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2010-04-26 Lehman Hearing Transcript Amended

2010-04-26 Lehman Hearing Transcript Amended

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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK Case No. 08-13555(JMP) Adv. Case No. 08-01420(JMP)(SIPA) - - - - - - - - - - - - - - - - - - - - -x In the Matter of: LEHMAN BROTHERS HOLDINGS INC., et al., Debtors. - - - - - - - - - - - - - - - - - - - - -x SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff, -againstLEHMAN BROTHERS INC., Debtor. - - - - - - - - - - - - - - - - - - - - -x U.S. Bankruptcy Court One Bowling Green New York, New York April 26, 2010 9:36 AM B E F O R E: HON. JAMES M. PECK U.S. BANKRUPTCY JUDGE TRIAL VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400

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HEARING re Objection of SunGard Entities to the Motion of the Trustee for Relief Pursuant to Sale Orders or, Alternatively, for Certain Limited Relief Under Rule 60(b) and Reservation of Rights [Case No. 08-01420, Docket No. 1917] HEARING re Objection of HWA 555 Owners, LLC to the Motions of Lehman Brothers Holdings Inc., James W. Giddens as Trustee for Lehman Brothers Inc., and the Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc. to Modify the September 20, 2008 Sale Order and for Other Relief [Case No. 08-13555, Docket No. 5419; Case No. 08-01420, Docket No. 1911] HEARING re Statement of the Securities Investor Protection Corporation in Support of Trustee's Motion for Relief Pursuant to the Sale Orders or, Alternatively, For Certain Limited Relief Under Rule 60(b) [Case No. 08-1420, Docket No. 2989] HEARING re Motion by Barclays Capital Inc. for an Order Compelling Documents from LBHI, the Trustee, the Creditors' Committee and their Financial Advisors Deloitte, FTI, Alvarez & Marsal, and Houlihan Lokey [Case No. 08-13555, Docket No. 8331]

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HEARING re Objection of SunGard Entities to (1) the Motion of the Debtors for an Order Modifying the September 20, 2008 Sale Order and Granting Other Relief and (2) the Motion of Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc. [Case No. 08-13555, Docket No. 5426] HEARING re Statement of the Bank of New York Mellon Trust Company in Support of the Motions for (I) an Order Modifying the September 20, 2008 Sale Order and Granting Other Relief and (II) to Unseal Motions for Relief from September 20, 2008 Sale Order (and Related SIPA Sale Order) [Case No. 08-13555, Docket No. 5424] HEARING re Motion of Evergreen Solar, Inc. to Join to Motion of Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc. [Case No. 08-13555, Docket No. 5422; Case No. 0801420, Docket No. 1914]

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HEARING re LibertyView's: (A) Joinder to (i) the SIPA Trustee's Motion, (ii) the Committee's Motion, and (iii) LBHI's Motion for Relief from the Sale Orders or, Alternatively, for Certain Limited Relief Under Rule 60(b); and (B) Objection to Barclays Capital Inc.'s Motion to Enforce the Sale Order [Case No. 0813555, Docket No. 7417; Case No. 08-01420, Docket No. 2775] HEARING re Australia & New Zealand Banking Group LTD's Letter Regarding Rule 60 Proceedings [Adv. No. 08-1789, Docket No. 33] HEARING re Joint Statement And Reservation Of Rights Of The Bank Of Tokyo-Mitsubishi UFJ, Ltd. And Lloyds TSB Bank, plc In Connection With (I) Motions Of Lehman Brothers Holdings, Inc., The Official Committee Of Unsecured Creditors, And James W. Giddens, As Trustee For Lehman Brothers, Inc., For Certain Relief Pursuant To The September 20, 2008 Sale Orders; And (II) Motion Of Barclays Capital Inc. To Enforce The Sale Orders And Secure Delivery Of Undelivered Assets [Case No. 08-13555, Docket No. 7165; Case No. 08-1420, Docket No. 2679]

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HEARING re Motion of Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc., Authorizing and Approving (A) Sale of Purchased Assets Free and Clear of Liens and Other Interests and (B) Assumption and Assignment of Executory Contracts and Unexpired Leases, Dated September 20, 2008 (and Related SIPA Sale Order) and Joinder in Debtors and SIPA Trustees' Motions for an Order Under Rule 60(b) to Modify Sale Order [Case No. 08-13555, Docket No. 5169; Case No. 08-01420, Docket No. 1686] HEARING re Motion of the Trustee for Relief Pursuant to the Sale Orders or, Alternatively, for Certain Limited Relief Under Rule 60(b) [Case No. 08-01420, Docket No. 1682] HEARING re Motion of Debtor to Modify the September 20, 2008 Sale Order and Granting Other Relief [Case No. 08-13555, Docket No. 5148] HEARING re Joinder of Newport Global Opportunities to LibertyView's: (A) Joinder to (I) the Trustees' Motion, (II) the Committee's Motion and (III) LBHI's Motion for Relief from the Sale Orders or, Alternatively, for Certain Limited Relief Under Rule 60(b); and (B) Objection to Barclays Capital Inc.'s Motion to Enforce the Sale Order [Case No. 08-13555, Docket No. 7419; Case No. 08-01420, Docket No. 2778]

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Transcribed by: Clara Rubin HEARING re Creditors' Committee Complaint for Declaratory Relief Pursuant to 11 U.S.C. Section 105(a) and 28 U.S.C. Sections 2201, 2202 and for an Accounting [Adv. No. 09-01733, Docket No. 1] HEARING re LBHI's Adversary Complaint [Adv. No. 09-01731, Docket No. 1] HEARING re Trustee's Adversary Complaint [Adv. No. 09-01732, Docket No. 1] HEARING re Motion of Barclays Capital Inc. to Enforce the Sale Order and Secure Delivery of All Undelivered Assets [Case No. 08-13555, Docket No. 6814; Case No. 08- 1420, Docket No. 2581]

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BY: TRICIA J. BLOOMER, ESQ. VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 BOIES, SCHILLER & FLEXNER LLP Attorneys for Barclays Capital, Inc. 10 North Pearl Street 4th Floor Albany, NY 12207 BY: HAMISH P.M. HUME, ESQ. JONATHAN D. SCHILLER, ESQ. BOIES, SCHILLER & FLEXNER LLP Attorneys for Barclays Capital, Inc. 5301 Wisconsin Avenue, N.W. Washington, DC 20015 BY: ROBERT W. GAFFEY, ESQ. WILLIAM J. HINE, ESQ. A P P E A R A N C E S : JONES DAY Special Counsel for the Debtors 222 East 41st Street New York, NY 10017

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BY: KENNETH M. BIALO, ESQ. EMMET, MARVIN & MARTIN, LLP Attorneys for Australia and New Zealand Banking Group Limited 120 Broadway New York, NY 10271 BY: HOWARD S. STEEL, ESQ. BROWN RUDNICK LLP Attorneys for Newport/Providence Funds Seven Times Square New York, NY 10036 BY: TODD THOMAS, ESQ. BOIES, SCHILLER & FLEXNER LLP Attorneys for Barclays Capital, Inc. 401 East Las Olas Boulevard Suite 1200 Fort Lauderdale, FL 33301

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VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 BY: JONATHAN E. MINSKER, ESQ. KASOWITZ BENSON TORRES & FRIEDMAN LLP Attorneys for Lloyds TSB Bank 1633 Broadway New York, NY 10019 BY: WILLIAM R. MAGUIRE, ESQ. HUGHES HUBBARD & REED LLP Attorneys for the James W. Giddens, SIPA Trustee One Battery Park Plaza New York, NY 10004 BY: K. BRENT TOMER, ESQ. GOODWIN PROCTER LLP Attorneys for Evergreen Solar Inc. The New York Times Building 620 Eighth Avenue New York, NY 10018

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BY: SUSHEEL KIRPALANI, ESQ. JAMES C. TECCE, ESQ. QUINN EMMANUEL URQUHART OLIVER & HEDGES, LLP Special Counsel to the Official Committee of Unsecured Creditors 51 Madison Avenue 22nd Floor New York, NY 10010 BY: JOHN BOUGIAMAS, ESQ. OTTERBOURG, STEINDLER, HOUSTON & ROSEN, P.C. Attorneys for Bank of Tokyo-Mitsubishi UFJ, Ltd. 230 Park Avenue New York, NY 10169-0075 BY: MICHAEL S. ETKIN, ESQ. LOWENSTEIN SANDLER PC Attorneys for LibertyView Funds 65 Livingston Avenue Roseland, NJ 07068

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BY: JAMES HEISER, ESQ. (TELEPHONICALLY) FRANKLIN H. TOP III, ESQ. (TELEPHONICALLY) CHAPMAN & CUTLER Attorneys for Creditor, US Bank 111 West Monroe Street Chicago, IL 60603 BY: KENNETH J. CAPUTO, ESQ. SECURITIES INVESTOR PROTECTION CORPORATION 805 15th Street, N.W. Suite 800 Washington, DC 20005 BY: ERICA P. TAGGART, ESQ. QUINN EMMANUEL URQUHART OLIVER & HEDGES, LLP Special Counsel to the Official Committee of Unsecured Creditors 865 S. Figueroa St., 10th Floor Los Angeles, CA 90017

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VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 BY: FARALLON CAPITAL MANAGEMENT Creditor ANATOLY BUSHLER (TELEPHONICALLY) BY: BANK OF AMERICA Creditor NATALIE FOY (TELEPHONICALLY) BY: AURELIUS CAPITAL MANAGEMENT Interested Party DAVID TIOMKIN (TELEPHONICALLY) BY: WHITMAN L. HOLT, ESQ. (TELEPHONICALLY) REBECCA S. REVICH, ESQ. (TELEPHONICALLY) STUTMAN TREISTER & GLATT Attorneys for Interested Party, Elliott Company 1901 Avenue of the Stars, 12th Floor Los Angeles, CA 90067

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VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 BY: VARDE PARTNERS Creditor SCOTT HARTMAN (TELEPHONICALLY) MORGAN STANLEY BY: JOHN O'MEARA, IN PROPRIA PERSONA (TELEPHONICALLY)

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know. MR. GAFFEY: Oh. Then I'm not sure if you were It struck us that it's THE COURT: P R O C E E D I N G S Please be seated. Good morning. I think

we have certain parties who have filed papers in support of or in opposition to the pending 60(b) relief. It's not clear to

me whether or not we're going to start with those or where those are going to fit into the morning's activities. MR. GAFFEY: Robert Gaffey, Your Honor, special

counsel for the debtor. On the agenda that was filed -THE COURT: MR. GAFFEY: THE COURT: Oh, I wasn't looking at the agenda -Oh, I beg your pardon, Your Honor. -- which is one of the reasons I don't

inviting any comment from me, Judge.

probably better to get that out of the way first, at least from our point of view. THE COURT: MR. GAFFEY: And then -That works. -- there may one or two housekeeping

matters relating to the hearing. THE COURT: MR. GAFFEY: THE COURT: And then go to the discovery motion? Yes. Is that acceptable to Barclays? Yes, Your Honor.

UNIDENTIFIED SPEAKER: THE COURT:

Why don't we do that, then?

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here? (No response) MR. CAPUTO: Your Honor, Kenneth Caputo on behalf of The Court has

the Securities Investor Protection Corporation.

a very full docket today, so with that in mind, may it please the Court; I will be brief. SIPC has already submitted a pretrial statement in this case, and that statement makes clear SIPC's position that in order to properly effect and provide true investor protection in this case, as was intended from the commencement of the liquidation proceeding, it is required as a matter of law that property marshaled by the SIPA trustee, including the disputed assets, be made available first and foremost to customers and that none of the disputed assets can be delivered to or left with Barclays unless and until all customers have been fully satisfied. Barclays' motion to secure delivery of all undelivered assets runs counter to the applicable provisions of the financial responsibility rules and SIPA. SIPC respectfully

submits, Your Honor, that the trustee's motion for relief has sound footing in, and should be granted as a matter of, law, and that this Court should put investor protection ahead of Barclays' further commercial profit. THE COURT: Thank you. Are they Thank you, Your Honor.

Next on the list is HWA 555 Owners, LLC.

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THE COURT: SunGard? (No response) THE COURT: MR. TOMER: Evergreen Solar? Good morning, Your Honor. Brent Tomer I assume they're resting on their papers.

from Goodwin Procter, on behalf of Evergreen Solar, Inc. We have a pending adversary proceeding alleging that LBI improperly transferred shares of Evergreen Solar to Barclays under the guise of the repo agreement. Despite the

fact that those shares were merely lent to LB -- or, I'm sorry, merely lent to Lehman Brothers International Europe and that LBI merely held their shares as agent for LBIE, we believe those -- our claims should be dealt with in the context of the adversary proceeding. But we've come here today because these proceedings do implicate, and may perhaps validate, the claims we've made with respect to the manner in which the sale was conducted outside of the public view, and perhaps outside of this Court's view as well. Barclays has argued along the way that the sale order

bars our claims and that we've waived our claims by failing to object at the sale hearing. Well, now, while we've had no notice of the sale hearing, we did have notice of these proceedings here today, and so we merely stand to preserve our claims on the record. That's it. Thank you, Your Honor.

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THE COURT: Okay. Thank you. I

There's a statement by Bank of New York Mellon. assume they rely on their papers. (No response) THE COURT: There's another objection of SunGard.

Joint statement and reservation of rights of Bank of Tokyo-Mitsubishi? MR. BOUGIAMAS: Good morning, Your Honor. John

Bougiamas, Otterbourg, Stone, Houston & Rosen, on behalf of the Bank of Tokyo-Mitsubishi UFJ, Ltd. Bank of Tokyo-Mitsubishi is an interpleader defendant in a case filed by the OCC concerning the disposition of eighty million dollars of letter-of-credit proceeds drawn by the OCC on the day LBI's SIPA liquidation was filed. in the interpleader in February 2009. Issue was joined

The letter-of-credit

proceeds themselves are on deposit with the Court, pursuant to stipulation and order, so ordered by Your Honor. As we -- we recognize that the Court may issue certain rulings that may impact BTMU's -- Bank of Tokyo's claims in that interpleader action, including rulings that may be construed to order delivery of the letter-of-credit proceeds to Barclays or the LBI trustee in this action. We request that,

to the extent the Court issues any such rulings, the Court order that Barclays or LBI trustee take such proceeds, subject to whatever rights and claims that the Bank of Tokyo and the

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obvious. MR. MINSKER: Your Honor. Barclays claims that it is entitled to not only the OCC margin but claims that the letter-of-credit proceeds, and this is eighty million dollars withdrawn to have been deposited in the court registry, are specifically part of that OCC margin. Even though the letters of credit were drawn by the Well, that footnote in particular, yes, other interpleader defendant banks have to those proceeds and for reimbursement, as we may establish in the separate adversary proceeding. MR. MINSKER: Good morning, Your Honor. Jonathan

Minsker, Lloyds TSB Bank. I just wanted to point out one thing that might not be clear in the papers that were filed. We joined in the joint

statement filed by Bank of Tokyo-Mitsubishi and want to point out that we don't take a position on the ultimate disposition on the Rule 60 motions. However, there is one argument that

Barclays makes in its papers in this proceeding, and that's at page 187, footnote 164. THE COURT: You've read them very carefully, it's

OCC on the petition date, there were no amounts outstanding on the LBI obligations under the accounts, but the OCC drew these proceeds in the interest of protecting the public under an OCC rule that allows it to do so. That money was held in a

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suspense account. Barclays nonetheless asserts that that money

is now part of the OCC margin that belongs to it. So if Your Honor rules in this proceeding that Barclays takes not only the OCC margin but the specific letterof-credit proceeds, then Lloyds requests that Your Honor also rule that Barclays also takes the concomitant reimbursement obligation pursuant to both the transfer and assumption agreement, which states that Barclays not only would take the OCC margin but the repayment obligation and pursuant to equity, because Barclays should not be able to get the benefit of the eighty million dollars without paying back the issuing banks. If Your Honor rules that Barclays is not entitled to the OCC margin or is entitled to the OCC margin but Your Honor disagrees with footnote 164 and believes that the LC proceeds, which are cash in the suspense account, didn't go to Barclays, then the issue of whether the OCC needs to pay that back to Lloyds can be resolved in the interpleader action. In either

case, your ruling here can significantly either eliminate or reduce what is to be litigated in that action. Honor. THE COURT: Okay. Thank you. Thank you, Your

Australia and New Zealand Banking Group? MR. BIALO: Good morning, Your Honor. I'm Ken Bialo,

and I represent the Australia and New Zealand Banking Group Limited. We are also a defendant in the interpleader case

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brought by OCC. And of the eighty million dollars in proceeds

that's on deposit with the Court, twenty million and change are ours. I would just like to point out to the Court that, with respect to our submission of February 18th of this year in which we stated our position, and we were hoping to preserve all of our rights for litigation in the OCC interpleader case, there has not been, as far as I can tell, any disagreement with the notion that the issues in the interpleader case are in fact unique and discrete, and no disagreement, as far as I can tell, with the idea that discovery in that proceeding should take place after the conclusion of these proceedings. I think,

amongst counsel, we had circulated the idea of about 120 days. And that's all I have to say this morning, Your Honor. I know that you have a busy morning. THE COURT: Fine. Since this is not a pretrial

conference in that adversary proceeding, I'm not making any comment one way or the other about your stipulation. free to live by it whether or not I've approved it. MR. BIALO: It wasn't a formal stipulation, Your And feel

Honor; it was an exchange of ideas. THE COURT: MR. BIALO: THE COURT: MR. ETKIN: An understanding. Okay.

Thank you, Your Honor. LibertyView? Good morning, Your Honor. Michael Etkin,

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Lowenstein Sandler. Again, very briefly, LibertyView is a group of investment funds that was a party to prime brokerage agreements with Lehman Brothers Inc. We were not among those accounts

that were transferred to Barclays, and we believe we are among those customers that Mr. Caputo so eloquently indicated require the protection of this Court. And our concern is raised in our joinder; it relates to the transfer of customer property to Barclays -- the potential transfer of customer property to Barclays that is part of the fund of customer property that should be there to satisfy the claims of customer claimants such as us. Specifically, Your Honor, in going through the mounds of material that were filed, the one thing that struck us, which makes this proceeding so significant and the issues for the Court so significant, was some documents that were previously filed under seal but that were revealed for the first time only recently in the various filings, one of which, which was Barclays' Exhibit 521, set forth a list of assets that were transferred with CUSIP numbers. Interestingly

enough, Your Honor, those assets, Alliance One International, Charter Communications Operating, Delta Airlines Inc. bonds, all had identical CUSIP numbers to those CUSIP numbers that were on the securities that belong to my client. So that

obviously put the issue squarely in front of us when we were

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response. able to read that and, thus, we filed our joinder in the relief requested by the trustee, the committee and the debtor. THE COURT: All right. Thank you.

