. Giddens was appointed Trustee.[2] SIPA governs the liquidation of broker-dealers that are registered with the Securities Exchange Commission (" SEC" ). In addition to having the general duties and powers of a bankruptcy trustee, a SIPA trustee is charged with recovering " customer property" -- i.e., the cash and securities held in brokerage accounts -- which is then pooled and distributed to " customers" pro rata.[3] With respect to LBI's brokerage business, the Trustee has satisfied in full all undisputed customer claims, and has also made significant distributions to general unsecured creditors.

Prior to being placed into liquidation, LBI was also a commodity broker registered as a futures commission merchant (" FCM" ) with the CFTC. When a debtor operates as both a broker-dealer and a commodity broker, SIPA trustees are authorized to administer the commodity broker estate -- separate from the SIPA estate -- in accordance with the Bankruptcy

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Code's commodity broker liquidation provisions, subchapter IV of chapter 7 (" subchapter IV" ).[4]

Subchapter IV provides that " customers" of a commodity broker business are entitled to receive a pro rata distribution from " customer property." Customer property is defined as " cash, a security, or other property, or proceeds of such cash, security, or property, received, acquired, or held by or for the account of the debtor, from or for the account of a customer." [5] Under subchapter IV, " customer" status hinges on whether a creditor's claim is on account of a " commodity contract," as defined by section 761(4).

Thus, in a liquidation of a broker-dealer that was also a commodity broker, separate pools of customer funds are created for broker-dealer and commodity broker customers. In this case, the Trustee has not separately administered an estate under subchapter IV because LBI's exchange-traded derivatives business was sold to Barclays Capital Inc. on September 22, 2008, and there have been no valid customer claims asserted against the estate.[6] However, MGI contends that it is entitled to " customer" status because its claim against LBI is on account of funds held by LBI to margin commodity contracts.

The Trustee does not deny that MGI has a claim against the estate. But the Trustee argues that the transactions giving rise to MGI's claim -- over-thecounter (" OTC" ) foreign exchange contracts (" OTC FX Contracts" ) in which LBI and MGI were counterparties -- are " forward" contracts that do not qualify as commodity contracts under subchapter IV. Accordingly, the Trustee argues that MGI is not entitled to customer status and is instead a general unsecured creditor. For the following reasons, the Trustee's motion is GRANTED to the extent of confirming its determination that MGI's claim is not entitled to customer status, and MGI's motion is DENIED. Further proceedings are necessary to determine whether the funds used to margin the OTC FX Contracts are property of the estate.


In January 2003, MGI and LBI entered into a Master Institutional Futures Customer

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Agreement (the " Customer Agreement" ), which resulted in the opening of two accounts.[8] The Customer Agreement permitted MGI to trade both OTC FX Contracts and exchange-traded futures contracts.[9]

Under paragraph 2 of the Customer Agreement, MGI " agree[d] to maintain such collateral and/or margin in its account as LBI in its reasonable discretion may require." Paragraph 5 states that " [a]ll Contracts and other Property belonging to [MGI] which LBI . . . may at any time be carrying for [MGI] or holding in its . . . possession or control on behalf of [MGI] for any purpose, including safekeeping, shall be held by LBI as security and be subject to a general lien and right of setoff for the discharge of all liabilities and obligations of [MGI] owed to LBI . . ."

MGI booked OTC FX Contracts in its accounts between 2003 and the commencement of LBI's liquidation in September 2008.[10] In addition, " [a]t least thirteen [f]utures [c]ontracts were booked into one of the MGI Accounts, each of which was subsequently reversed." [11] At the time LBI was placed into liquidation, MGI had approximately thirty open OTC FX Contracts as well as cash balances.[12]

