Professional Documents
Culture Documents
In re
Case No. 08-01420 (JMP) SIPA
LEHMAN BROTHERS, INC.,
Debtor.
BlackRock Mortgage Investors Master Fund, L.P. (together with the Advisor, the
“Customer”), hereby submit this objection to the denial and reclassification of the
Customer’s claim number 900007961 (the “Claim”) filed against Lehman Brothers Inc.
1
Including, but not limited to, BlackRock Investment Management LLC, BlackRock Advisers LLC,
BlackRock Capital Management, BlackRock Japan Co. Ltd., BlackRock (Channel Islands) Ltd.,
BlackRock Investment Management (Australia) Ltd., BlackRock Investment Management (UK) Ltd.,
State Street Research & Management Company, BlackRock Fund Managers Ltd., and BlackRock
International.
BACKGROUND
certain of its affiliates filed voluntary petitions under chapter 11 of Title 11 of the United
commenced under the Securities Investor Protection Act of 1970, as amended (“SIPA”),
15 U.S.C. §§ 78aaa - 78lll, with respect to the Debtor, a securities broker-dealer. James
W. Giddens was appointed as trustee (the “Trustee”) under SIPA to liquidate the Debtor’s
assets.
asserting that the Claim, which arose from pre-Commencement Date transactions, is
“customer” status and reclassifying the Claim as a general creditor claim. The
Determination Notice does not specify a rationale for denying “customer” status to the
Claim.
5. The Customer objects to the Determination Notice and asserts that the
2
The Customer and the Trustee negotiated a consensual extension of time to respond to the
Determination Notice.
2
THE CLAIM
6. The Claim arises from the Customer’s financing transaction with the
Debtor in which the Customer agreed to transfer to the Debtor certain securities (the
“Securities”)3 against the transfer of funds by the Debtor, with a simultaneous agreement
by the Debtor to transfer to the Customer such Securities at a later date (the “Reverse
Agreement, dated as of October 25, 1994 (as amended, supplemented or modified, the
“MRA”).
7. On August 8, 2008, the Customer entered into the Reverse Repo with the
Debtor for settlement on August 12, 2008 and pledged the Securities to the Debtor as
collateral.4 The Securities were delivered to the Debtor’s Depositary Trust Company
(“DTC”) participant number 636 under DTC repo code 220 (open) (“Open Repo Code”).
Because the Securities were delivered with Open Repo Code, the Customer, as deliverer
of the Securities, retained “economic ownership” of any future interest and principal
payments made on the Securities. Accordingly, DTC should have transferred any interest
8. The Reverse Repo was closed on September 15, 2008 with the Debtor
returning the Securities under DTC repo code 230 (close) (“Close Repo Code”). The
Close Repo Code did not affect the Customer’s entitlement, as economic owner, to
3
The Securities consist of (a) $9,639,000, in principal amount, of CUSIP 52521LAC8 notes,
(b) $19,583,000, in principal amount, of CUSIP 52521LAB0 notes, (c) $21,830,000, in principal
amount, of CUSIP 17309AAE9 notes, and (d) $36,446,000, in principal amount, of CUSIP
17309VAH6 notes.
4
Due to a typographical error, the Customer’s proof of claim states that the Securities were not
transferred to the Debtor until August 30, 2008 but such transfer actually occurred on August 12, 2008.
August 30, 2008 is the record date for the September 25 Payments (as defined below).
3
distributions on the Securities declared as of record during the term of the Reverse Repo.
Rather, it merely reversed the Open Repo Code for distributions on the Securities with a
9. August 30, 2008 (the “Record Date”) was the record date for the
scheduled September 25, 2008 interest and/or principal payments, in the aggregate
30, 2008, the Debtor was the record holder of the Securities but the Open Repo Code
status of the Securities would have nonetheless caused DTC to transfer such September
DTC removed all “repo code” links on the Securities in response to the commencement
of the Debtor’s SIPA proceeding. The removal of the “repo code” links on the Securities
nullified the Open Repo Code that made clear the Customer’s entitlement to the
25 Payments were inappropriately made to the Debtor, as the holder on the Record Date,
rather than to the Customer in accordance with the terms of the Reverse Repo.
10. As such, the Customer’s Claim seeks the payment of the September 25
ARGUMENT
and, therefore, the Claim constitutes a “customer” claim under SIPA. See 15 U.S.C. §
78lll(2). Under SIPA, “customer” claims are entitled to (i) recover against “customer
5
The portion of the September 25 Payments relating to each of the Securities is set forth in the
Customer’s proof of claim.
4
property,” id. § 78lll(4) on the basis of their “net equity,” id. § 78lll(11) and (ii) receive
advances from a fund maintained by the Securities Investor Protection Corp. (the
“SIPC”).
[A]ny person (including any person with whom the debtor deals as
principal or agent) who has a claim on account of securities received,
acquired, or held by the debtor in the ordinary course of its business as a
broker or dealer from or for the securities account of such person for
safekeeping, with a view to sale, to cover consummated sales, pursuant to
purchases, as collateral security, or for purposes of effecting transfer.