Newport Global Opportunities? MR. STEEL: Good morning, Your Honor. Howard Steel of

Brown Rudnick, on behalf of Newport/Providence funds. We're in the same boat as LibertyView and join their Newport opened a prime brokerage account with LBI Newport entrusts its

pursuant to a prime brokerage agreement.

securities to LBI and, pre-commencement, requested that those securities be transferred to a third-party prime brokerage. This transfer did not occur. We filed timely customer claims.

The LBI trustee has denied our customer claims. But similar to LibertyView, we still don't have definitive conclusions on where our securities are, who has them, why aren't they being returned to us. This is the third

calendar year and we're still in limbo, and Newport is suffocating because of the delay in the return of their securities. In connection with this proceeding, Newport just requested the trustee and this Court put a spotlight on the sale transaction so prime brokerage claimants, about six billion strong, aren't further aggrieved as they wait for the return of their property. THE COURT: Thank you.

Are you speaking on behalf of Newport or

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are you speaking on behalf of a class of similarly affected prime brokerage customers? MR. STEEL: Today I'm speaking on behalf of the

Newport/Providence group of funds, but, as Your Honor is aware, there is an ad hoc group, including LibertyView, of other similarly situated prime brokerage claimants. THE COURT: Okay, and so your final remark was on

behalf of your Greek chorus friends, is that right? MR. STEEL: THE COURT: MR. STEEL: THE COURT: heard on this? Yes. Okay. Got it.

Thank you. Is there anyone else who wishes to be

I've gone through the list of third parties who This isn't a general invitation to the

have submitted papers.

audience to speak, but just wanted to see if I left anybody out. (No response) THE COURT: All right, fine. Why don't we proceed

with the discovery matters. MR. HUME: Good morning, Your Honor. Thank you.

Hamish Hume from Boies Schiller, for Barclays. Your Honor, I have a very small number of demonstratives that I might use in the argument, if I may. They're being handed out to proposing counsel. THE COURT: You may. May I approach?

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please. Your Honor, we're here on this motion to compel production from the movants and their financial advisors of their economic analyses of the sale transaction at the time of the sale transaction and through to March 13th, 2009. And our Thank you. MR. HUME: And if I could have A-1 on the screen,

discovery request, which we issued right after the Rule 60 motions were filed, used that cutoff because that was the date the district court issued its decision affirming the sale orders on appeal. And we've asked, therefore, during that period of time when the movants were supporting the sale and defending the sale and the sale orders on appeal -- we wanted to know what they understood about the economics of the sale transaction during that time, because -- and the reason for that, Your Honor, is that they are now, obviously, asking this Court to modify the terms of the sale order and of the purchase agreement that they asked the Court to approve, they expressly agreed to, they chose not to seek reconsideration of, and they defended on appeal, which they actually did through to June 19th when the Second Circuit finally dismissed the appeal. Your Honor, as a matter of law, for them to seek that extraordinary relief under Rule 60, their claims must as a matter of law require them to show that they simply did not

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understand the economic terms of the sale. they say. And that's what

They didn't say it explicitly in their opening

brief, but they did say it explicitly in their reply brief, because they have to, and it's not because we forced them to; it's because the law forces them to. They must show, for their

Rule 60(b)(2) claims, that they simply did not understand the terms of the sale. It's both that they subjectively didn't

understand it and that they objectively could not have understood it. They have to clear both hurdles.

Now, it's especially hard for us to understand, Your Honor, how they can clear those hurdles given what was publicly announced and known about the sale at the time. And I don't

want to depart too much from this, but I would like to show Your Honor what we showed you two weeks ago -And show slide 49, please. -- from our defensive binder, our argument binder, from April 9th. Two days before the sale was presented for approval, Barclays publicly announced its expectation that the sale transaction would result in an accounting gain of approximately two billion dollars. This was told to an investor The public was

teleconference that was open to the public.

invited to it through a press release, and it was noticed in the press. And if I could have the next slide, slide 50, please.

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below it? In the same public press announcement, Barclays described the sale as involving an acquisition of 72 billion dollars of trading assets, for trading liabilities of 68 billion dollars, for a cash consideration of 250 million dollars. Now may I have, please, the Sunday Times article? This description of the sale was noticed in all of the newspapers and publicized at the time. Could you blow up, please, that paragraph and the one There we go. The middle paragraph says "Mr. Diamond revealed" -this is before the sale was presented for approval. Sorry, the first paragraph. "Barclays will spend 250 million dollars on Lehman's U.S. trading assets worth 72 billion dollars and at 68 billion dollars of trading liabilities." That spread between trading

assets and trading liabilities was public, was discussed, was open for everyone to see, and no other bidder came forward to offer a better deal. Could I have The Wall Street Journal article, please? And can you blow up again the paragraph -In The Wall Street Journal it was reported that the price tag for what was roughly half the entire company appears to value the business at a tiny fraction of what it would have fetched eighteen months ago. After subtracting the 1.5 billion

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Barclays said it will pay for the Lehman headquarters, the U.K. bank is paying just 250 million dollars for the business, and its trading assets of 72 billion dollars, and liabilities of 68 billion dollars. So, Your Honor, there was a lot of public attention on this deal at the time. There was a lot of description at the There were also,

time about how favorable it was to Barclays.

I'll note, in many of these articles notes from people who said they thought it was a very risky deal for Barclays and expressed skepticism. But, clearly, there was public notice

about how Barclays expected to record an accounting gain from the deal. And yet the movants are here a year later saying the

deal was supposed to be a wash, supposed to be a wash, everything was supposed to balance perfectly. It doesn't

balance perfectly in what was publicly said at the time. So for them to bring these claims and ask you to modify the sale order that went up on appeal and was defended at their -- with their explicit support all the way through to June, they must be saying that they were profoundly confused about what the sale was all about. they did not understand it. be saying that. They must be saying that

As a matter of law, they have to

And yet they all --

If I may have slide A-2. -- they, all three of the movants -A-2.

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the time: -- had world-class financial advisors advising them at Deloitte & Touche advising the trustee, FTI

consultant and Houlihan Lokey advising the creditors' committee, Alvarez & Marsal advising LBHI. So we asked as soon as we got their Rule 60 motions Please produce what you thought the values were of the purchased assets and the assumed liabilities so that we can understand how it is that you can be saying that there's new evidence. And they refused. They've refused to produce to us

what their financial advisors understood and thought about the sale at the time. Now, I hasten to add that we would acknowledge there was tremendous uncertainty about the values of both the assets and the liabilities, and we expected if we got these financial analyses it would show that; it would show that they recognized the uncertainty and they accepted that uncertainty, and they defended the sale transaction with that acknowledged uncertainty. And now they've come back and asked you to redo

everything because basically the markets have stabilized and they think that they would like to get a better deal. THE COURT: Let me ask you question about Deloitte &

Touche for a moment, which is the first firm listed in red on that slide. The papers filed by the SIPA trustee indicate that

discovery was taken and, assuming the credibility of the information revealed in discovery, Deloitte did no work with

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respect to valuation of the deal. just focusing on this. And you know that. So I'm

How can you be making a last-minute

motion -- this is the first day of the evidentiary hearing of the trial; it couldn't be more last-minute -- seeking discovery of an enterprise such as Deloitte, that you acknowledge is world-class, and I'm sure they're very pleased to hear that on the public record, but that acknowledges having done none of the work that you're seeking to find out about? even on the list? MR. HUME: Your Honor, you've asked two questions; let Deloitte & Touche you've singled Why are they

me try to answer them both.

out; to me, they are the hardest for the movants to defend withholding what they did. They did do analyses, wholly

unrelated to litigation, because they were tasked immediately with preparing an opening balance sheet for the SIPA liquidation as of September 19th, before the sale closed. were asked immediately to prepare an opening balance sheet, what were the assets and liabilities that LBI had when it came into court for the SIPA liquidation, and to do that they have to value the assets. And I would like to show you, Your Honor, in response to your question, the evidence for that, because I don't understand this argument that they did no work. If I may have, please, first, the 30(b)(6) clip from James Kobak on the Deloitte and opening balance sheet question? They

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"Q. "Q. This is -(Begin playback of clip) One of Deloitte & Touche's tasks is to create a balance

sheet for LBI as of the start of the SIPA liquidation, is that correct? "A. "Q. "A. We asked them to do that at some point. And they have not yet completed that, correct? That's correct." (End playback of clip) MR. HUME: And now, Your Honor, the 30(b)(6)

representative from Deloitte who was asked about their work on that opening balance sheet: (Begin playback of clip) Did Deloitte at any time attempt to value any of the

assets listed under the purchased assets? "A. The only time we attempted to value -- or, sorry, we did

not attempt to value anything related to this listing. "Q. Can I ask -- well, it seems like you were clarifying your Was there something you were going to say before

language. that? "A.

We had been in process of creating a draft balance sheet,

but Deloitte hasn't been doing the valuations. "Q. Who was, then, doing the valuations for the draft balance

sheet? "A. The valuations have been coming from third-party sources

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and Barclays. "Q. "A. What were the third-party sources? They're publicly available sources. The two that I

remember are Bloomberg and IBSI. "Q. "A. "Q. Is that work still going on? Yes. When did Deloitte first work on in any way a balance sheet

for LBI? "A. Started in late '08. We did not have access to the books

and records until around that time to be able to get the details to start creating a balance sheet. "Q. "A. What was the purpose of creating a balance sheet? To determine what assets and liabilities existed as of

9/19/08, the date of liquidation. "Q. "A. And Deloitte is still working on that balance sheet today? Yeah." (End playback of clip) MR. HUME: Your Honor, so if they're trying to put

together a balance sheet for the broker-dealer as of the date of the liquidation, that is going to show the values of the assets and liabilities; it's going to show whether they're doing it themselves or relying on other people. And I did ask

the trustee's 30(b)(6) (sic) in deposition are these assets difficult to value, since it's taken a year, or more now, to actually produce this opening balance sheet. And he said yes,

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I think some of them are very difficult to value. And if

they're accepting Barclays' valuations, that undercuts the arguments of the other movants. We're entitled to know what they thought that balance sheet looked like, what they thought we were getting from that balance sheet at the time. claims. It's directly relevant to our It's work they would be doing

It's not work product.

if -- wholly independent of this litigation and which, I assume in good faith, no one was thinking about at that time, since, if they were, then it wouldn't be new evidence; they would have had that evidence. Now, Your Honor asked a second question, which is why is -- why are we bringing this at this time; is it -- and how do we explain what Your Honor called the last-minute nature of it. Your Honor, we did bring a motion, as you'll recall, after the Rule 60 motions were filed, seeking a broad -arguing that there had been a broad waiver of both attorneyclient privilege and attorney work product. And if I may have slide A-8. In response to that motion, the movants argued that all of their claims were objective, based on objective evidence, what was told to the Court; nothing to do with what they knew. And they made all these arguments in their

opposition then, and they made it in their oppositions to our

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second motion to compel. And Your Honor accepted those

arguments on page -- I think it's 116 to -17 of the December 16th transcript. When you read your opinion denying our

motion, you said "I view these claims as objective," as based upon what was told to the Court, nothing to do with what the movants knew. And, Your Honor, we respectfully disagreed with that, but we, obviously, respected the Court's decision. And we made

our arguments in our brief to explain why legally there is no way they can bring the claims they're bringing without showing their own subjective lack of understanding of the terms of this deal. Judge Peck, there's no case that has ever allowed a Rule 60(b) modification of a sale order that was affirmed on appeal. There are virtually none that have had any 60(b) They

modification of the sale order; none after an appeal.

argue new evidence under 60(b)(2), a required element of which is that they subjectively did not understand the terms of the sale. Because there's a -- so that's one reason they must show they didn't understand. There's also a mandate from the The sale

district court, which is a jurisdictional mandate. order has been affirmed.

There's arguably no exception to that

mandate, but any such exception must again rely on their ability to show they didn't understand the sale they were

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defending before the district court. So we must know, therefore -- they must show that they didn't understand the terms of the deal. their reply brief -If I may have the next slide, A-9. -- that they didn't, because, knowing that they have to make this argument, they say repeatedly the committee was justifiably ignorant; LBHI was justifiably ignorant; there was not enough time for LBHI to analyze the information it had; they did not understand what they were saying in the October 2008 meeting; they did not develop a meaningful understanding of the sale transaction until after the 2004 discovery. Your And they argue in

Honor, we don't think those assertions are credible, and those assertions placed directly at issue what they truly did understand at the time and what their financial advisors understood at the time. And so we have asked in discovery what did those financial advisors understand at the time. And if the Court

will indulge me, I know that last clip went on a little long, but we have some shorter clips of the questions we've asked in discovery that we have not been able to get answers to. And

I'd like to begin with the most recent deposition we took of Mr. Despins -- I think I'm pronouncing his name correctly -from Milbank, the lead lawyer for the creditors' committee. May we show his deposition excerpt?

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question. "Q. Okay. You write 'Houlihan's review would indicate that "Q. (Begin playback of video clip) And this will be your e-mail, October 13, 2000 at In this e-mail you say 'Houlihan has reviewed the

3:47 p.m.

securities and cannot even come close to the amount which was announced in court.' in its review? "UNIDENTIFIED SPEAKER: Stop. What amount had Houlihan provided that --

"I'm going to instruct the witness not to answer the

the securities transferred could be worth billions more than the 47.7 billion.' "A. "Q. Yes. Okay. How many billions more? Objection. I'm going to Do you see where you wrote that?

"UNIDENTIFIED SPEAKER: instruct him not to answer. "Q.

I'm just trying to help the Court see what the committee

saw at the time. "A. "Q. I understand. And the committee saw a statement from Goldman Sachs

saying that Barclays would receive a windfall discount of at least several billion dollars. "A. "Q. "A. I see that e-mail. You see that in the e-mail? Yes. And my quest --

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"Q. "Q. My question is whether Houlihan or anyone acting on behalf

of the committee concluded that that was an incorrect analysis. "UNIDENTIFIED SPEAKER: the witness not to answer." (End playback of video clip) MR. HUME: Your Honor, we would like to show you also Again, objection. I instruct

what Michael Fazio, one of the Houlihan valuation people -now, not a lawyer, nothing to do with attorney-client communications -- what he said when we asked directly about Houlihan's effort to value the securities in the deal, or what -- more accurately, what he was not allowed to say. (Begin playback of video clip) You see that Mr. Despins says that Houlihan has reviewed

that and cannot even come close to the amount which was announced in court. What analysis had Houlihan done that led

Mr. Despins to make that comment? "UNIDENTIFIED SPEAKER: I'm going to object and

instruct not to answer on attorney-client and work product privilege. "Q. What figure for market value had Houlihan arrived at as a

result of its analysis? "UNIDENTIFIED SPEAKER: I'm going to object and

instruct not to answer on privilege. "Q. Mr. Despins writes, 'Houlihan's review would indicate that

the securities transfer could be worth billions more than the

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"Q. 47.7 billion.' "A. "Q. Yes, I do. Okay. But do you recall how many billions more Houlihan's Do you see that?

review indicated at the time? "UNIDENTIFIED SPEAKER: Objection and an instruction

not to answer on attorney-client and work product privileges. "Q. And at that point in time after closing, did Houlihan do

anything to access publicly available information, from Bloomberg or other sources, concerning the value of the securities on the lists that you had at that time? "UNIDENTIFIED SPEAKER: I'm going to object and

instruct not to answer on privilege." (End playback of video clip) MR. HUME: Since we're taking some time with this, can

we skip the next one and just show, finally, what Saul Burian, the 30(b)(6) representative from Houlihan Lokey, showed -- was asked and not allowed to answer? (Begin playback of video clip) In the time period between September 22, 2008 and the end

of September, did you identify anything on the face of the agreements, marked as Exhibit 26, that was inconsistent with what you understood the Court had been told at the approval hearing? "UNIDENTIFIED SPEAKER: asked and answered. A set of objections: form;

To the extent, though, that you're asking

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binder? Your Honor, you've been told repeatedly in this proceeding that there was a secret five billion dollar discount. You've been told by the movants that the secret five for any of his analysis after the closing that was not communicated to someone outside Houlihan and the committee, I'm going to object on work product and instruct not to answer. "Q. Did Houlihan compare the Schedule A attached to 460-B, to

the Schedule A it previously received, as reflected in 461-B? "UNIDENTIFIED SPEAKER: "Wait. "When? When?

Don't answer that. Are you saying at any time? I need to know

for my privilege objection. "Q. Did Houlihan compare the Schedule A in 460-B and the

Schedule A in 461-B at any time after Houlihan received 460-B? "UNIDENTIFIED SPEAKER: I'm going to object on work

product grounds and instruct you not to answer as to the internal analysis that Houlihan did of the schedules." (End playback of video clip) MR. HUME: schedules are. May I have slide 28 from our April 9th argument Your Honor, let me show you what the

billion dollar discount was in the repo collateral that Barclays received when it took over the New York Fed's repo. This is a summary of what we were supposed to get. It

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didn't happen because we had a problem with the seven billion dollar cash item that had to be resolved in the settlement before Your Honor in December, but this is what Weil Gotshal was told had been delivered in the repo to Barclays before the closing: 49.9 billion. Those were the marks from the

custodian banks, JPMorgan -- basically Lehman's marks -- sent to Weil Gotshal. Slide 29, please. And I should say these are the summaries. As the

demonstrative tries to show, there are hundreds of pages behind that with individual CUSIP listings, all of the CUSIPS listed and their values and their marks -- their values may be something quite different -- sent to the committee before the closing on September 21st. They have the schedules; they knew the assets. If

they thought there was a secret five billion dollar discount, Houlihan Lokey could review it and value it themselves. If

they thought it was possible to value those securities and get a definite value and know a hundred percent it's XYZ.315, some exact number, they could have done it. They knew it wasn't

possible, because forty percent of the CUSIPs on that list, representing at least twenty-five percent of the value, were nontraded assets, private-label securities, structured financial products, CDOs, CMOs, asset-backed securities, the securities that gave rise to the financial crisis in the first

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place. That was a quarter of that value. And Barclays looked

at it and said we don't think it's worth what it's marked at, we think it's less, can we give you a precise number? it's worth less. And they bargained over it and they Fine. No, but

negotiated all weekend, and they agreed it was less.