In the year preceding LBI's collapse, MGI became concerned about a possible default by LBI and the implications of such a default for customer assets held by LBI. During this period, MGI asked for, and received, " assurances that the assets of LBI customers like MGI would be protected in the event of LBI's insolvency." [13] Zurma Vargas, a director in LBI's futures department, told MGI representatives during phone conversations from late 2007 through September 2008, that MGI's funds would be protected.[14] MGI claims, but the Trustee disputes, that " [w]ith respect to cash that was margining MGI's [OTC] FX Contracts, Ms. Vargas told MGI that those funds would be protected because they were held in a futures account." [15]

LBI never provided MGI with a written statement pursuant to SEC Rule 15c3-2 (2008).[16] A document sent by LBI to its customers entitled " Client Asset Protection Overview" informed customers that LBI, as an FCM, was required to maintain three types of customer fund accounts: a " Segregated Funds" account; a " Secured Amount Funds" account; and a " Non-Regulated Funds" account.[17] The description of the " Non-Regulated Funds" account provided that " [t]he assets held in this account can not [sic] be commingled with LBI's proprietary funds and are maintained in a designated Special Custody Account for the 'Exclusive Benefit of

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Customers (EBOC Account)['] held at Chase." [18] The overview further provided that " creditors of LBI's bankruptcy estate would have no claim to any of the assets held in these three accounts," and that " the assets held in these accounts at Chase do not fall within the bankrupt estate and are reserved for payments to customers if LBI would ever file for bankruptcy." [19]

MGI's OTC FX Contracts and exchange-traded foreign exchange futures (" FX Futures" ) are both agreements to buy or sell currency in the future at a pre-determined rate and call for physical delivery of the underlying currencies at maturity. Positions in both contracts can be closed out early by offsetting contracts, in which case any gains or losses will be settled in cash without physical delivery of the underlying currencies. In addition, both types of contracts present counterparty credit risk. MGI was exposed to LBI's credit risk when engaging in the OTC FX Contracts. Had it traded FX Futures, MGI would have been exposed primarily to the credit risk of a clearinghouse such as the Chicago Mercantile Exchange.[20]

LBI required MGI to post margin on the OTC FX Contracts. MGI entered into the OTC FX Contracts to hedge currency fluctuation risk. Whenever MGI needed to decrease one of the hedging positions it had in the MGI Accounts, MGI and LBI would enter into an offsetting FX Contract to decrease the net open position.[21]

Pursuant to protocols issued by the Trustee, the OTC FX Contracts were deemed terminated as of the commencement of LBI's liquidation. MGI had outstanding gross cash balances in its accounts of $70,576,023.06 and $6,055,385.09. Upon termination of the OTC FX Contracts, $59,179,357.27 and $5,320,485.94 was owed to LBI in respect of the OTC FX Contracts in each account, reflecting the values of the contracts in favor of LBI. The remaining $11,396,647.79 and $734,899.15 (the " Net Cash Balances" ), respectively, represent the excess cash margin held by LBI.[22]

It is this money -- roughly twelve million dollars -- as to which MGI seeks preferred customer status. On January 27, 2009, MGI filed two customer claims seeking the Net Cash Balances. After the Trustee denied the claims and reclassified them as general creditor claims, MGI filed an objection, asserting it was entitled to customer status.[23]


Summary judgment is appropriate " only where, construing all the evidence in the light most favorable to the non-movant and drawing all reasonable inferences in that party's favor, there is 'no genuine issue as to any material fact and . . . the movant is entitled to judgment as a matter of law.'" [24] " A fact is material if it might affect the outcome of the suit under the governing law, and an issue of fact is genuine if the evidence is such that a reasonable jury

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could return a verdict for the nonmoving party." [25]

" [T]he moving party has the burden of showing that no genuine issue of material fact exists and that the undisputed facts entitle [it] to judgment as a matter of law." [26] To defeat a motion for summary judgment, the non-moving party must " do more than simply show that there is some metaphysical doubt as to the material facts," [27] and " may not rely on conclusory allegations or unsubstantiated speculation." [28]

In deciding a motion for summary judgment, " [t]he role of the court is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried." [29] " 'Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from ...

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