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Lehman 2007 Bonuses?

posted by Adam Levitin

Lehman paid out around $5.7 billion in bonuses in 2007. Are those bonuses safe? Maybe not.

The bonuses might be recoverable as fraudulent transfers---transfers made while insolvent without receiving reasonably equivalent value. (UFTA 5(a)).

Thus, the key question is whether Lehman was solvent when it paid out the bonuses? (The statute of limitations goes back past 2007, fwiw.) On an equity basis, almost assuredly yes, but on a balance sheet basis, that might be a closer call, depending on how things like MBS and CDOs are valued.

If Lehman was not solvent when it paid the bonuses, then I think there's a fraudulent transfer. It's hard to see how a bonus could ever be paid in exchange for reasonably equivalent value, when an employee has already been paid a salary for their efforts. There are various defenses to FTs, but none would seem to apply here at first blush.

Of course, it takes a challenge by a creditor whose claim arose before the bonuses were paid, but per the rule of Moore v. Bay (which I am teaching tomorrow), it only takes one of them, owed a single cent, in order to challenge all the bonuses. The lack of a creditor might protect the bonuses, but as creditors look to carve up what's left of Lehman, the thought of recovering a decent chunk of $5.7 billion is going to look very appealing.


How vigorously would a trustee pursue recovery of these against people who had received these bonuses and already spent them; i.e., would not be able to pay them back.

I would think these bonuses would be preferences, too, no?

Lawyers are actually much, much more valuable than most people in business realize. "Kill all the lawyers" was the first step in a coup d'etat. One of the best things to come out of this will be lawyers eviserating the Wall Street graspers, it is about time!

Question: how can those bonuses be recovered? Presumably, any bonus in stock is now worthless. Any cash bonus is now either spent or in someone's personal account? Can a court file a claim to get that money back and if so would it have any success proving employees' did not provide "equivalent value"? Finally, did the courts go after cash bonuses paid to Enron or Worldcom employees after those companies filed for bankrupctcy?

Well, in bankruptcy one can go back quite a while to recover payments made. But the issue is not whether Lehman was insolvent when the payments were made, but whether the bonuses were accrued in the amounts paid out. Most bonuses are tied to the amount of profits, and if the amount of profits was not correctly reported, and has to be restated, then lower bonuses were due and the overpayments have to be returned. Otherwise all a CEO has to do to become very rich is to do some multi-year business, recognize most of the revenues one year, most of the costs the next year, and collect an immense bonus on the large profit made in the first year. For example, it would be enough to sell a lot of debt to high credit risks in 2000-2005 without making adequate risk provisions, and then take the losses in 2005-2010, to award oneself very large bonuses during 2000-2005 while making no profit or even losses over 2000-2010. Clearly this fantastic hypothesis cannot be true :-).

As a former Lehman Employee I can vouch that a significant amount of bonuses paid are not only stock, but deferred stock that vests over time (typically 3-5 years) so the actual cash amount will likely be smaller.

My recollection is that there is some case law to the effect that bonuses may, depending on the facts, be deemed part of the compensation package (never mind they are called "bonuses"), so that the REV issue might be harder to establish than you might think.

Judge Clark's comment (or rather the caselaw to which he refers) was the basis for my comment, though I should have omitted the "too." That is, EITHER the bonuses were (arguably) fraudulent conveyances (if insolvency & no REV) OR they were (arguably) preferences (if insolvency & payment based on an implicit or explicit "antecedent debt" based on the expected comp package in which a bonus was not an unexpected plus, but a central vested expectation).

Since it's a Chapter 11, I wonder if we'll see a big fight over creditors' trying to take over the preference avoidance machinery--I doubt Lehman management will be eager to claw back bonuses . . . .

Congress should pass a "windfall bonus tax" on the bonuses of all financial institutions which are now declaring losses, and claw back bonuses for the last 5 years.

This would probably need to be a new law. As a tax, not a criminal issue, I would guess that it is as constitutional as a windfall profits tax, tho it might not be for the past. It should certainly have been passed after the dot.com bubble, and after the Long Term Cap Mgmt bailout, and after the S & L bailout in the '70s.

Incentives matter -- and bonus risk will drive more prudent behavior than any other regulation.

Jason, I agree with you that its an either/or situation (either a fraudulent conveyance or a preference). I think it will be the committee that makes that push too. BTW, I'm told that LeBouef may be a candidate for committee counsel -- they represent the 128 billion bond debt I think. That could get interesting.

Jason, I agree with you that its an either/or situation (either a fraudulent conveyance or a preference). I think it will be the committee that makes that push too. BTW, I'm told that LeBouef may be a candidate for committee counsel -- they represent the 128 billion bond debt I think. That could get interesting.

Just trying to rap my mind around 11 concepts here.

If say Lehman filed 11 before awarding bonuses and money didn't change hands would the recipients be entitled to an unsecured claim for the "compensation" package including stock and stock options that have not matured yet? Do CEOs and CFOs usually have those types of unsecured claims in 11? If Stocks were part of it wouldn't a portion be secured by stock? Couldn’t then Lehman argue that the bonuses were necessary for the continued operation, "regular course of business", if the CEOs retention benefitted the business in some manner? (I know that is usually for incurring debt) The fraudulent transfer would be if the Co. intended to shelter or hide funds that should go to creditors for the benefit of the Co. It would be a preference if the Co. paid an insider first before a general unsecured claim and the debt or “wage” should be lumped in with all the other unsecured creditors. ?? If anyone has time…

I have deferred income stock invested with Lehman
is there a chance that I will be able to recove some of it.

Also don't forget the possibility of a SOX 304 clawback. If the financials have to be restated "as a result of misconduct," then incentive-based compensation based on those false financials might have to be repaid to the issuer.

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