Id. § 78lll(2). Further, this definition “includes any person who has a claim against the
13. The Securities giving rise to the Claim are clearly “securities” under
SIPA.6 The Debtor’s financing trade with the Customer was clearly within the “ordinary
course of its business” as a “broker or dealer.” Id. § 78lll(2). The Securities have been
acquired “from or for the securities account” of the Customer. Moreover, the Debtor
received, acquired and held the Securities with a view to their resale back to the
Customer. Therefore, the nature of the relationship created by the MRA fits squarely
14. We believe that denying the Claim “customer” status is inconsistent with
SIPA, the legislative intent embodied by SIPA, and with prior case law. The primary
purpose of SIPA is “to provide protection for investors if the broker-dealer with whom
they are doing business encounters financial troubles.” H.R. Rep. No. 91-1613, at 1
6
SIPA’s definition of “security” includes “any note, stock, treasury stock, bond, debenture, evidence of
indebtedness, any collateral trust certificate . . . any certificate of interest or participation in, temporary
or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase or sell
any of the foregoing, and any other instrument commonly known as a security.” 15 U.S.C. § 78lll(14).
5
(1970), as reprinted in 1970 U.S.C.C.A.N. 5254, 5255. The Second Circuit has observed
that SIPA’s legislative history uses the term “‘investors’. . . synonymously with
‘customers,’ indicating that, in the eyes of Congress, [SIPA] would protect capital
markets by instilling confidence” in investors. SIPC v. Morgan, Kennedy & Co., 533
bankruptcy court in this District, that "[t]he sole legislative statement addressed to the
comprehends ‘anybody that interacts with the debtor in a capacity that concerns securities
transactions.’” In re SSIW Corp., 7 B.R. 735, 738 (Bankr. S.D.N.Y. 1980). Indeed, the
Reverse Repo transaction, in which the Customer and the Debtor engaged, and which
forms the basis of the Claim, was related to trading in the securities market.
16. The Bevill, Bresler court noted that Congress enacted SIPA to “protect
individual investors from financial hardship, insulate the economy from the disruption
which can follow the failure of major financial institutions, and to maintain public
confidence in the capital markets.” See In re Bevill, Bresler & Schulman Asset Mgmt.
Corp., 67 B.R. 557, 602 (D.N.J. 1986). Focusing on “the size and economic importance
of the repurchase market,” the court determined that providing “investors in this market
with the protections afforded ‘customers’ under SIPA will significantly advance” SIPA’s
goals. Id. As the Customer is clearly a participant of the repurchase market, the result
6
17. Several courts have held that parties to repurchase transactions are
“customers” under SIPA. See id. at 602 (holding that repo and reverse repo participants
were “customers” of a debtor broker-dealer under SIPA); see also City of Elkins v.
Davidson (In re Swink & Co.), 142 B.R. 874, 878-79 (Bankr. E.D. Ark. 1992) (holding
that the parties to a repurchase transaction had contemplated a relationship in which they
would trade in securities as broker-dealer and customer and that the broker-dealer had
under SIPA, the court in Bevill, Bresler noted that (i) reverse repurchase agreements were
an integral part of the broker-dealer’s ordinary course of business, (ii) the broker-dealer
purchases and sales pursuant to reverse repurchase transactions were duly recorded, and
(iii) the securities underlying the reverse repurchase transactions were received and/or
acquired by the broker-dealer with a view to their resale back to the reverse repo
a creditor as dependant on whether the claimant entrusted cash or securities to the broker-
dealer debtor. See, e.g., SIPC v. Executive Sec. Corp., 556 F.2d 98, 99 (2d Cir. 1977)
(per curiam). In the present situation the Customer is clearly a “customer” of the Debtor,
not a creditor. In the Bevill, Bresler case, the court reasoned that the reverse repurchase
transaction participants were not creditors of the debtor because the risks and potential
rewards of the transactions were “unquestionably market-related risks and rewards which
7
are entirely distinct from and additional to any credit risk associated with the solvency of
20. The Customer entrusted the Securities to the Debtor by transacting with
the Debtor, as a dealer. Therefore, the Customer’s ability to receive the benefits of its
investments depended on the Debtor fulfilling its obligations pursuant to the MRA terms
and a well-established course of dealing. The Customer was entitled to receive interest
and principal payments that were made on the Securities. However, the Debtor instead
received these amounts, due to the post-Commencement Date removal of the Open Repo
Code by DTC. Thus, the Debtor owes the amounts, set forth in the Customer’s proof of
21. For all of the reasons stated above, the Claim should be allowed as a
8
RESERVATION OF RIGHTS
22. The Customer reserves all rights with respect to the Claim asserted herein.
The Customer further reserves all rights to amend or supplement this Objection or file a
9
Exhibit A
Exhibit B