But the rock-bottom line is Houlihan had the schedule; Weil Gotshal had the schedule. had the schedule. All these financial advisors

If they felt it was valued something

different than what the Court was told and there was some big problem, they should have done something about it right away. Instead, they waited. to value it. And we looked at it; it took us months The valuation

We published our financials.

attributed to what we got in the repo, including what we received in the December settlement, was 45.5 billion. We told

them at the time the marks were wrong, our public financials confirmed the marks are wrong, we say in this proceeding the marks were wrong. Their new evidence is this: The marks were right. We discovered an

Because it was in an e-mail in Barclays.

e-mail summarizing the marks like that, that they were sent at the time. discount. That's the charade of this five billion dollar And to show why it's a charade, we would like to

know what their financial advisors thought about that CUSIP list at the time. May I have slide A-3, please?

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Let me just summarize our argument, Your Honor, and then I won't take any more of the Court's time. There are

three reasons why what we request in this narrower motion from our motion from last year -- we are only now seeking the financial analyses, not attorney-client communications. financial analyses are not work product, to begin with. Those There

was no lawsuit in September, October, November, December 2008, all the way through to March of 2009 when they're defending the sale order. They couldn't have been defending the sale order There was no

and planning to sue Barclays at the same time. lawsuit. There is no work product protection.

Number two, even if there were work product protection, it is a necessary element of their claims that they show that their financial advisors couldn't figure this out and gave them bad information and that's why they were justifiably ignorant. They have placed what their advisors did directly at

issue, and so there is an at-issue waiver of that work product. And third, Your Honor, whatever else you may think, it is simply not fair. It's not fair for them to come a year

later and say they didn't understand this CUSIP list that they were given at the time, even though they had all these advisors to analyze it. And now they're coming back to say that the

marks were right after all. We have a substantial need, that we cannot satisfy any other way, to know what they really did think at the time, to

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have all those questions we asked in deposition answered, and to have these financial analyses, that are on the privilege log that they refuse to produce, produced to us. Your Honor, unless you have any other questions, that's really the essence of our argument. Obviously, we have

some case law that we think supports us, but that is our argument. THE COURT: MR. HUME: MR. TECCE: All right. Thank you. Good morning, Your Honor. For the record, Thank you.

James Tecce of Quinn Emanuel Urquhart & Sullivan, on behalf of the official committee. Your Honor, addressing a question Your Honor raised to Barclay, first in my presentation this morning relating to the timing of the filing of the instant motion, I would just note for the record that Mr. Burian's deposition was taken on the 17th of December. This Court issued its ruling with respect to

Barclays' request for attorney-client communications on the 16th of December, and that motion specifically reserved the right, Barclays' motion, to raise the issue of attorney work product at a later time. Mr. Burian's deposition was taken the

very next day, Mr. Fazio's deposition was taken in February, and we are here on the eve of trial defending against this motion, which was filed on the 14th of April. And, Your Honor, when you denied Barclays' motion in

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December, you noted in your decision that, considering the importance of attorney-client privilege, which is what was at issue in that motion, you noted that the Second Circuit cautions that rules which result in a waiver of this privilege, and thus possess the potential to weaken attorney-client trust, should be formulated with caution. And today, Your Honor, you're engaging in an equally weighty examination of the work product privilege, which briefly has been described as critical to the adversary system since it allows attorneys to be free to prepare their cases without fear that their work product will be used against their clients. And for that reason, Your Honor, we submit that

Barclays' instant demand for documents protected by the work product privilege warrants the very same careful scrutiny that was employed with respect to the request for attorney-client communications. We also maintain that Barclays' argument is no more compelling today than it was in December, and indeed it actually suffers from the record that has developed since December, including the pleadings that have been filed in this case and the oral argument that was held on April 9th, because what that record confirms is that Barclays has not demonstrated the indispensable requirement for establishing an at-issue waiver, because the committee does not rely on attorney work product materials in asserting its claims, especially with

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respect to new evidence, and especially with respect to timeliness. The committee's motion rests on newly discovered evidence that was unearthed in the Rule 2004 discovery, including e-mails and deposition testimony concerning discounts from book value, e-mails concerning an agreement about that discount at the time the asset purchase agreement was executed, e-mails and deposition testimony concerning the use of the Barclays repurchase agreement as a vehicle to transfer that discount, and e-mails and deposition testimony concerning the attribution of liquidation valuations to the securities transferred as part of the transaction. Similarly, Your Honor, and this is an important point, the committee argues it was justifiably ignorant of that evidence, of that evidence, without reference to our reliance on attorney work product. That is the standard. Barclays

argues that we have to argue that we were ignorant of the transaction. That's not correct. We have to argue and

establish, and we have established, that we were ignorant of the evidence, and we were because it was not uncovered until Rule 2004 discovery was initiated. In terms of timeliness, Your Honor, again, we do not rely on attorney work product in establishing that we filed our motions on a timely basis. We point to the deficiency and

inaccuracy of the information that was provided to the

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committee. We point to the statements that were provided to And we point

the Court that we argue have proven inaccurate.

to the steps that we took to try and get a reconciliation concerning the transaction. At no point do we rely on attorney We rely on the timeline

work product in making those elements.

that we established, that we mentioned in oral argument and that we will establish at trial. Again, Barclays characterizes our claim as necessarily misunderstanding the terms of the transaction. But that's not Our

an accurate characterization of our claim, Your Honor. claim is an objective claim. Our claim is that this

transaction that was described to Your Honor, that was reviewed by Your Honor and that was proved by Your Honor, that that transaction is not the transaction that was ultimately consummated. It examines the objective facts of what the Court

was told, and it examines the objective facts of what were the contours of the consummated transaction. State of mind is not

relevant in establishing the elements of that claim, Your Honor. Our understanding -- we were in court on the day of the sale hearing, Your Honor. mentioned to the Court. understand that number. We heard the number 47.4 billion

At no -- we don't argue that we didn't What we argue is that that number was

not an accurate number, and at trial we will prove what the accurate number of the value of the assets that were

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transferred was. Your Honor, with respect to substantial need, which Barclays must satisfy in order to prove it's entitled to work product protection, it has been offered and given a wide array of options to unearth the evidence that it maintains exists. It maintains that the committee was aware of the terms, the material terms, of the transaction as it was consummated. And since December even, it has been given access to nearly every principal and professional that was involved in the sale transaction. It has been given access to the

committee's witnesses and it has been able to ask those witnesses what they were told by third parties to ascertain whether the committee knew or learned of what it believes were the material terms of the transaction. It has deposed the

chairman of the creditors' committee, it has deposed two Houlihan Lokey witnesses, it has deposed an FTI witness, and it has deposed a Milbank Tweed witness. It also has deposed third

parties about what they told the creditors' committee and their professionals, including five witnesses from Alvarez & Marsal, Lazard Freres' 30(b)(6) witness, a Weil Gotshal witness, a Simpson Thacher witness, a Hughes Hubbard witness, and, as you saw, a Deloitte & Touche witness, where they were asked the very questions that they maintained that they had not access now. The centerpiece of their knowledge argument is the

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September 17th press release and analyst call which Mr. Hume mentioned in his argument. They also argue that an October 8th

presentation to the creditors' committee indicates that these documents reveal that in fact, in point of fact, the committee was aware of the salient terms of the consummated transaction. But they have been given the opportunity, Your Honor, to show those documents to every one of the witnesses that I just mentioned during their depositions, and they were not instructed in response to press releases that they were not (sic) instructed not to answer. They also -- I don't know as a

matter of fact whether the newspaper articles that were mentioned were shown to each one of these witnesses, but they certainly had the opportunity to show those articles to the witnesses and ask them questions as to whether or not they knew the facts in those articles. Your Honor, on the point of whether or not these materials were prepared in anticipation of litigation and Barclays' argument that they were not prepared in anticipation of litigation, our brief is very detailed on this point. And I

will not rehash the arguments that are set forth in our brief, but there are three points that I would like to make. The

first, Your Honor, that in this circuit the standard is a more relaxed standard, the, quote/unquote, "because of litigation" standard. And that does mean that if it can be freely said

that the document was prepared because of the prospect of

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litigation, then it was prepared in anticipation of litigation for purposes of the rule. And that's a more lenient standard

that the simple "prepared in anticipation of litigation" standard. THE COURT: Let me ask you a question as it relates to

the committee's professionals in reference to that standard. Is it the position of the committee that the work product of committee-retained professionals -- and I'm merely talking about the financial advisors, not counsel -- constitutes work product regardless of whether there is any contemplated litigation on the horizon because there may be litigation on the horizon at some point that can't yet be foreseen? question 1. And question 2 is, is it the committee's position that this is work product simply because bankruptcy almost definitionally is an adversarial process and what goes in bankruptcy court is some form of litigation most every day? MR. TECCE: Sure. Your Honor, the committee's That's

position is that this is work product because it was prepared by a financial advisor to a statutorily appointed committee, in response to a motion filed by the debtor to sell substantial amount of assets, substantial amount of assets. prepared in response to that motion. It was

That does not mean that

everything that the financial advisor does for the committee is automatically work product, but in this case a motion had been

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file to sell substantial amount of the debtors' assets. There

were objections to that motion filed; it was a contested matter in a bankruptcy case. I note, but I don't need to rely on, the case that says exactly what Your Honor asked, which is that bankruptcy in and of itself is litigation, and I note those cases. But, Your

Honor, in this particular case that is not to say -- and Barclays actually argues this in their motion. We're not

asking for a rule that any and all work product prepared by any creditor or any party-in-interest relating to a bankruptcy case is protected by work product. What we're saying is that, given

the inherent tension in a bankruptcy case between an estate fiduciary, a Chapter 11 debtor and an official committee of unsecured creditors, if they come to court and seek to sell substantial amount of their assets, and our financial advisor is aiding the attorneys in the discharge of their duties in examining that transaction, it is foreseeable that litigation could ensue and the work that Houlihan does is protected by attorney work product in that case. THE COURT: MR. TECCE: Okay. Just briefly, Your Honor, in terms of

timing, I opened with this because Your Honor had asked about this question, but I would just note again for the record that this motion -- this issue was first raised in December, and the deposition that is at the subject of this motion was taken the

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very next day after the motion was decided. And to wait until

April 14th -- there's simply no reason why the motion had to wait that time. The last point I would make is really one of policy, Your Honor, and that is that if the motion is granted, I would respectfully submit that it runs against the very purpose of the work product doctrine, which is to allow a zone of privacy within which attorneys can formulate and prepare their cases without intrusion from their adversaries. And that's

especially true and especially important in the bankruptcy context where counsel to a creditors' committee relies on their financial advisor to assist the committee in the discharge of its fiduciary duties to all creditors. And in this case where

they were reviewing a very significant motion, I would submit that that policy is most paramount, given the facts and circumstances under which the work was performed. Lastly, one point, Your Honor, that was raised during Barclays' argument. The creditors' committee did not support We did not brief --

the appeal of the sale order through June.

we were not -- we did not submit briefs with respect to whether the order should be affirmed on appeal or not. party to that appeal. statement. THE COURT: MR. TECCE: Okay. Thank you. We were not a

So I just wanted to correct that

If Your Honor has any questions -- that's

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my argument. THE COURT: MR. TECCE: MR. MAGUIRE: for the SIPA trustee. Your Honor, the trustee does not rely on any of Deloitte's work. In fact, our motion papers do not even Why it's on the list is a complete Not at this time. s Thank you. If it please the Court. William Maguire

mention Deloitte's work. mystery.

What Mr. Hume said in his argument was that the

movants refuse to disclose what the financial advisors understood and thought about the sale at the time. Deloitte did no work on the sale at that time. And in answer to the question from the Court, Mr. Hume told you that Deloitte was tasked immediately with doing work, and we had the little show-and-tell where the very first witness was the trustee's representative Mr. Kobak, who is deposed in early December, and he did not testify that Deloitte was tasked immediately. The testimony that you saw said that And then we had the Deloitte The Deloitte Of course,

Deloitte was asked at some point.

witness who testified on January 20 of this year.

witness testified that Deloitte did not attempt to value anything and that the work started in late 2008 because Deloitte didn't have access to the books any time before that. So the notion that Deloitte was tasked immediately and produced some work that would be of any relevance, even if

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denied. MR. HINE: Good morning, Your Honor. Bill Hine from Barclays could overcome the Erie standard, of which we heard nothing in Barclays' argument -As a fallback argument, you heard that, well, if Deloitte accepted Barclays' values, that would be helpful or relevant to Barclays. Of course the testimony from the witness The witness

shows absolutely no evidentiary basis for that.

specifically testified that Deloitte did not do any independent valuation. And the witness specifically testified that

Deloitte did not agree or disagree with Barclays' values. All this testimony from December and from January explains why this motion was not brought before; it does not explain why this motion was brought at all. And what we did

not hear from Barclays was the key standard in this circuit set by the Erie case, which is the question of reliance. And since

the trustee is not relying on any of Deloitte's work, since the trustee doesn't even mention any of Deloitte's work, there is no prejudice to Barclays, there's nothing for them to address. So, respectfully, Your Honor, we ask this motion be

Jones Day, on behalf of LBHI. We join in the arguments made by the other movants, but I did want to point out a few things that are unique to LBHI with respect to this motion. As you may remember, we were

not a party to the prior motion that was brought before this

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Court, and that's largely because LBHI had agreed to a waiver of its privilege, to a limited extent. We had an agreement

with Barclays whereby we would produce, and we did produce, all the documents relating -- work product documents and attorneyclient documents for the period ending September 30th. We did

that because we felt we were in a somewhat unique position as to the other movants, and we have put that in issue. We also

agreed to produce documents related to the December settlement. So we've also produced that. Contrary to suggestion from Barclays, we have not withheld documents that were produced in the normal course of A&M administering the estate. We have, for example, produced

some documents relating to A&M's efforts early on to figure out what assets had made it to Barclays and what was left in the estate. So the notion that we've withheld things that are not

work product we take issue with. What we have withheld is documents relating to the investigation that A&M eventually took. At some point in time

they do start to realize that they might have claims against Barclays relating to what we've raised in our motions. It

started off with an analysis of why the comp and cure numbers didn't add up. But basically we've withheld the documents that

relate to that analysis and whether there's potential claims. And with all these documents we've produced, Barclays has had ample opportunity to take discovery from all the other

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movants as well as five different A&M witnesses, including Mr. Marsal and Mr. Kruse who were taken shortly after the last motion. And, in addition, they've been able to interview, with

all those documents, all the former Lehman employees that now work for them. So we think -- we take issue with the notion that they've demonstrated any kind of substantial need. They've had

a heck of a lot of discovery here and a heck of a lot of access to this stuff. And we also take notion -- we dispute the

notion that we've withheld anything that really isn't legitimate work product. The second point I wanted to raise is that when you look at this limited waiver that we've agreed to, it should inform the analysis of whether Barclays can assert a wholesale waiver, at-issue waiver, on our behalf. If you read our

papers, we -- Barclays argues that we moved under 60(b)(1) for mistake. Well, if you read our papers, and I would point you

to paragraphs 151 and 155 of our reply brief, the only mistakes we allege are the ones that took place during the week of September 15th up to the closing, all of which were within the period of our limited waiver. related to that. Same with the newly discovered evidence. The only So they have all the documents

newly discovered evidence, we allege, and I would point to our reply brief at paragraph 164, is that which was produced in

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2004 discovery. They've had all of that. They've used all of

that to depose all the witnesses we've talked about. The crux of their argument seems to be that it has to do with timeliness. And I would just like to remind the Court We argued that our motion

of our argument as to timeliness.

was timely because we met the one-year requirement of Rule 60, and also we explained the difficult circumstances that Alvarez & Marsal faced when it first took over this estate. It had

limited access to any documents, limited access to the customer system, virtually no access to its former employees who were all involved in this transaction who now work for Barclays, and part of that limited access was based on Barclays' own misconduct under the TAA, to the point where we almost sued Barclays under the TAA. Now, in response to that, Barclays says, well, you should have figured it out earlier, or you really knew more than those documents to which you had access indicated. it's fine for them to argue that, and it's fine for us to defend it, but the fact is there's no support in the case law for the notion that a litigant can put its opponent's work product in issue simply making an argument on what he understood. There's just no support for the notion that you Well,

can offensively use an at-issue waiver based on your allegations about what we understood. And so when you look at their argument as to documents

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relating to A&M, you'll see just that. They said that we made

arguments concerning the October presentation that Mr. Fogarty gave, but we did that in our reply brief in response to arguments that they raised. responding to (sic). They put it in issue and we're And that's not

We're allowed to do that.

a waiver, under any of the case law that they've cited. The final point I wanted to make is that there's a bit of a slippery slope that I'd like to alert people to, and, in particular, Barclays might be concerned with this, because the fact is Barclays' understanding of the economics of the transaction has also been placed in issue. And unlike the

movants, Barclays has placed its own understanding in issue. In response to a motion that is basically a motion dealing with the adequacy of the disclosures that were made to the Court, Barclays has argued all about its expectations, its intentions, its understanding of the economics. Barclays was the first to

argue that it understood the comp and cure numbers to be merely estimates. Barclays is the first to argue that the asset grab

was justified because it didn't get all the -- what it understood it was going to get under the repo. Their papers

are laced with their putting their own understanding of the transaction in issue in response to what is really a disclosure motion. So in that regard, I would ask that, if we are going to go down the road of finding an at-issue waiver based on

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people's understanding, that it should be applied across the board, and I doubt Barclays is going to like that. That's all I have, Your Honor, unless you have questions for me. THE COURT: MR. HUME: No, I don't have any questions. Your Honor, very briefly in rebuttal.

Could I have slide 13, please? Obviously, logically, the first question is whether what we're asking for is even protected by the work product privilege, and Your Honor asked a question of the committee on that. I'd like to give -A-13, please. -- an example from the privilege log that we can provide more from the various privilege logs. things we're talking about concretely: These are the

a September 2008 e-mail

forwarding redacted communication between the financial advisors regarding the Barclays sale transaction analysis between Houlihan, financial advisors; September 20, 2008 spreadsheet regarding assets transferred in the sales transaction, Houlihan Lokey, financial advisors; October 5th, spreadsheet prepared by committee financial advisor regarding the assets to be transferred to Barclays, nothing about lawyers, nothing about attorney-client privilege, nothing about litigation; e-mail regarding trustee books and records and balance sheet analysis; November 3rd e-mail and attachment re:

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UCC presentation -- that's unsecured creditors' committee -that's that PowerPoint that Alvarez & Marsal presented to the committee, that we showed Your Honor two weeks ago, that talks about what it calls a five billion dollar negotiated reduction from Lehman's stale marks. Well, there they are talking about And it's not

it in November, and we don't know what they said.

privileged, it's not work product; it's part of their analysis of the sale. Mr. Tecce said that he didn't need to rely on the extreme line of cases that say every single thing in bankruptcy is work product, and we agree with him, he shouldn't, because we don't think they could possibly make sense, nor could it make sense that, if you don't contemplate litigation, that something's work product just because looking back in hindsight you can say, well, it's possible there might have been litigation. And just to understand Mr. Tecce's argument, which was -- there was a motion by the debtor to sell assets; that's technically a contested matter. concluded contested matter. First of all, it was also a

It was approved, and so there was But,

no longer a contested matter, and they didn't object. more importantly, I want -- in this goose-versus-gander

argument that you heard from Mr. Hine, I would like to make sure it's clear that Barclays produced all of the backup for its financial analyses of these CUSIPs that were transferred.

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It's given dozens of depositions. asymmetrical discovery here: We -- there's been a real

thousands upon thousands of

documents about our valuation going all the way down into all the valuations. Should we have claimed work product privilege? Because we had bought assets in a contested matter; so does that mean it was protected by the work product doctrine? I'm not just saying that rhetorically. been made public. (sic) their briefs. And

Not all of them have

They've made those public; they attached to We would like to know if we should call

back what we produced. THE COURT: Well, let me just ask you a question about The materials you describe, I

what you've just asserted.

presume, largely consist of documents internal to Barclays, prepared by Barclays employees, not by Barclays' financial advisor or expert witnesses or counsel. MR. HUME: It includes the auditors at

PricewaterhouseCoopers. THE COURT: MR. HUME: Okay. But otherwise that's right.

Your Honor, the committee -- so the first point on rebuttal is simply most, if not all, of what we're asking for here we just don't think satisfies work product privilege. Secondly, Your Honor, the committee told the Court that they intend in this trial to prove a number. They're going to prove

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that the assets we got were not 47.4, that they had this understanding and it's different. But they're hiding from the

Court and from Barclays what their analysis of that number was at the time. They have placed it in issue what they think the

number was, but they won't reveal the documents that show what the number was. Now, let met address this at-issue point that you heard from the movants, and the Erie case. And the Erie case

says on pages 228 to 229, and I believe I tried to raise this in December and probably didn't do a good enough job so I'm going to try again very briefly, and it cites -- it does reject the old test and it says there has to be reliance, but it doesn't say the reliance has to be explicitly stated we are relying. It just means there needs to be reliance. And it quotes an earlier case, Bilzerian, where the defendant in the case, who's accused of securities law violations, wanted to testify that he had made a good-faith effort to comply with the laws. And the district court judge

said fine, but if you're going to do that you open up crossexamination on what your lawyer told you about the laws, because, implicitly, if you are going to say hey, I was acting in good faith and what I understood the law to permit, you're placing at issue what you understood about the law, which places at issue what your lawyers told you. Here, in that case, the defendant had a choice: Are

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you going to argue good faith or not; if you are, waiver. Here, they don't have a choice. The law requires them --

60(b)(2) and the mandate rule require them to say that they were justifiably ignorant, which is why they say it in their reply briefs, which we didn't get until March 18th, which is why the motion was brought when it was brought. We brought it We said,

initially; they said no, no, no, we don't argue that. well, we think you have to argue that. saying you have to argue that.

And we filed a brief

And then, sure enough, in

reply, while they try to dodge the issue, they say "We were justifiably ignorant." So it is at issue, it's necessarily at

issue, based on what they are legally required to argue. The movants keep saying that our argument is based upon timeliness, that we need to know why they didn't bring the motion sooner. that. That's very fuzzy. It's much more precise than

And the reason I'm talking about the mandate rule and

60(b)(2), those are the two things that require them to have been justifiably ignorant. It's not just because we want to They have a

prove they were untimely and dilatory.

jurisdictional requirement to show the Court why it can address and modify the sale order that was affirmed on appeal. jurisdictional. And the only way, if there is any way -- and the law is mixed; Second Circuit actually makes it sound like there's no exception -- is that they can show they were justifiably It's

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ignorant. 60(b)(2). So they must show it. Same thing is true under Rule

So it is not simply to show that they were untimely;

it's to defeat an element of their claims. Your Honor, the committee said it did not support the sale on appeal. May I have slide 68 from our April 9th binder? This is what the committee did. And, first of all,

obviously, the major point is they chose not to appeal, not to seek reconsideration. But when an appeal was filed, they filed

a counterstatement in response to the appellants under Rule 8006. That rule allows a counterstatement only by appellees.

They chose in October of 2008 to act like an appellee opposing the appeal. And in their counterstatement they asked

whether -- they reframed the issues -- whether X, Y or Z, the appellants were arguing, given that Barclays, quote, "purchased the property covered by the appeal, the order's in good faith" given that, quote, "the appealed orders contain detailed findings of fact with respect to the arm's-length nature of negotiations and where no collusion has been found". They

framed the issues on asserted facts that squarely did defend the appeal. The trustee argued, Your Honor, that Deloitte was not immediately asked to do an opening balance sheet. what "immediately" means. I don't know

What I do know is, at a minimum, And they

it's before the end of 2008 they were working on it.

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were working on it while the trustee was defending this sale on appeal. So we want -- if the trustee was defending the sale on appeal and telling the district court that all relevant facts were disclosed to this Court, and now they're saying all relevant facts were not disclosed because of the financial analysis that they didn't know, they're placing at issue what Deloitte did know at the time in 2008 and early 2009. Now, finally, Your Honor, in terms of the timing, again, I've tried to explain why we brought the motion now. was within the scope of our earlier motion, which was a broad privilege waiver which included a substantial-need argument for work product. We focused our argument on the attorney-client It

(sic), but our motion absolutely included work product, included what we're asking for now. And the Court ruled that

it was an objective test and their claims were objective, not subjective. They've now, in reply, confirmed our argument that That's why we brought it now. And based on We are

that is not true.

the scheduling developments, we have plenty of time.

going to resume this in September, and we are entitled to this discovery. There are going to be defendants testifying this

week; we'd like to be able to cross-examine them without having instructions not to answer. So while we would have liked to have resolved this earlier, we think we have good reasons for bringing it at this

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time. THE COURT: Let me ask you a question as to your claim My

of substantial need, in respect of LBHI in particular. understanding is that LBHI has provided substantial

documentation to Barclays without any claim of privilege, at least for the period through September 30. MR. HUME: Their lawyers have. Correct?

They waived attorney-

client privilege, and so we did get the Weil Gotshal and Simpson Thacher e-mails. We have not received a lot of And it is --

documents from LBHI directly, or Alvarez. THE COURT:

Are you saying you haven't you haven't

received substantial documentation from Alvarez & Marsal? MR. HUME: I'd need to check how much we've received.

I just honestly, Judge, can't say that we know with any confidence whether we've received everything. I think there

are things on the privilege log from Alvarez from before September 30th. THE COURT: I think the -- we can look at the slide I

again, although I don't think we need to belabor the point. believe that everything was later than September. November date that I remember. MR. HUME: The earlier ones that I showed you were

There was a

Houlihan, that's right.

I'm sorry, I'm not arguing the issue;

I'm just not certain that everything Alvarez did before September 30th that relates to the sale has been produced or

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whether some of it's being withheld. colleague to know. I could confer with a But there's no

I just don't know for sure.

question we've received the Weil Gotshal e-mails and the Simpson Thacher e-mails under this privilege waiver. THE COURT: Okay.

Is there anything more on this? MR. HUME: Thank you, Judge Peck. Your Honor, just to clarify, I

UNIDENTIFIED SPEAKER:

believe we have produced everything from Alvarez & Marsal up to the September 30th date. have produced. THE COURT: All right. Everything before that, I believe, we

I'm going to suggest a ten-minute break, and I'll make some comments when I return from the break. about five past 11. We'll resume at

We're adjourned till then.

(Recess from 10:52 a.m. until 11:20 a.m.) THE COURT: Please be seated.

I have some comments regarding the argument that was just presented, but this is not yet a ruling. I'm continuing

to deliberate and will rule either later today or sometime this week. Before making the comments, I do have a couple of questions as it relates to the manner in which this trial will proceed, depending upon the ruling. choices here: There are obviously binary

Either the motion is completely denied, in which

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case everybody's prepared for trial as if the motion had never been filed; or the motion is granted entirely as to all of the movants or it's granted in part. My question to the group is what it means to the trial of the case that's about to begin if there are witnesses who are called to the stand who are then asked questions. Will

there be a need for delay in order to conduct discovery, assuming there is discovery to be had here? If the motion is

denied, will witnesses be instructed not to answer questions, in the same way that they were instructed not to answer questions during the excerpted deposition transcripts that I saw? I'm just trying to get a sense as to what happens to this

trial based upon this ruling. Okay, well, we'll hear from LBHI's counsel first. MR. GAFFEY: THE COURT: MR. GAFFEY: Your Honor. With regard to the timing issue, Your Honor, it strikes me that either way, either binary choice, we still should go ahead, obviously. I know that for the debtors' part Thank you. Mr. Boies was almost ready to get up. A little quicker off the mark, I guess,

we have a couple of witnesses listed who are Alvarez & Marsal personnel, and there's two ways we can go there. I mean, if it

makes more sense to move them to later, and we could do that, but I recommend we go ahead. And if Your Honor did grant in

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full or in part the motion, we've still got that second phase; we can bring them back. THE COURT: MR. GAFFEY: THE COURT: Okay. That strikes me as the practical answer. Okay.

Mr. Kirpalani? I guess we'll hear from the movants first; that's how we're doing this. MR. KIRPALANI: you, Your Honor. committee. In terms of -- it depends a little bit in terms of whether we'd need to bring people back, depending on when Your Honor rules. The two committee witnesses -- Mr. Despins is Just to not break up the flow. Thank

Susheel Kirpalani of Quinn Emanuel, for the

going to be here this Friday, and Mr. Burian is going to be here next Monday. And if Your Honor were to rule and grant

Barclays' request -- for example, tomorrow, I think, for my team, I know we have about ninety documents that have been logged as the ones that we've withheld on this basis -depositions of Mr. Despins and Mr. Burian could happen this week, I'm sure, and not interrupt that. To the extent that they do -- Your Honor has not had an opportunity to yet rule on the issue or you still want to deliberate over it, I do intend to instruct Mr. Despins and Mr. Burian not to answer if they're asked the same types of

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questions. And if they have to come back after Your Honor's

ruling, they're both here in New York. THE COURT: MR. BOIES: Thank you. Your Honor, the advantage of letting them I don't have anything to

go first is that I agree with them. add to what they've said. THE COURT: MR. BOIES: Fine.

I think we can go forward.

And we can deal with any necessity of

bringing people back, which I think would be very limited, if it comes up. THE COURT: Okay. Terrific.

Here's how I view the issues, at least on a preliminary basis, and I'm being fairly transparent here and telling you what I'm having some trouble with in terms of the argument. The Barclays motion is one discovery motion, but it

really applies to three very different kinds of litigants and different sources of documentary evidence. I view the excerpts

that were played of the Deloitte deposition as actually much more damaging to the Barclays position than helpful in that I don't believe that the Deloitte witness has anything to offer that's relevant to the motion brought by the SIPA trustee, and the work product isn't even yet complete. As to the LBHI position, the fact that it seems to be undisputed that Alvarez & Marsal has turned over all work product generated through the end of September 2008, pursuant

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to the letter agreement providing a limited waiver, demonstrates to me that, at least as to LBHI, it's very difficult for Barclays to establish substantial need. case of the committee, I'm having some more difficulty. On the general question of whether or not the work product of these retained financial advisors qualifies for purposes of protection, I'm satisfied that it's all work product. I believe that work done by retained professionals in In the

a bankruptcy case may not always be work product, but the focus of this particular discovery, to me, indisputably is work product. In the case of Deloitte and the SIPA trustee, this is work being conducted by Deloitte in the context of actual litigation. The SIPA liquidation proceeding arises as a result

of the commencement of a litigation in the district court which is sent to me; that's how this happened. case. It's not a Chapter 11

And while it sometimes appears to be disarmingly like a The case itself is one identifiable

Chapter 11 case, it's not.

separately docketed litigation. Moreover, in the context of the SIPA liquidation, I am aware and take judicial notice of the fact that there's a lot of litigation within that litigation, particularly relating to the allowance of claims, the determination of what is or is not customer property, and similar matters. So I have little doubt

that whatever work has been done by Deloitte at the request of

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the SIPA trustee, and upon which the SIPA trustee either has relied or will rely in the future, is work product. As to LBHI, similarly I have no doubt but that work performed by Alvarez & Marsal may be work product. Marsal is in an ambiguous spot here. Alvarez &

Unlike FTI and Houlihan

Lokey who are professionals retained by a creditors' committee, Alvarez & Marsal has functioned as the purchased infrastructure for Lehman Brothers Inc. and for Lehman Brothers Holdings Inc. Alvarez & Marsal, during the early months of this bankruptcy, provided what amounted to outplacement employees for the lost Lehman employees. So it's not entirely clear to me that

everything that Alvarez & Marsal produced at any point in time is to be treated as if it's the work product of a financial advisory firm that has been retained to work in conjunction with outside counsel. But I am reasonably satisfied that during the period in question for which the limited waiver has already been given, Alvarez & Marsal was at least doing enough work that could be fairly characterized as advisory and, in consultation with Weil, Gotshal & Manges as debtors' counsel, to be deemed work product. As to the period thereafter, there may be room for debate and factual inquiry, but I'm not going to go there because I'm not going to grant the motion as it relates to that period of time, as it relates to LBHI. I believe that it

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becomes difficult, if not impossible, for Barclays, as to this particular part of its request, to demonstrate substantial need. Where I am going to spend some time deliberating is the request as it relates to the committee. I heard the

argument of committee counsel that the at-issue waiver question, to the extent that it relates to justifiable ignorance of the evidence, does not relate to what the committee advisors knew or thought they knew at a various point in time but, rather, documents and evidence and other parts of the record that I will come to learn during the course of the trial that were withheld from the committee, and presumably also withheld from the Court, at the time of the approval hearing on September 19th, 2008. The committee still makes the argument, which I found persuasive once before, that there's an objective test here, not a subjective one, and that the mental impressions of the committee's advisors are really completely irrelevant to the evidence that will be presented during the hearing. In opposition to that, Barclays argues that they have a substantial need to know what the committee understood about this very important sale transaction, not in September of 2008 so much as throughout the entire period from September 2008 through March 13th 2009 when the district court affirmed the sale order. Presumably the reason that they are so concerned

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about that is that they are looking for the proverbial smoking gun: the document or documents that would reveal an

understanding of the transaction at a sufficiently complete and comprehensive level to demonstrate waiver and estoppel and positions inconsistent with those being taken now. In effect, the substantial need that Barclays has for the material being withheld on the grounds of work product privilege is the substantial need to defend itself by being able to find facts thus far concealed, congruent with its theories of the case. information. I'm going to spend some more time thinking about the briefs that have been submitted and the arguments that have been presented, and will endeavor to decide this as promptly as I can, consistent with getting it right. But in terms of I can understand why they want this

preliminary indications of outcome, substantially for the same reasons stated by the Court in December of 2009, as to the work product of Deloitte and the work product of A&M after September 30, 2008, you should assume the motion will be denied. the request for FTI and Houlihan, you should make no assumptions whatsoever as to what I'm going to do, but I'll do it quickly, I hope. Now let's proceed. MR. GAFFEY: Your Honor, Movant's prepared to call its I have two minor housekeeping As to

first witness, Michael Ainslie.

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matters that will make things go, I think, a lot more smoothly as we proceed, both with Mr. Ainslie and the other witnesses. First, I'm pleased to report we have -- although I don't have the signed copy to put in to the court, we have reached some stipulations of fact, and they're signed off, Your Honor. And as I said at the pretrial conference, that puts us in a position, having gotten some but not all of what we want, to withdraw the motion in limine regarding admissions of fact. So

that's a motion that we can remove from the Court's docket and we'll send the appropriate notice to do that. THE COURT: MR. GAFFEY: I'm very pleased that it's been removed. And we'll also get Your Honor a copy of

the stip so you know what facts have been agreed. THE COURT: MR. GAFFEY: Great. Secondly, at the pretrial conference,

Your Honor will recall, we agreed that all documents -- all exhibits as to which no objection was lodged would be moved into evidence on the first day. And, again, I'm happy to

report there's quite a few of those, not as many as one would like, but I have -- what I was going to suggest is -- I put together a list of -- for the movant's side, those exhibits; that is, those to which there is no Barclays objection. And if

I could ask the Court to mark that as a court exhibit, we'll have a record of those by exhibit number rather than I have to read them all out now; there's several hundred of them. Does

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fine. that make sense? THE COURT: I don't mark exhibits, but if you want to

have me hold onto it in some identifiable fashion, I will. MR. GAFFEY: At the very least, Your Honor, I think it

would be helpful for you to have so if a document comes up and -- well, this confirms that there are no objections to it. THE COURT: Why don't you just hand it up and I'll

deal with it as I deal with all -MR. GAFFEY: THE COURT: Okay. -- my other papers: It'll just up here.

But it won't be an exhibit, unless you want it to be, in which case you'll have to mark it. MR. GAFFEY: It's not an exhibit, Your Honor. That's

We'll need maybe at the end of a court date to just put

these exhibit numbers into the record so there is a record of what's in evidence and what's not, by exhibit number. THE COURT: MR. GAFFEY: That's fine. Okay. And with that, Your Honor, the

movants are prepared to call their first witness, Michael Ainslie. THE COURT: your right hand. (Witness duly sworn) THE COURT: THE WITNESS: Please be seated. Thank you. Mr. Ainslie, good morning. Please raise

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MR. GAFFEY: Your Honor, we've also prepared witness If the

books, and I've supplied one to Barclays' counsel.

Court would find it useful -- what our plan is with respect to any witness, there's a book that contains the exhibits; we anticipate using a copy of the deposition transcript. THE COURT: MR. GAFFEY: THE COURT: MR. GAFFEY: I'd be very happy to have the book. Fine. Thanks.

Thank you. And if it's all right with Your Honor,

I'll hand one to Mr. Ainslie as well, in case he needs his transcript during -THE COURT: MR. GAFFEY: THE WITNESS: MR. GAFFEY: Sure. -- testimony? Thank you. So there's a dry run of all the And with that --

housekeeping, Your Honor. DIRECT EXAMINATION BY MR. GAFFEY: Q. A. Q.

Good afternoon, Mr. Ainslie. Good morning. Mr. Ainslie, if you could keep your voice up and into the

microphone, that would be quite helpful. Would you give the Court a brief summary of your education and business background, sir? A. Yes. I was an undergraduate at Vanderbilt University,

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studied economics and minored in math there, graduating in 1965. Following that, I was awarded a Corning World Travel

Fellowship and spent a year traveling around the world, studying economic development. And then following that year, I

returned and attended Harvard Business School where I graduated in 1968 with an MBA in finance. Subsequent to that, I went to work in New York as a consultant with McKinsey & Company for several years, and in the early '70s left consulting to become president of a real estate company that was a subsidiary of the Sea Pines Company at Hilton Head Island; spent almost five years doing that. And

in the mid-'70s, I think '75, I moved to Cincinnati to become chief operating officer of a company there called Enrin (ph.) Corporation, which was in the oil and gas and fertilizer businesses. While living in Cincinnati, I restored several homes and investment properties and became very involved with the National Trust for Historic Preservation, and in 1980 I was asked to come there as president and chief executive of the National Trust and moved my family to Washington and lived there for almost five years in that nonprofit national advocacy organization. And in the mid-'80s I was approached by an executive search firm to consider going to Sotheby's, and in, I think, late '84/mid-'84 I accepted that position and moved to New York

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and became the CEO of Sotheby's Holdings and a director of that company. In that role, I oversaw the worldwide auction

businesses, the real estate business and the financial services business of Sotheby's, all -- basically all of the businesses of Sotheby's. And I continued in that role until 1994.

After a decade of doing that, I chose to retire from that position and I set up an investment company of my own and have been very involved in the nonprofit world subsequently and served on several other boards. Q. And are you currently serving as a member of any board,

sir, any corporate boards? A. Q. Yes. Are you on the board of Lehman Corporate -- of Lehman

Brothers, sir? A. Q. A. Q. I am a director of LBHI, the estate, yes. And how long have you been on the board of LBHI? I believe my initial appointment was in 1996. And has your service on the board been continuous since

that time? A. Q. Yes. Are you on any committees of the board, or have you served

at any time on committees of the board? A. Yes, I served for the entire time on the audit committee. And beginning

I currently still serve on that audit committee.

last summer I became a member of the executive committee of the

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board. I also served for several years as a director of Lehman

Brothers Bank, which was a subsidiary, and chairman of that bank's audit committee. Q. I take it, as a member of the board, sir, you recall the

times in or around September of 2008 when ultimately Lehman filed a bankruptcy petition, correct? A. Q. I do. And to direct your attention to that time, sir, would you

describe to the Court what your activities were as a board member over the weekend of September 13th and 14th, just prior to the bankruptcy filing? A. Yes. On the 14th, which I think was Sunday, September We had a

14th, the board was called to New York for meetings.

meeting in the afternoon where we were briefed on possible sale prospects for the firm -- or parts of the firm. And we then

had a recess and reconvened later in the evening on Sunday night, really, and it was at that meeting that we were told that Barclays was no longer a prospect for buying the firm and that we, after long, long consultation with counsel, painful consultation, decided that filing a chapter proceeding was the best course of action. Q. Now, you referred to Barclays no longer being a prospect Had you been aware of any discussions

for buying the firm.

with Barclays prior to that weekend? A. Yes.

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Q. Could you describe to the Court what you knew or learned

about those discussions with Barclays prior to the weekend of the 13th and the 14th? A. We were apprised that there were two firms interested in One was Bank of America and

buying -- possibly buying Lehman: the other was Barclays.

And we were told, I believe on Sunday

afternoon, that there were issues with Barclays, that there were regulatory issues in the U.K. that might be insurmountable in terms of their getting approval to do this. And I think we

were also told that they might require a full shareholder vote, which would create a time delay that might be unacceptable. Q. So come the Sunday when the board is discussing whether or

not to file a bankruptcy petition, what's the state of play on Sunday with regard to potential acquirers of the firm? A. Sunday afternoon we were advised by Dick Fuld that he had

had a frustrating weekend with Bank of America, trying to get through to their CEO, and that he had finally been advised that they were not an interested party. We were not advised as to

what they were doing, which we learned later, as I recall it. We still believed during the afternoon that there was a real possibility of a deal with Barclays. There was some

degree of optimism about that, but we then adjourned for several hours and then were told in the -- upon reconvening that that now was a dead issue and was not going to happen. Q. And who was it that had told you it was a dead issue, it

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was not going to happen? A. Well, it was Dick Fuld, and I think Bart McDade was also

part of that conversation. Q. So from that point, sir, would you describe to the Court

the meeting of the board that resulted in the decision to file a bankruptcy petition? A. Well, we heard from our treasurer that there was going to

be very great difficulty funding the firm -- our CFO, excuse me; he'd been treasurer previously. We heard from bankruptcy

counsel what our responsibilities as a board were and what our options were. We had a very lively debate about whether that

was truly required at that point in time or whether we should attempt to go forward even given the difficulties of funding. And around 9 p.m. we were in the midst of those deliberations and we had an interruption. Dick Fuld was asked to, by his

assistant, to leave the meeting to take a call from the commissioner of the SEC and the general counsel of the Fed. I

don't know that we knew that when he left the meeting, but when he returned about five minutes later he told us they were on the phone and that they wanted to speak to the full board. So with some degree of exasperation, he put through Chairman Cox -- and I don't remember the Fed counsel's name -and they were on a speaker in the middle of our board room, and proceeded to tell us in rather oblique but rather clear terms that we needed to act immediately and that we needed to act --

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we needed to do what we needed to do. And we were at -What are you

several of our board members asked questions: saying?

Are you, the federal government, telling us to declare And they denied that they were but then said:

bankruptcy?

Your management knows what our opinion on this is, we told them at 4 o'clock meetings this afternoon, which had been that we needed to declare bankruptcy. Cox was very insistent. There was a question asked of

him, I recall, which was will you fund -- are you saying you will not fund the broker-dealer tomorrow if we don't declare bankruptcy? And after some hesitation, I think he answered no, But we basically asked him some questions He became somewhat

I'm not saying that.

about what was really going on here.

defensive after a few minutes and finally said I think we need to end this conversation, and fairly quickly he did so. We then spent a good bit of time, in fact perhaps a more lengthy time than we might otherwise have, debating not declaring bankruptcy because of the arrogance of what we perceived as a -- really, an inappropriate bit of advice. But

after, again, a long discussion with Weil Gotshal and our inhouse counsel Tom Russo and others, we really concluded there were no alternatives. So we voted sometime late that evening

to declare bankruptcy and have management implement that, which I think was filed in the wee hours of the next morning. Q. Now, after the bankruptcy filing, when was the next time

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that the board met? A. As I recall, the -- that was the 14th, the evening of the

14th, and I think the next meeting was a day and a half, two days later, early in the morning of September 16th. Q. And what did you learn would be the topic of that meeting

on the 16th? A. The -- there were several topics, but one of the

principals ones was the possible sale of the broker-dealer, which was the New York Lehman Brothers' business activity, to Barclays. There was also discussion and an ultimate resolution

of retaining Alvarez & Marsal to manage the affairs of the estate. I think there were some financing issues of debtor-inSo those were

possession financing that were also put forth.

the principal subjects of that September 16th meeting. Q. Did you receive any written materials describing what the

topics would be, or were -- did you receive any written materials, prior to the commencement of the meeting, about the business that would be addressed at the meeting? A. Q. A. Q. A. To my recollection, no. Did you attend the meeting? I did attend the meeting. And approximately what time of day did the meeting begin? The meeting was very early. I think the time called was

6 a.m.

That's when -- I was -- as I think most directors had,

returned home and participated by telephone.

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Q. Now, in the course of that meeting, did you underst -- did

you develop an understanding of the transaction that was proposed to take place between Lehman and Barclays? A. Q. I did. Okay. And who spoke at that meeting about the proposed

transaction? A. Well, there were several people that spoke, as I recall. One of our staff

I think Tom Roberts of Weil Gotshal spoke.

people, Mark Schaffer, I think, spoke at some time during the meeting. I'm sure that Dick Fuld spoke and Bart McDade. And

there were other lawyers, and I think a Lazard partner was also present and spoke to the board. Q. Do you remember the names of the other lawyers who were

there, apart from Tom Roberts? A. I think one of the lawyers was a man named Lubowitz for

Weil Gotshal. Q. A. Was Harvey Miller there? I am not certain. I don't remember him speaking. As I

said, I was on the phone, so it's hard to know and recall from a meeting about eighteen/nineteen months ago exactly who all was there. Q. A. Q. Do you remember the name of the person from Lazard? I think his name was Barry Ridings. And who spoke first about the nature and structure of the

transaction?

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A. I think -- Tom Roberts was the person who outlined the

overall structure of the transaction. Q. Would you describe to the Court what your understanding

was of the outline -- of the structure of the transaction after Mr. Roberts outlined it? A. Well, it was actually quite simple, and it was basically a

transaction whereby the assets and the liabilities were equal. And at some point during the meeting it was described as a wash. And there was some discussion about what was included in

the sale, particularly questions about the asset management division, most of which was known as Neuberger Berman, which we were told was not included. And there were discussions about

obligations that were being assumed -- would be assumed if the transaction went through by Barclays, having to do with employee obligations, both severance and bonus, I believe. there were also contract issues that Barclays would assume, contract claims. Q. Now, you said, sir, the word "wash" was used. Do you And

remember if Mr. Roberts himself used the word "wash"? A. I am not certain who used it. I am quite certain that the

concept of assets and liabilities equating was described by Tom Roberts. There was a later conversation amongst the directors It's possible that's

and Tom Russo, summed up the transaction. when the word "wash" was used.

So I'm not certain exactly who used it, but it was used in

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the course of the meeting. Q. Okay. Now, in the course of the meeting where Mr. Russo

and the directors had a discussion and summed it up, were the advisors still present for that portion of that meeting? A. Q. Yes, I believe so. Okay. Now, in addition to Mr. Roberts, who else described

the transaction in terms -- if anyone, in terms of its structure? A. Well, I remember at the end of the meeting Tom Cruickshank

kind of led a summary -- Tom was chairman of our audit committee and one of our board members -- and brought together the key elements. And there was some interaction, as I recall,

between him and Tom Russo in describing -- Tom was our general counsel and someone we had known for a long time. And that was

the -- kind of the backend of the conversation where the overall structure was explained. Q. Now, when this discussion took place of a wash or an

exchange of assets and liabilities, do you recall, sir, whether particular figures were used about the value of the assets, the value of the liabilities? A. I do not recall specific numbers from that meeting. I

recall very clearly the deal structure, because we had been briefed already that we were now working for the creditors as the board of Lehman, the Lehman estate. And we were concerned

about claims, and this deal structure seemed to eliminate the

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possibility of a loss to Lehman or claims that would more than offset the value of the assets being transferred. It was a

very simple deal in reality, assets equal liabilities, and that sticks with me very clearly. Q. You mentioned a discussion about a loss to Lehman. Was

there any discussion about a gain to Barclays upon the transaction? A. Q. No, not that I recall. At any part (sic) in the meeting, to your knowledge, sir,

was the board told it would be a condition of the transaction that there be an immediate day-one gain for Barclays? A. Q. No. Would that have been -- was that consistent with what you

were told at the meeting? A. Q. No, it would not have been. Was the board told at any point it was imperative there be

a day-one gain for Barclays upon conclusion of the transaction? A. Q. No. Okay. What was your understanding of the state of the

proposal vis-a-vis discussions between Lehman and Barclays? Had there been a documented deal? A. Q. I'm sorry, the last statement? Had there -- had the deal been documented at the point the

board was told about it? A. Um --

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Q. A. Is there a written agreement, sir? There was -- to my knowledge, there was no written

agreement, and in fact Bart McDade was dismissed from the meeting before the conclusion so that he could go resume work on the transaction. Q. Did you ever see a copy of the written agreement embodying

the transaction, the deal between Lehman and Barclays? A. Q. No. Did you have an understanding at the time of the board

meeting whether the transaction would have to be approved by this Court? A. I believe we had had a briefing that we were -- we, the

board, were part of a stepped process that would -- a major transaction such as this would go from Alvarez & Marsal to us, to the creditors' committee and to Judge Peck. So, yes, I -- we were aware that this would go forward to the bankruptcy court. Q. Now, after the discussion, after the presentations by

those present and the discussion you described between Mr. Russo and the boards where the deal was summarized, what did the board do with respect to the proposal of a transaction with Barclays? A. We passed a resolution that basically said that the

outline of the transaction as we had had it presented was approved and management was directed to implement it.

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Q. Q. Was there any part of the transaction, to your knowledge,

sir, that the board approved, that incorporated an asset/liability mismatch in Barclays' favor? A. No. As I said, the assets and liabilities, including

assumed obligations, were supposed to match. Q. Did there come a time when you saw the minutes of the --

were minutes generated of the September 16th, 2008 meeting? A. Q. A. Yes. Have you seen those minutes, sir? I have. MR. GAFFEY: THE COURT: Your Honor, may I approach? Yes, you may.

Mr. Ainslie, I'm showing you what we've marked as Movants' Do you recognize the document?

Exhibit 9 in evidence. A. Q. Yes.

It appears to be those minutes.

As a matter of course, sir, were board members supplied

with minutes after a meeting? A. Q. Yes. As a matter of course, are board members supplied with

drafts of minutes? A. Q. No. Prior to your becoming involved as a witness in this case

by deposition or by appearing today, have you ever seen drafts of those minutes? A. No.

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Q. Would you take a look, sir, at page 3 of Exhibit 9, sir,

the minutes? A. Q. Yes, I'm seeing -Well, let me ask you as a general matter, Mr. Ainslie,

have you reviewed these minutes prior to testifying today? A. Q. Yes, I have. And in your view, are they consistent with a transaction

you had described to you as a member of the board on the 16th of September, 2008? A. Q. I think generally, they are. And if you would take a look at page 4, sir, in the third

paragraph from the bottom that begins, "Mr. Russo asked for any questions or comments." A. Q. Yes, I do. Do you understand that to be a reference to the discussion Do you see that?

you referred to before where Mr. Russo spoke to the directors and the deal was summarized? A. Q. Yes. Do you have a recollection, sir, if in that discussion, in

that portion of the meeting, the word "wash" was used? A. Q. it? A. I'm -- I believe that it was Tom Russo who was summarizing I believe that it was. Do you have a recollection of who in that discussion said

the director's comments as we outlined the elements of the

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deal. Q. And directing your attention, sir, to page 5 of the --

actually, page 6 of the minutes, sir, to the paragraph entitled Authorization of Asset Purchase Agreement. A. Q. Yes. And you'll see that from page 6 and overleaf onto page 7, Are those the resolutions you You with me?

there are three resolutions.

told the Court about that authorized the transaction between Lehman and Barclays? A. Q. Yes, that is -- those are the resolutions. Okay, now when the board approved the transactions, sir,

did you have any knowledge or involvement in the actual valuation of the assets being discussed? A. Q. No. Would that have, in your view, been normal for a board

member to get involved in the valuation of the assets being discussed when considering whether to authorize an asset purchase agreement? A. No, not only would it not have been normal, it would have That's what management is there for.

been highly abnormal. Q.

After the conclusion of the September 16th, 2008 meeting,

did you at any point receive news as to whether the transaction had been signed up into a written agreement? A. yes. I believe that was reported to the board at a later date,

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Q. Q. And did you learn whether or not the deal was approved by

the Court? A. I don't recall the specifics of that report, but I knew

the deal had gone forward, so -Q. Did you attend any of the hearings before the Court

considering the approval of the deal? A. No. MR. GAFFEY: THE COURT: May I consult for one second, Your Honor? Yes.

Sir, you referred, when we talked about an earlier Who was it you were

meeting, to the CFO of the -- of LEI. referring to? A. Q. A gentleman named Ian Lowitt.

And had you worked with Ian Lowitt prior to the September

16th, 2008 board meeting? A. I had both seen him at board meetings and I served on the

board of Lehman Brothers Bank, as I mentioned earlier, and Ian Lowitt was chairman of that board for several of the seven or eight years I served on that board, so I knew him reasonably well. Q. Do you recall of Mr. Lowitt participated in the Sunday

night board meeting you described where the board decided a bankruptcy filing was necessary? A. I don'5 think he was at that meeting; I think he was at

the afternoon meeting.

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A. Q. Q. him? A. Q. And when he was at the afternoon meeting, did you observe Did you see him? Yes. And how did he appear to you? MR. BOIES: THE COURT: MR. BOIES: THE COURT: Objection, Your Honor. Basis? Foundation, conclusion, opinion. Why don't you restate the question? Was he --

What was Mr. Lowitt's manner at that meeting?

what was his manner at that meeting? MR. BOIES: THE COURT: Same objection, Your Honor. Overruled. It's simply calling for a

mental impression, an observation. MR. GAFFEY: Thank you, Your Honor.

Well, I think my observation would be that as probably was

understandable, Ian was under a great deal of pressure and stress. He appeared somewhat disheveled, he had tennis shoes It was on a

that were untied on, he had blue jeans on. weekend.

But he was clearly under pressure and under stress,

in my opinion. Q. Now, did Mr. Lowitt participate in the September 16th

meeting as well? A. Q. Yes, I think he was on the phone for that. And did you hear Mr. Lowitt speak when you participated at

that meeting?

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A. Q. A. Yes. What did Mr. Lowitt say about the transaction? He basically said that the ability to fund our business on

a going-forward basis was highly -- he did not think we could fund the business going forward, the -- the New York brokerage company, the broker-dealer. Q. To your knowledge, sir, was that view shared unanimously

across the board that there was no way Lehman could survive the day without this transaction? A. I can't speak for the other board members because I don't

think I've ever had any conversation of -- particularly since we did vote to go ahead with Barclays. I remember myself

feeling that he was probably right that we couldn't rely on traditional sources of funding, but I was not at all sure, given what Commissioner Cox had said Sunday night, that there might not be government funding to keep LBI functioning for a short period of time. Q. And at the end of the day, why did -- to your knowledge,

why did -- did you vote in favor of approval of the Barclays transaction? A. Q. A. I did. Why -- what was your reason for that? I felt the break-even, the assets-equal-liabilities I feared

structure of the deal minimized downside exposure.

that there could be enormous claims from the tens of thousands

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witness. THE COURT: THE WITNESS: THE COURT: Approaching with a bottle of water, yes. Thank you. Mr. Boies, is -- who's -- oh, you're going of customers who held accounts with LBI. And I felt there were

other reasons to support it, including maintaining some portion of the jobs and the businesses that would be preserved under Barclays. Q. Did the view have anything -- did your view that this was

a deal that should be approved derive in any part from the description of the structure of the transaction as you'd heard it at the meeting? A. Absolutely. MR. GAFFEY: I have nothing further, Your Honor. I

tender the witness to the other movants. Your Honor, may I approach? I think I have a parched

to be questioning further? MS. TAGGART: CROSS-EXAMINATION BY MS. TAGGART: Q. Good afternoon, Mr. Ainslie. I'm Erica Taggart from Quinn I am, very briefly.

Emanuel Urquhart Oliver & Sullivan on behalf of the creditors' committee. THE COURT: Can I just stop for one second. I'm not

trying to interrupt your examination at all, but just so I have

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Q. a better understanding as to how this is likely to play out, in terms of presentation. Is it contemplated that each witness --

I'm not trying to limit anybody's ability to question, but each witness will be questioned serially, first by LBHI, then by the creditors' committee, and then by the SIPA trustee, to the extent the trustee chooses to become involved? Or is this an

exceptional start that we're having here because we're having additional questioning. MS. TAGGART: I think my understanding was that it

would -- there would be an opportunity for all three movants to ask questions serially. THE COURT: may not be exercised. MS. TAGGART: THE COURT: That's correct. All right, fine. Go ahead. So there's an opportunity, but it may or

I just want to ask about one part of the minutes, so maybe

we could bring up the minutes again, that's Trial Exhibit 9, and in particular, page 4. And I'd like to direct your It starts, "Mr. Ridings".

attention to the third paragraph.

And I want to ask you a question about the first two sentences. It says, "Mr. Ridings of Lazard advised the directors that the applicable standards for this sale under Section 363 of the Bankruptcy Code are to obtain the highest and best price and a price greater than liquidation value. He advised the directors

that he believes these tests can be met, but that it will be a

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close decision for the bankruptcy court judge." My question

for you is do you recall any discussion about that at the meeting, that being that there would be a best price and a price greater than liquidation value? A. I recall the advice that Mr. Ridings gave us. I can't

recount for you discussion that pursued -- you know, ensued. Q. Did you have an understanding at the time about what price

greater than liquidation value meant in this context when you were voting to approve the sale transaction? A. I don't think we had a clear idea of liquidation value or

price, but I think we had a sense that it could be an openended negative series of claims on the -- on the estate. Q. And was it your understanding after this discussion and

when you voted to approve the sale transaction, that the price, whatever it was that Barclays was paying, was going to be more than a liquidation value? A. Yes, we felt that. MS. TAGGART: MR. CAPUTO: THE COURT: MR. BOIES: CROSS-EXAMINATION BY MR. BOIES: Q. Good afternoon, Mr. Ainslie. I don't believe we've met, That's all my questions. No questions, Your Honor. All right, Mr. Boies, now it's your turn. Thank you, Your Honor.

but my name is David Boies, and I represent Barclays in this

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transaction, in this case. A. Q. I do. Now, you testified that you'd been a director of LBHI Were you also a director, at any time, of LBI? You understand that?

since 1996. A. Q. A. Q. No.

Did you ever have any position with LBI? No. You testified that you were told prior to the Sunday board

meetings on September 14th that there was a possible prospect of Barclays buying Lehman. A. Q. Yes. When were you first apprised of the possibility that Do you recall that?

Barclays would buy Lehman? A. Q. A. I cannot give you a date. Approximately. We probably had somewhere between ten and fifteen board And there were a I would -- I would

meetings in late August and early September. number of possible transactions discussed.

guess that the date was somewhere in the early September range, those meetings. Q. Okay, now, you testified that there came a time when you

were told that that deal was not going forward, correct? A. Q. I did, yes. And then there was a meeting on September 16th in the

morning where you were told that there might be a transaction

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with Barclays after all, correct? A. Q. Yes. And the transaction that was being considered on September

16th was a very different transaction than the transaction that had been considered with Barclays before September 14th, correct? A. Q. Yes, it was. When were you first apprised of the fact that there might

be a second transaction with Barclays? A. It's possible, but I cannot recall, specifically, the

communication that set up the meeting for the 16th, that that was discussed in the notice of the meeting. I was traveling

back to my home that day; I do not recall exactly how I got the communication of that meeting. It's possible at that time

there was a conversation about that, but I can definitively say it was the morning of the 16th when we were briefed on the transaction we just discussed. Q. That is, you recall being told about it during the board

meeting, and you don't recall one way or the other if you knew about it before? A. Q. That's correct. Now, at the board meeting, you indicated a number of Were any of the people who described

people who were there.

the transaction people that were actually participating in negotiating the transaction with Barclays, as you understood?

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A. Yes, the lead negotiator was Bart McDade, and he was at

the meeting for part of the meeting. Q. My question was whether anyone who was participating in

the negotiations discussed the structure of the transaction. Did Mr. McDade -- is it your testimony he discussed the structure of the transaction at this meeting? A. I'm sorry, I misunderstood you. I thought you said were

they at the meeting. conversation. Q.

I think McDade participated in the

He was not one of the main presenters.

Do you recall anything at all that Mr. McDade said at that

meeting? A. Q. A. Not in specific, no. In general, do you remember anything he said? There was general discussion and agreement with the

overall structure of the deal that Tom Roberts initially outlined and others reinforced later, and it's my recollection that Bart McDade concurred with that. Q. So it's your recollection that at this meeting, Bart

McDade concurred in something that Mr. Roberts had said. A. Perhaps not by saying "I concur," specifically, but it was

an open discussion, directors were asking questions, he was answering, and should he have disagreed, there would have been plenty of chances to say so. Q. When you say there was an open discussion and he was

answering, do you mean that Mr. McDade was answering questions

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of directors at this meeting? A. Q. A. Q. I think he -Is that your testimony? I think he was, yes. And you recognized Mr. McDade's voice because you weren't

there; you were on the telephone, correct? A. at -Q. And so it is your testimony here under oath that Mr. I knew him well for probably twenty years of his work

McDade, at this meeting, answered questions of the directors as to the nature and structure of the transaction, is that correct? A. Q. That's my recollection. Now, did Mr. McDade say that the transaction was going to

be, in your words, a wash? A. Q. A. I don't recall him saying that. Did Mr. Roberts say that it was going to be a wash? As I said earlier, Mr. Roberts described the nature of the

transaction as an asset liability -- an asset purchase where the assets and liabilities would equate, would be equal. don't know that he said the word "wash". Q. Well, let me ask you to look at the book that counsel gave I

you, and Exhibit -- Movant's Exhibit 9, and he directed your attention to page 4, and I'd like you to turn to page 4 again. A. Yes.

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Q. And do you see in the paragraph that he directed your

attention to, the one that begins, "Mr. Russo asked for any questions or comments" -A. Q. I do. -- and do you see at the end that it talks about

"Barclays' assuming liabilities including employee liabilities and contract cure amounts basically equivalent to the assets. Do you see that? A. Q. I do. And is that what Mr. Russo said, that these assets and

liabilities would be basically equivalent? A. The word equivalent was used throughout the meeting. I

don't recall, specifically, "basically equivalent" being stated, but that's what the minutes say here. Q. And you had an opportunity to review these minutes,

correct sir? A. Q. Subsequently, yes. By the way, when did you first see a copy of the minutes

from this meeting? A. I can't tell you. I don't recall. We had subsequent

board meetings, and normally we review the minutes before each subsequent board meetings, so I have to think that was probably when, but I can't give you the date of that meeting. Q. A. When was the next board meeting? I don't know.

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Q. A. Approximately. There was a telephonic meeting about five or six days

later, as I best recall. Q. A. Q. A. Q. A. And after that meeting, when was the next meeting? I'm sorry, I can't tell you. Approximately. I can't tell you. Within -We began meeting regularly with Alvarez, with Bryan

Marsal, and I can't recall the exact dates we're talking about. Q. But you would be meeting regularly -- you wouldn't go by a

month without meeting, correct? A. Q. That's -- that's correct. How many meetings do you think you had of the board

between, say, the time of September 16th and a month later, October 16th? A. Well, as I mentioned, there was a meeting five or six days

later; I don't recall the next meeting either, but it probably would have been, you know, within the next month. answer might be two -Q. A. Um-hum. -- but I'm -- I haven't looked or researched those So maybe the

numbers. Q. Now, at any of the meetings that took place over the month

following September 16th, were you furnished a copy of the

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minutes for the September 16th meeting? A. I think I answered I don't recall when I saw the minutes

for the first time. Q. Do you recall -- does it refresh your recollection that a

month afterwards, you still had not seen a copy of the minutes? A. Q. I don't recall that. Did anybody have any conversations with you about these

minutes going through numerous drafts as people tried to put into them things they thought would be helpful later. anybody tell you that? A. Q. No one told me that. Would that be consistent with what you think ought to be Did

done in preparing minutes? A. Q. That's speculation. I don't know that that was done.

No, but I'm asking you whether, as a member of the board,

you would think that was an appropriate thing to do? A. All I know is this generally reflected the meeting, the It was an

contents of the meeting that I participated in. accurate description. Q.

Well, sir, maybe I can hand out a binder, too.

You'll

find it contains some drafts of the minutes. A. Thank you. MR. BOIES: And Your Honor, I believe that the

exhibits in this binder, Exhibits -- BCI Exhibits 473 -MR. GAFFEY: Excuse me, Your Honor, I don't mean to

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interrupt, but could I have a copy of the binder? MR. BOIES: Oh, it's coming. I apologize.

-- that the exhibits that are in this binder, I believe, are exhibits as to which the movants have no objections, and I would, therefore, offer at this time BCI Exhibits 473, 765, 766, 770, 771, 773, and 789. THE COURT: these exhibits? MR. GAFFEY: THE COURT: MR. CAPUTO: THE COURT: No objection, Your Honor. Does that apply to everybody else? No objection, Your Honor. Okay, they're admitted. Is there any objection to the admission of

(Various drafts of minutes of September 16th Lehman board meeting were hereby received into evidence as BCI's Exhibit 473, 765, 766, 770, 771, 773, and 789, as of this date.) Q. 771. Mr. Ainslie, would you turn to tab 2, which is BCI Exhibit And I want you to turn to page 7 of these draft minutes.

And in particular, I want to focus on the paragraph that is a draft of the paragraph we've just been talking about, the one that begins, Mr. Russo asks for any questions or comments. A. Q. I see that. And I want to direct your attention to the last sentence

there, and you again see the same language that I directed your attention to before, talking about with Barclays assuming liabilities basically equivalent to the assets, do you see

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that? A. Q. I do. And there, it says that the liabilities that Barclays is

assuming is sixty-four billion dollars, and the assets that Barclays is getting is seventy billion dollars. that, sir? A. Q. A. I do. Was that said at the meeting, sir? The rest of the sentence was said, which was "plus Do you see

assuming employee compensation liabilities and contract cure liabilities. Q. Do you have my question, sir? My question is whether at

the meeting that you attended, that you've testified about, you were told that Barclays was assuming liabilities of sixty-four billion dollars and getting assets of seventy billion dollars. Were you told that, sir, at that meeting? A. As I said earlier, I do not recall the numbers that were I do

used in the meeting; this is nineteen months or so ago. recall the statement I made earlier. Q.

Are these numbers in any way inconsistent with what you

were told at the meeting? A. The assets were supposed to equal the liabilities. So

you're asking me do the employee cure -- employee compensation and cure amounts equal six billion because that would be what would be required for this to be what I was told at the

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meeting. Q. You say cure amounts. This doesn't say anything about

cure amounts right here, does it, sir? A. Q. That's what I was told at the meeting. I'm asking whether what is written in these draft minutes

is or is not inconsistent with what you claim you were told at this meeting. A. Can you answer that question, sir?

I, you know, this is not precisely what I was told in the

meeting. Q. My question, sir, is whether it is inconsistent with what

you were told at the meeting? A. I think the answer is it is inconsistent in the -- in the

definition of assets equal liabilities. Q. Now, do you have any explanation for how something that is

inconsistent, as you say, with your testimony as to what happened in this meeting found its way into these draft minutes prepared by LBHI? A. I don't know who wrote these or how they put them

together, no. Q. Okay, let me ask you to look at tab 3, Exhibit 473. This

is another draft of the minutes. page 5.

And I'd like you to look at

And do you see there another draft of the paragraph

we've been talking about, do you see that? A. Q. Yes. And you again see the language with Barclays assuming

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liabilities of sixty-four billion dollars, basically equivalent to the assets of seventy billion dollars, plus assuming some employees and accounts. A. Q. I do. And although there were other edits that have occurred, That's the same as Do you see that?

that portion has not been edited, correct? the one we saw in the previous draft? A. Q. A. Q. 765. I believe so. I'm sorry? I believe that's correct.

Okay, now let me ask you to look at tab 4, BCI Exhibit And I'd ask you to turn to page 4. And again, although

some changes have been made to these draft minutes, the provision that I've been directing your attention to that has the sixty-four billion dollars and the seventy billion dollar figure in it has not been changed, correct? A. Q. That has not been changed. Now, let me ask you to look at tab 5, BCI Exhibit 766. And do you see again, first full paragraph

And go to page 7.

on the page, another draft of Mr. Russo's paragraph that we've been talking about? A. Q. Yes, I see that. And you see in this draft as well, you have the reference

to the sixty-four billion liability estimate and the seventy billion dollar asset estimate, correct?

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A. I consider employee, whatever the statement it means, to So I don't consider

be liabilities at the end of the sentence. it to be sixty-four billion of liabilities. Q.

Well, what it says here is that Barclays is assuming

liabilities of sixty-four billion dollars, basically equivalent to the assets of seventy billion, plus assuming some employees and accounts, correct? A. Q. That's what it says. Okay. And that's the same language that we've seen in all

the prior drafts we've looked at, right? A. Q. Yes. Now, would you turn to tab 6, BCI Exhibit 770, page 7? Ad

do you see the same language in this draft as well? A. Q. I do. And if you turn to tab 7, BCI Exhibit 773, and turn to

page 5, at the top of the page, first full paragraph, do you see that exact same language again, in this draft? A. Q. Yes. Now would you turn to tab 8, BCI Exhibit 789. This is

another draft of the minutes. correct, sir? A.

This one has a cover e-mail,

I haven't seen this before, but it -- I guess that is a

cover e-mail. Q. Yes, and the cover e-mail is dated October 28, 2008,

correct sir?

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A. Q. Yes. This is a month and over a week since the September 16th

meeting, correct? A. Q. Yes. And this is minutes being sent around including to lawyers

for further review, correct? A. Appears to be sent to Rod Miller; I don't know if it was

sent around. Q. Well, do you see it was sent to Tom Roberts, up in the

right-hand corner? A. Oh, I'm sorry, I was looking at "forwarded by". Okay.

Yes, now I see it. Q. A. Q. And you know he's a Weil, Gotshal partner, correct? Yes, he is. And sent to Lori Fife, another Weil, Gotshal partner,

correct? A. Q. Yes. Now, turn to page 4, and the third full paragraph on that

page, do you see, again, the same language that we've been talking about with Barclays assuming liabilities of sixty-four billion dollars, basically equivalent to the assets of seventy billion dollars, plus assuming some employees and accounts. You see that, sir? A. Q. Yes, yes, sir. Now, you have said a number of times that the employees

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A. Q. Q. and the accounts that were here, you thought, related somehow to liabilities. A. Q. here? A. Q. I don't know. Were they accounts at places like OCC and DTC, is that the Yes. Okay, now, what were the accounts that were referenced Did I understand you right?

accounts that were being referenced? A. I don't know the -- what's being referred to by

"accounts". Q. You do know that Lehman had various exchange-traded

derivative accounts that had margins; you know that from your service as a director, correct? A. I'm certainly aware of that activity, that business

activity, yes. Q. A. Q. Is that the accounts that were being talked about here? I have to repeat, I don't know. Did you ever ask? MR. GAFFEY: Objection. Foundation.

Did you ever ask at this September 16th board meeting? THE COURT: Okay, the objection's mooted by the

modification of the question. MR. GAFFEY: Thank you.

I don't recall asking about accounts at this meeting. Now, it also talks about assuming some employees. Did you

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understand that Barclays wanted to assume the employees? A. Q. A. Q. Yes. Did you understand why that was important to Barclays? It was important to continuing the businesses. And did you believe that Barclays considered assuming

those employees to be a liability or an asset to Barclays? A. I can't assume what Barclays assumed. I know what we were

told, which was they were assuming obligations with regard to those employees. Q. They were assuming obligations for those employees, but

they were also getting the employees, correct, sir? A. Q. Yes. And did you have any understanding on September 16th as to

whether Barclays thought that the net of all that, getting the employees with whatever obligations were there, was an asset for Barclays or a liability for Barclays? understanding about that? A. Q. A. Yes. And from whom did that understanding come? I think from Tom Roberts, initially, and others throughout Did you have an

the conversation at the board meeting where it was discussed that they were going to assume obligations to pay those employees, should they be terminated, and pay those employees accrued bonus obligations. Q. My question, sir, and I want to -- maybe I'm not being

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of mind. THE COURT: Sustained. Q. Did you have an understanding, Mr. Ainslie, at the It does go to Barclays' state of mind. clear -- is I understand that you've said that Barclays was assuming obligations with respect to employees. A. Q. Right. I understand that you've said that Barclays wanted to get

the employees because the employees were valuable to Barclays, correct? A. Q. Yes. Now my question is whether you had an understand as to

whether the net effect, as far as Barclays was concerned, the net effect of getting the employees, which was a good thing, compared to the effect of having obligations to those employees, which might be a liability, was that net, after taking both of those into account, something that Barclays thought was an asset or a liability. MR. GAFFEY: THE COURT: MR. GAFFEY: Objection. Basis for the objection? Foundation. It goes to Barclays' state

September 16th board meeting, whether Barclays believed that the combination of the advantage of having the employees and the possible disadvantage of having obligations to those employees, whether the net of that was considered by Barclays

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to be an asset or a liability, a positive or a negative. MR. GAFFEY: MR. BOIES: Same objection, Your Honor. I'm here only asking for the witness's

understanding at the board meeting. THE COURT: If it's only his understanding, he can

certainly say that he either had one or he didn't have one, and if he didn't have one, he can say that. A. I did not have an understanding of Barclays' view of that

issue. Q. A. Q. One way or the other? One way or the other. And you never asked anybody at the meeting on September

16th what Barclays' understanding was, did you? A. Q. No. In fact, at that meeting, neither you nor any other member

of the board of directors ever asked what Barclays' understanding was of the transaction at all, correct? A. We were the Lehman board and we were asking the questions And I don't recall anyone asking

about Lehman's position.

about what Barclays' point of view was. Q. Okay. Now, let me go back to the book that your counsel And

gave you, and I want to go back to Movant's Exhibit 9.

counsel, I believe it was for the committee, directed your attention to pages 6 and 7 of these minutes where the resolution authorizing the asset purchase agreement is; do you

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see that? A. Q. I do. And I believe you testified that this accurately reflected

what the board had approved on September 16th, correct? A. Yes, the resolution on the next page which references the

lawyers' description of it incorporates the outline I gave earlier. Q. Um-hum. Now, if you look at the second paragraph, the

resolved paragraph, do you see that? A. Q. I do. It says "resolve that each authorized officer of LBHI is

individually authorized, empowered" and it goes on with some lawyer language "to negotiate, prepare, execute and deliver the asset purchase agreement substantially in accordance with the material terms described to the board of directors by counsel on the date hereof". A. Q. Yes, sir. And then it goes on to say, "with such changes, additions, Do you see that?

and modifications thereto as such authorized officer shall deem necessary and appropriate." A. Q. A. Yes. Who was the authorized officer? I think that Bart McDade was authorized to negotiate the Do you see that?

agreement. Q. Okay, and was it your understanding that Mr. McDade, as

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the authorized officer, could make such changes, additions, and modifications to the asset purchase agreement as he deemed necessary or appropriate? A. Q. As long as it was substantially in accordance. Well, it says "substantially in accordance with the

material terms ... with such changes, additions, and modifications", correct, sir? A. Q. A. Q. A. Right. Did you see this resolution at the board meeting? It's my recollection that we did see this resolution. At the board meeting? Yeah, we either saw it or it was read to us. I cannot That's what it says here.

recall. Q. A. Q. And either way, you approved it? Yes, we did. Everything you know about the asset purchase agreement

comes from what you learned at that meeting on September 16th, correct? A. Q. Yes, that's correct. That is, you didn't receive any materials before, you

didn't receive any materials afterwards, is that correct? A. Q. I never saw the asset purchase agreement -And you never saw the asset purchase agreement itself,

correct? A. Correct.

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Q. A. Q. And you never asked to see it, correct? I would not have considered it appropriate. Do you know if whether there were any changes made to the

asset purchase agreement after September 16th? A. It was my understanding, as we discussed earlier, that it I don't think it even

was still in formation at that time. existed on September 16th. Q.

Do you know whether there were any changes to what you

refer to as the structure of the deal after September 16th? A. I believe there were, but we were never notified as a

board. Q. A. Q. You were never notified as a board of the changes? No. When did you first find out that there'd been these

changes? A. At some point in late '08, Bryan Marsal reported to the

board that there were issues with the transaction that were being fully investigated by Alvarez & Marsal. I believe it was

in late '08; it may have been early '09 at a board -- at a telephonic board call. Q. A. He advised us of this.

Did he tell you what the issues were? Not in detail, but that there were questions about whether

the assets conveyed were -- were the appropriate -- the appropriate level. Q. I know it's been a while since late '08 or early '09 --

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A. Q. Right. -- but can you tell me as best you can, sitting here under

oath, when that first conversation occurred when you were told that there were some changes to the structure of the APA agreement that you'd approved? A. date. Q. A. Approximately, your best approximation. I think I just gave it to you. It was either late '08 or The answer is no, I cannot tell you. I don't know the

early '09. Q. And until -- and when you say late '08, are you talking November?

about December? A. Q.

Somewhere in that range, November, December, or early '09. Now, when you were told that there had been these changes

to the basic structure of the APA after September 16th, were you surprised? A. Q. A. Yes. Did you ask why those changes were made? It was presented as a work-in-progress by Bryan, and there

were not a lot of questions asked, and I did not ask questions. Q. Okay, so you didn't ask at that time, why there had been

changes to the basic structure of the APA that you approved on September 16th, is that your testimony? A. Q. That's correct. Did there ever come a time when anybody told you or you

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asked why there had been some basic changes, or these changes to the basic structure of the APA that you had approved on September 16th? A. We were, as I said -MR. GAFFEY: Your Honor, can I ask, for privilege

issues, given that there's no time period on that, that the witness first answer yes or no so I can watch for privilege a bit more carefully? MR. BOIES: THE COURT: MR. BOIES: or no questions. THE COURT: While we're at a pause, and I -- I'm just I support that request, Your Honor. Fine. How are you supporting that?

That I would ask yes or no answers to yes

noting that it's getting deeply into our lunch hour, I'm wondering if we're close to concluding the cross or whether or not there's going to be some extensive additional examination. MR. BOIES: time to break. THE COURT: Why don't we do that, then. And this is Your Honor, I think this would be a good

the first time that we're breaking with a witness who is in the midst of cross-examination, and I think the understanding is that the "rule" applies, namely that counsel for the movants, frankly, counsel for anyone or any other party, shall not engage the witness in any discussion as to the substance of his testimony, either testimony that's been given or testimony that

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witness. MR. GAFFEY: MR. BOIES: He's coming. Your Honor, while the witness is taking might be given. That doesn't mean that he's in isolation. He

can talk about the rain that's outside, assuming it's still raining, or his personal needs, whatever they may be. But he's

otherwise to be in a cone of silence with respect to the subject matter of his testimony. MR. BOIES: THE COURT: Thank you, Your Honor. And that is, I think, at least my --

today's articulation of the rule, which I think is well understood by litigators and will apply to not only this witness but to any other witness throughout the course of the hearings. And we're adjourned until 2 o'clock. MR. BOIES: Thank you, Your Honor.

(Recess from 12:54 p.m. until 2:04 p.m.) THE COURT: Please be seated. I don't see the

the stand, counsel and I agreed that subject to the Court's views, obviously, that we would not invoke the rule in terms of excluding new witnesses. We obviously are going to apply the

rule the Court talked about in terms of not talking to a witness while they're on the stand, but with respect to the other so-called rule that witnesses should not be in the courtroom while another witness is testifying, if it's

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acceptable to the Court -THE COURT: MR. BOIES: THE COURT: It's perfectly acceptable. -- we would not impose that. I was simply dealing with a lunch break

while cross-examination was in process. MR. BOIES: THE COURT: MR. BOIES: THE COURT: All right, thank you, Your Honor. Which I think, by the way, is a good rule. We all agree on that, Your Honor. Fine.

RESUMED CROSS-EXAMINATION BY MR. BOIES: Q. Mr. Ainslie, let me direct your attention to the question

that was pending when we broke which, as your counsel indicates, is a yes or no question. Did there ever come a time when you asked why there had been the changes to the basic structure of the APA that you had approved on September 16th that you indicated had been made? A. Q. No. Did there ever come a time when anybody told you why there

had been basic changes to the structure of the APA that you had approved on September 16th? A. Q. A. Q. I think I'd have to say yes to that. When was the first such time? When Bryan Marsal told us that there was a discrepancy. And that would have been late 2008, early 2009, is that

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correct? A. Q. Yes. And as you sit here now, you can't place it any more

precisely than that, correct? A. Q. A. Q. That's correct. And you were told this on a telephone call, correct? I believe it was a telephonic board meeting, yes. Okay, I want to go back and clear up one thing. If you

would look at Movant's Exhibit 9, which is in the binder your counsel gave you. And look on page 7. You'll recall that the

second resolve clause, we talked about how the authorized officer was authorized to "negotiate, prepare, execute and deliver the APA substantially in accordance with the material terms described to the board of directors by counsel with such changes, additions, or modifications thereto as such authorized officers shall deem necessary or appropriate." that language? A. Q. I do. Now, there's a reference there to counsel, and counsel as Do you recall

it was used in this resolution, was a defined term meaning the Weil, Gotshal firm and the Simpson Thacher firm, correct? A. You're saying our general counsel of Lehman doesn't fall

under that definition? Q. I'm saying that exactly, sir. But more at the point, I'm

asking you whether isn't that so?

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A. I have to be honest. I'm not a lawyer, and I don't know I didn't see it defined

that that was a defined term. elsewhere. Q.

Well, sir, look at the paragraph right above, where it's

talking about the terms being described to the board of directors by its legal counsel -A. Q. Right. -- Weil and Simpson, and then it says, Simpson, together Do you see that?

with Weil, "counsel". A. Q. I do see that.

And does that refresh your recollection that when you

approved this resolution, the counsel that was referred to as having described the material terms to the board of directors that people were directed to implement were the outside counsel, Weil, Gotshal and Simpson Thacher? A. Q. Yes. Thank you. Now, you've seen how the minutes used the term You, at one point in your testimony, Now, am I correct that as you sit here

"basically equivalent". used the word "equal".

now, you don't recall whether at the board meeting the term was "equal" or "basically equivalent" or some other similar term, correct? A. I recall assets equaling liabilities being the

description. Q. Well, sir, let me ask you to look at your deposition, page

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89. And I direct your attention particularly to lines 18

through 24. A. Q. Hold just a second, if you will. And at the very top, just for context, at line 4, you say "We were told the

in your deposition what you've said here: assets equal the liabilities." A. Q. I do.

Do you see that?

And then down at line 18, I ask you, question:

"We're

seeing language in these notes that use the term 'basically equivalent'. Is it your testimony that you specifically

remember that the word 'equal' was used as opposed to 'basically equivalent'?" Answer: "I can't recall the Do you see that, sir?

discussion to that level of precision." A. Q. I do see that.

And was that accurate and truthful testimony at the time

you gave it? A. Q. A. Q. It was. And is it accurate and truthful testimony today? Yes. Now, whether the term is "equal" or "basically equivalent"

or something else, what was your understanding as to what value was going to be used in making that basic equivalence? A. Q. It was not a board matter that was discussed. Well, when did you understand the assets were going to be

valued?

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A. We knew there was urgency to close this deal within a

matter of a very few days, and presumably within that time frame. Q. On September 16th, did you think the assets had already

been valued or were going to be valued later? A. As a member of the audit committee of Lehman, I presumed Marks were done on a regular, you

they were valued currently. know, very current basis. Q.

And indeed, as a member of the audit committee of Lehman,

you were responsible for making sure that Lehman's marks were accurate and up to date, correct? A. No. MR. GAFFEY: THE COURT: Objection, calls for a legal conclusion. I don't think so. I think he knows what I

he was responsible for as a member of the committee. overrule that. A. Q. Can you repeat the question?

Yes, as a member of Lehman's audit committee, you were

responsible for overseeing and making sure that Lehman's marks were accurate and up to date, correct? A. As a member of the audit committee, we were responsible And

for reviewing the process by which marks were established. we did. And it was management's job to mark assets

appropriately, and Ernst & Young's job to report to us if there were indiscrepancies (sic). So I would say the answer is no.

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Q. So if Ernst & Young didn't report any discrepancies to

you, you didn't think you had any responsibility for checking management, is that correct? A. Q. No, I didn't say that. Well, did you think you had a responsibility for checking

management in the marks that they were putting on Lehman's assets, even if Ernst & Young didn't complain to you? A. We had a robust 140-person internal audit function at

Lehman who reported at every audit committee meeting, and we're always asked in executive session were there any discrepancies between management and their assessment, so there was a continuous checking. Q. Did it ever come to your attention that there was any

concern about the accuracy or up-to-dateness of Lehman's marks? A. Q. Not in a -- no, not in an audit committee function. Well, whether it's in an audit committee function or not,

in your function as a member of the audit committee, you take into account information that you receive even if it doesn't come in an audit committee meeting, right? A. I take official information from management and our I don't take press coverage seriously. Are

advisors. Q.

Let me just be sure I understand what you're saying.

you saying that there was press coverage that suggested there was something the matter with Lehman's marks? A. I saw such and -- and attributed to buyers' views.

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Q. And when you saw that, did you make inquiry about whether

those concerns were valid? A. As I already said, we met with both internal financial

staff, internal audit staff, and external auditors on a regular basis and challenged both the process and the accuracy and asked them -- we did not go into marks, mark-by-mark -- but we asked them about the accuracy of marks. Q. Let me be sure my question's clear. There came a time

when you were aware from published reports that people were questioning Lehman's marks, correct? A. Q. From newspaper reports, yes. And at that time, did you go as a member of the audit

committee and try to find out whether those concerns were valid or not? Did you do something special as a result of being

aware of these press reports? A. We did what I said. We asked management through the form

of internal audit, the financial staff, and then, secondly, external audit function if the marking process was accurate. Q. So -- and by the external people, you're talking about

Ernst & Young, correct? A. Q. Yes. And so it's your testimony that when you received these

press reports, you asked Ernst & Young to check out whether those press reports were accurate. testifying to? Is that what you're

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A. Q. A. Q. That's part of what I testified. Okay, that's part of what you did, correct? Yes. And did Ernst & Young come back and report to you, as a

member of the audit committee? A. Q. A. Yes. And what did they say? They said there was no significant discrepancy in the

marks. Q. Did they say there was discrepancy, but it wasn't

significant? A. There was no material issue with regard to marks and

nothing that was an audit issue. Q. A. And when did they tell you that, sir? We had a very in-depth review of the mark-to-market And then as

process sometime in the summer of '08, I believe.

I said, at every audit committee meeting, we had executive sessions with Ernst & Young and internal audits where those same questions were asked. Q. Did anyone ever tell you in this process that you've

described that there were certain assets on Lehman's books that had not, as of September, been remarked since June 30th? A. Q. No. Did anybody tell you that there were a number of assets on

Lehman's books on September 16th that had not been remarked

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since August? A. Q. No. If those things were true, that would surprise you a lot,

right? A. Q. You're asking me about a large, diverse -A significant -- a significant, material amount of assets.

If you found that a material amount of Lehman's assets had not been remarked between August and September 16th, would that have surprised you? A. If it were illiquid assets that did not have a free -- a If it were liquid

ready market, that might not surprise me.

assets that had a quotable market, it would surprise me. Q. And did Lehman have illiquid assets that did not have a

ready market? A. Q. A. Q. A. Q. it? A. Q. A. Q. That's -- that's a matter of judgment. Well -I'll just say that we had some and they were all reported. Well, your judgment, sir, how much of Lehman's assets, as I -Absolutely. And did it have a lot of those assets? It had some. What? It had some. Oh, I know it had some, but it had a lot of them, didn't

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of September 16th, were illiquid without a ready market? A. Q. A. I can't give you a percentage. Approximately. I -- that's calling for a recollection that I can't give

you, exactly. Q. A. Q. A. Q. A. Q. A. Was it more than a third, sir? I don't think it was more than a third. Was it more than a quarter? It probably was in that range. Between a quarter and third? Maybe. That would be your best recollection as you sit here now? I -- I -- given that you're giving me no choice but to put

a number on it, that's what I'm saying. Q. Did you understand that those illiquid assets, whatever

the amount, that had not been remarked for quite a while, would have to be revalued for purposes of the Barclays transaction? A. No, we did not go into the depth of what assets were

included. Q. Did you understand that some of the assets that were being

included in the Barclays transaction were illiquid assets? A. Frankly, no. We did not discuss the nature of the assets

that were included. Q. And you did not discuss when those assets had been or

would be valued, is that correct?

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A. Q. Not at the board meeting. And indeed, the only time you had any discussions about

this was at the board meeting, correct? A. Q. A. Q. A. About the assets in this sale? Yes. Yes. Or about the APA at all, correct? We didn't discuss the APA in any -- at any time. The APA

was a document; we approved a deal structure. Q. And the deal structure that you approved, the only time

you talked about that deal structure was at that September 16th board meeting, correct? A. Q. Yes. Now, when you expected the assets and the liabilities to

be, in the words of the Lehman minutes, basically equivalent, was that based on liquidation value? A. Again, management was to put the deal together. We

approved the outlines of the deal, the framework of the deal, and the way in which they valued the assets was to be implemented by management. Q. For example, if you go back to Movant's 9, and I want to This

direct your attention to the third paragraph on page 4. is the paragraph that counsel for the committee, I think, directed your attention to. It's talking about what Mr. Do you see that?

Ridings of Lazard advised you.

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A. Q. Right. And he advised you that you should obtain "the highest and Do you

best price and a price greater than liquidation value". see that? A. Q. I do.

And as you understood it, when you say you were told that

assets and liabilities were to be basically equivalent, was the value of the assets being calculated based on the liquidation value? A. As I said earlier, the method of valuation was not That was a management

discussed with the board. responsibility. Q.

Did you, as a director, have any understanding one way or

the other as to whether Lehman's assets, for purposes of the Barclays transaction, were being valued on a liquidation value basis? A. Q. No. Okay, now, is the term "fair market value" a term that

you're familiar with? A. Q. I am, yes. And would the fair market value of an asset, at least in

some circumstances, be materially different from its liquidation value? A. Q. It's theoretically possible. Now, did you or the board give any consideration as to

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whether management should be instructed to try to use fair market value as opposed to liquidation value, or vice versa? A. Q. No, we did not. Were you aware of whether or not, as of September 16th,

there were any disagreements between Barclays and Lehman as to how to value the assets that were going to be subject to the transaction? A. Q. No. Based on all your experience in business, did you expect

it would be likely in a transaction of this size, there would be such disagreements? A. It's, you know, again, we set out the rules for management

and they were asked to implement equivalency, as you put it -as the minutes put it. Q. Did you ever ask anybody at this meeting whether or not

there was any disagreement as to what the value of the assets were? A. Q. I don't recall that being asked, no. I think I, therefore, know the answer to this question, Am I correct

but I want to ask it anyway, just to be sure.

that you would not have had any discussion about how any disagreements would be resolved, if they existed. A. Q. You're correct. Did you have any understanding, one way or the other, as

to whether the size of the portfolio was going to be taken into

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account in valuing Lehman's assets? A. Q. No, we did not consider that. And you didn't ask anybody whether that was going to be

taken into account, is that correct? A. Q. Yes, that's my recollection. Now, you were aware that the week of September 15th was a

week of chaos and turmoil, both for Lehman and for the financial markets, correct? A. Q. Yes, I was rather aware of that. And you were aware that the value of Lehman's assets was

changing, even over the course of that week, correct? A. I knew it was a volatile time, yes, and asset values were

changing. Q. And while there may have been some assets that went up, in

the main, Lehman's assets were declining, the value was deteriorating, correct? A. You know, there were less liquid assets and there were

more liquid assets, and the more liquid assets held their value better. Q. Yes, but overall, the total value of Lehman's assets was

declining materially over the course of that week of September 15th, correct? A. Q. I would say it declined. And indeed, I think Mr. Ridings told you it was

deteriorating, correct?

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A. Q. I think he did. As you understood it, were there any representations or

warranties in the APA concerning the value of the assets or liabilities? A. No. I'm saying no because I did not see or study that

document, so I -- I don't know that there were or weren't. Q. As you understood it on September 16th when you were at

the board meeting, did you believe that there would be representations and warranties concerning the value of the assets and liabilities that were the subject of the transaction? A. You're asking for my knowledge of a negotiated agreement

to sell a major assets of a broker-dealer, and I don't have that knowledge. All I know is what we approved as a board and

gave to management as guidance. Q. But my question is about that guidance. Did you think

that you were giving management guidance, one way or the other, about whether to have representations and warranties about the value of the assets and liabilities that were the subject of the APA transaction? A. We did not give any guidance to them on reps and

warranties, no. Q. A. Q. Did you consider the point at all at the board meeting? No, not to my recollection. Now, if you had been doing this deal, you would have had a

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212-267-6868
Honor. THE COURT: Well, it sure is. If you had been doing true-up clause, correct? MR. GAFFEY: Objection, calls for speculation, Your

this deal -- Mr. Boies, I respectfully suggest you rephrase that question because in some capacity, he was doing this deal. He's a board member; you've asked him a whole bunch of questions about his role. question makes no sense. MR. BOIES: Your Honor, I withdraw the question. And So he's clearly in the deal. So the

let me try to rephrase it. Q. Let me ask you to look at your deposition at the bottom of And I'm asking

page 86, line 24, and the top of page 87. you -- or, I'm not asking.

Actually, Mr. Thomas is asking you,

but we're asking you at the bottom of page 86 whether you would consider a difference between sixty-nine billion and seventy billion to be a wash, and at line 6 you answer, "If I were doing this deal, I would have had a true-up clause where you figure out what the actual assets are, and the actual liabilities are after a period of time, and you equate them. understand that that was not part of this agreement." see that? A. Q. Which page are you on? 88? Do you I

I'm on page 87, lines 6 to 10. MR. GAFFEY: Your Honor, for completeness, can we have

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lines 11 through 18, as well? MR. BOIES: THE COURT: Yes. Let's do that or let's leave it for

redirect, but it's probably better to do it now. MR. BOIES: Okay. I will read it now, and then I will

come back because I was planning to take it in two chunks. Q. The next section says: "Did you ever think that was part

of this agreement? "A. I didn't see the agreement, as I said, so I didn't know

what was actually part of it. "Q. Slightly different question: did you ever think a true-up

clause was part of the agreement? "A. It was never discussed, so I can't opine as to whether I

thought it or not." A. I'm sorry, I'm having trouble where you -- give me the

line and page you're reading? Q. A. Q. Sure. Right. And you see at the bottom -- and this is for context Start on page 86.

purposes, the question is whether you would consider a difference between seventy and sixty-nine billion dollars to be a wash. A. Q. Do you see that?

Right. And then lines 6 through 10, the answer is "If I were

doing this deal, I would have had a true-up clause where you

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figure out what the actual assets are, and the actual liabilities are after a period of time, and you equate them. understand that that was not part of this agreement." see that? A. Q. I do. Now, as the Court indicates, you were, as a member of the Did it ever occur to you to ask Do you I

board, doing this deal.

management to include a true-up clause? A. I had a -- the answer is no. I had a great deal of

confidence in management, and they were sophisticated deal structurers. Q. Was it your expectation on September 16th when you were

approving this deal that management would include a true-up clause? A. It was my expectation that assets would equal liabilities,

and that whatever was needed to make that happen would be included. And there are other ways that it could've been done,

not just a true-up clause. Q. Are you telling me that you can think of a way to

accomplish it without using a true-up provision? A. Q. A. Q. A. I think there probably are. But you can't think of it, can you, sir? I can think of others, yes. I'm sorry? From other business experience, I can --

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Q. You can think of how to accomplish equality of assets and

liabilities in this Barclays transaction without a true-up clause, is that what you're telling me? A. Q. I said yes. Let me -- when did you think of these other ideas? Has it

been since your deposition? A. I discussed the true-up in my deposition, and it was

certainly after the deal was -- was approved by the board. Q. Let me show you page 88, the very next page. Lines 12

through 18, question: it?"

"Can you think of a way to accomplish

And the "it" is the equivalence of assets to

liabilities, correct, sir? A. "Q. I think so, yes. Can you think of any say to accomplish it without the use

of a true-up provision, which you mentioned? "A. No, I can't. I don't know the assets; I don't know the

marketability of those assets; I can't respond." Q. A. Q. A. Q. A. Q. Was that your testimony at your deposition, sir? That was, yes. Was that truthful and accurate at the time you gave it? Yes. Is it truthful and accurate today? Yes. Do you believe today, given everything that you know, that

it was a mistake on Lehman's part not to have a true-up clause

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of the kind you describe? A. Q. In my opinion, yes. Okay, now, a couple more questions like that. Today, as

you sit here now, based on everything you know, is there any Lehman employee who you believed breached their duty of care or loyalty to Lehman during the Barclays sale process? A. No. MR. BOIES: THE COURT: REDIRECT EXAMINATION BY MR. GAFFEY: Q. Mr. Ainslie, at any point during the meeting on the 16th I have no more questions, Your Honor. Is there any redirect?

of September, did the chief financial officer, Ian Lowitt, say anything about a discount off of Lehman's books -- off its marks? A. The morning meeting of the 16th, no, not to my

recollection. Q. Did anyone else at that meeting who was describing the

deal say anything about a discount off of Lehman's marks? A. Q. No, I don't recall it. Mr. Boies, showed you Barclays Exhibit 789. Do you have

that in front of you? counsel gave you. A. Q.

It should be in the book that Barclays'

Which exhibit is that? It's BCI-789. It'll be in the book with a white label on

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too. Q. the front. A. Q. A. Q. Tab 8. Okay. Yes. And for the sake of completeness, sir, I'm going to show And I'm putting before you

you another e-mail in that chain.

what's been marked as Movant's Exhibit 142. MR. GAFFEY: this is in -THE COURT: Thank you. Mr. Ainslie, Movant's Exhibit 142 is an e-mail from Do you recognize those as You can approach this the second time, Your Honor, may I approach? I'm not sure

Michael Lubowitz to Rod Miller. lawyers at Weil, Gotshal? A. Q. Yes.

And have you seen Mr. Lubowitz's statement, "Here are a I don't recall the reference to the sixty-four and

few nits.

seventy billion asset -- and seventy billion asset/liability numbers"? A. I see it here. MR. BOIES: testimony -THE COURT: MR. BOIES: Excuse me? I said I'm not objecting his testimony I've not seen this before. Your Honor, I'm not objecting to his

because I'm perfectly happy to have them open the door, but

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Honor. MR. GAFFEY: That relates to a pre-September 30th this is a clear waiver of attorney/client privilege, and I just don't want it to be done inadvertently. MR. GAFFEY: Your Honor, we -- as Your Honor knows --

once I finish throwing documents around -- as Your Honor Knows, under the letter -THE COURT: MR. GAFFEY: It's a dramatic moment. -- under the letter agreement from

discovery, LBHI waived its privilege up to the period September 30. And we also produced, during discovery, documents that

related to the period of September 30, which is why this document was produced to Barclays during discovery. So there's

no additional waiver here; it doesn't go beyond the waiver we've already given. THE COURT: MR. BOIES: Okay. It's an October 29, 2008 document, Your

event, and that's why we produced it and instructed Weil, Gotshal to produce it, Your Honor. MR. BOIES: I just want to make clear, Your Honor, it

is our position, they cannot affirmatively use post-September 30 statements without waiving the privilege up to the point of the time of the statement. THE COURT: Now --

Well, let's treat this as an unresolved It may or may not get resolved

dispute between trial counsel.

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McDade. THE COURT: your right hand. (Witness duly sworn) Mr. McDade, good afternoon. Please raise during the course of the trial. The question is whether or

not, given this articulation of Barclays' position with respect to the document, that you're comfortable using the document in this manner in redirect. MR. GAFFEY: THE COURT: BY MR. GAFFEY: Q. And the question, sir, was did you ever have a I am, Your Honor. Then we'll see what happens next.

conversation with Mr. Lubowitz where he told you he did not recall the sixty-four and seventy billion numbers in the draft minutes? A. No, I did not. MR. GAFFEY: THE COURT: I have nothing further, Your Honor. As a result of that question, Mr. Boies,

do you have anything more? MR. BOIES: THE COURT: No, Your Honor. Fine. Mr. Ainslie, you're excused. Thank

you very much for your time. (Witness excused) THE WITNESS: MR. GAFFEY: Thank you. Your Honor, movants would call Bart

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THE COURT: THE WITNESS: THE COURT: THE WITNESS: THE COURT: Be seated, please. Can I request a bottle of water? Yes, you may request it. Thank you. Thank you. The witness is looking for a

bottle of water before proceeding. DIRECT EXAMINATION BY MR. GAFFEY: Q. A. Q. Good afternoon, Mr. McDade. Good afternoon. Mr. McDade, I'm Robert Gaffey. I'm from Jones Day. Have you and I met We

represent the debtor in this matter. before? A. Q. A. Q. A. Q. Yes, we have. When did we meet? In the deposition in the fall. Have we met any time since then? No, we have not.

Could you describe for the Court, sir, your current

employment? A. My current employment, I am a partner at River Birch

Capital, which is a credit-focused investment management firm. Q. And how long have you been a partner at River Birch

Capital? A. We started the firm approximately about five months ago.

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Q. And prior to your employment at River Birch Capital, what

was your employment, sir? A. My last employment was at Barclays after the Lehman

bankruptcy for the period after the bankruptcy, approximately the week of September 22nd, through to the end of 2008. Q. Okay, and we'll come to that in a bit more detailed, sir,

but what was the -- was there a particular purpose for your going over to Barclays after the transaction? A. My purpose was specifically to help in the transition with

the acquisition of the people and the businesses. Q. A. Q. A. Q. Did you have any employment contract with Barclays? No, I did not. Did you receive any bonuses from Barclays? No, I did not. What was the nature -- not the number, sir, but the nature

of your remuneration during your employment by Barclays. A. It was simply the continuation of my salary that I had had

at Lehman Brothers. Q. A. Q. And why did you leave Barclays' employ? I was finished my duties around the transition. Now, sir, at or around the time of the -- could you

give -- perhaps, first, you could give the Court a description -- a summary, sir, of your Lehman career. How long

were you there, and maybe just the last two or three positions that you held.

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A. I'll keep it short. It started summer intern in 1979,

full-time employee in 1983, grew up as a corporate bond trader in the fixed income division. the fixed income division. Ultimately was privileged to run

Also ran the equities division for And I was the president and

three years from 2005 to 2008.

chief operating officer from the middle of June 2008 until bankruptcy. Q. And while you were president and chief operating officer,

did you have any involvement, sir, in the negotiations of the sale transaction with Barclays that has brought us here today? A. Q. Yes, I did. Okay, and about when did they begin, sir? When did you

first become involved in this. A. Q. A. These -- the week -Well, like -We had two trans -- we had two sets of negotiations with They really started in earnest sometime Thursday This form of the actual negotiation started

Barclays.

before bankruptcy.

Monday morning at 7 a.m. Q. Maybe you should briefly first describe that first set of

negotiations that began in the few days before the weekend. A. Sure. So Lehman had been approaching a number of suitors There were really

toward the end of its operational existence. two. The first was Bank of America.

The firm was engaged very

specifically, me directly along with a large team in attempting

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to sell Lehman pre-bankruptcy to Bank of America. Those

negotiations started to wind down in a negative sense in terms of the likelihood of an outcome, and Barclays entered a series of specific negotiations sometime late Thursday and Friday and up through the weekend, including up through Sunday. Q. And do you have a guess, sir, as to why that set of

negotiations did not come to fruition with an agreement? A. Those transactions required a number of specific changes They contemplated buying Global They did not want to or could

to what they would be buying. Lehman as a set of businesses.

contemplate certain illiquid asset classes, so it required a credit facility from the marketplace and it certainly required an enormous amount of regulatory cooperation, not only in the US, but obviously, Barclays' a big UK institution. regulatory cooperation. Q. And what was the nature, if any, of your personal So global

involvement in that first phase of negotiations with Barclays? A. Q. I was very involved with those negotiations, as well. Now, did there come a time when negotiations with Barclays

resumed after that first deal died? A. We were informed of the inability to consummate that We pushed for resuming,

overall transaction Sunday afternoon.

once we understood that LBHI would be in bankruptcy, resuming conversations with Barclays Sunday evening. I reached out and

made a call to Bob Diamond, and we resumed Monday morning with

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a team of his and my senior partners. Q. Okay, now, from the time that you first reached out to Mr.

Diamond through the conclusion of the deal, did you have some level of involvement in the negotiations and the consummation of the transaction? A. Q. Yes, I did. All right, and at the outset of those activities, of those

negotiations, did there come a time when Barclays offered you employment? A. Barclays -- the evening of Monday -- whatever the Monday

is; I apologize, I forget the exact date. Q. sir. A. Monday the 15th, late in the evening, I was sitting in my Everybody at this side of the table knows it was the 15th,

office on the thirty-first floor with Bob Diamond, and he attempted to start a conversation with me with respect to employment. I stopped that conversation and immediately

reached out to lawyers -- Tom Roberts -- lawyers from Lehman and made sure that Bob and his counsel knew that I was to be independent of any of that process. Q. A. Why did you do that? I knew it was the right thing to do in terms of making

sure that Lehman had independence in the process. Q. Now, after your initial call with Mr. Diamond on the

evening of the 14th, just for a timeline over the next couple

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of days, could you describe what the nature of the transactions were through, say, Tuesday morning the 16th and what your involvement was in them? A. Sure. We had the organizational meeting, as I described, From that, we

7 a.m., which was a telephonic meeting.

assembled, using the thirty-second floor of Lehman Brothers' old headquarters. Large groups of constituent parts of the That setup

Lehman organization and the Barclays organization.

of the thirty-second floor was very conducive to lots of different meetings that needed to go on at that point in time because it was our old dining room facility. So there were, in I would

effect, conference-room-like facilities in place.

describe the course of the meeting as roughly starting around noon on that Monday with an organizational meeting with advisors, lawyers, and the senior principals involved in the discussions from both sides. Q. Who were the senior principals involved in the discussions

on both sides? A. The senior principals involved on the Lehman Brothers side The senior

would have been Mark Schaffer, Skip McGee, myself.

principals on the Barclays side would have been Archibald Cox, would have been Rich Ricci, and would've been Michael Klein. Q. Apart from yourself, Mr. McGee, and Mr. Schaffer, were

other Lehman executives involved around the transactions, involved in activities related to the transactions?

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A. Q. Absolutely. Could you give us a roster of who that was? You don't

have to go all the way down through everybody with a sharp pencil, but who were the senior executives involved? A. There was -- well, it's a very long list. There were at

least fifty or sixty folks involved in a senior way, so the head of HR, Tracy Binkley, as an example. Q. A. Q. A. Q. A. No, I don't. Okay. I don't want all fifty names. Was Mr. Lowitt involved? Do you want me to --

Mr. Lowitt was not involved in the early discussions, no. Did there come a point when he became involved? Later in the week as we needed to finalize specific issues

around the transactions, yes. Q. A. And Martin Kelly. Was Martin Kelly involved?

Martin Kelly was involved in terms of making sure --

through the course of the week, in making sure information was provided for the participants, yes. Q. Any particular type of information was being provided to

the participants? A. He was the -- I'm sorry -- he was the controller of the

firm, and so data with respect to the balance sheet, data with respect to certain obligations that Barclays would be assuming, things like that. Q. When you refer to the obligations that Barclays' going to

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be assuming, what do you mean? A. Q. A. used. Cure payments, as an example. Were there others, apart from cure payments? He would have been responsible for all of the information So information at a high level, because he wouldn't have

seen specific compensation data, but a high level, as another example, would be compensation. Q. Okay, now let's go back to the initial call with Mr. And in that first call with mar. Diamond, was any

Diamond.

particular deal structure discussed? A. Q. Not at all. Where's the point where a deal -- well, describe -- when

did you come to a deal structure in the negotiations? A. Sometimes between the afternoon on that Monday and dawn

the next morning. Q. And so that would take you overnight from the 15th to

early morning on the 16th, correct, sir? A. Q. That's correct. And when -- so do I understand you correctly that a

structure was reached around dawn on the 16th? A. A -- a structure, in terms of a guidance document, yes,

that actually started to be formed. Q. Okay, now, what's going on on the thirty-second floor in

that overnight session that leads to a structure on the -around down on the 16th. How many people are there, how many

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rooms are being used? A. Could you give us a sense of that? There's well over a hundred

All the rooms are being used.

individuals, all the advisor teams, all the lawyer teams, very open, active, dynamic process broken out by individual work streams. Q. A. Okay, and give us an example of the work streams. A work stream, using Tracy Binkley, used to work HR at

Lehman, working with her counterparts at Barclays, trying to help create a sense of the necessary data and process around compensation. Q. Okay, were there work streams in connection with valuing

assets? A. There were work streams, yes, in valuing assets, right So all of the heads of the capital markets

from the beginning.

and the individuals who were responsible for risk managing head trader's business heads of the assets that were to be purchased as part of the transaction. They were in a room with their

counterparts, or at least in some cases, telephonically in a room with their counterparts from Barclays. Q. And what was your understanding of what was going on in

the meetings between the traders? A. Q. A. In the meetings between the traders? Yeah. There was a process to attempt to find value for those

assets given that this was September 15th and 16th, and the

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markets have changed dramatically. Q. And what was the result of that process, of the traders

talking about valuation? A. The result of that process was an agreement at that point

in time, knowing that there was a long week, in terms of ultimate sale process approval that valuations could change and likely would change, given what was happening in the market. But an agreement in principle around valuing in terms of the actual transaction, valuing the assets. Q. And what was the role, if any, of that agreement regarding

valuing the assets to the deal structure that was achieved by dawn on the morning of the 16th? A. Q. It was an important role. Now, did the valuation that was achieved with regard to

the assets contain any delta between the book value at which Lehman carried those assets and the price that Barclays would pay? A. To the best of my understanding, we had not marked the

books since Friday evening close because we had so many operational challenges, given the bankruptcy announcement on Sunday with just employees, loss of employees. So yes, my

understanding is that marking process, that valuing process, that dialogue amongst the different risk groups would have delivered a different outcome than the marks on Friday given everything that happened to Lehman and in the marketplace.

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delta? MR. BOIES: THE COURT: Yes, foundation. Witness's testimony. Q. And by different outcome, are we on the same page when I

say delta and you say different outcome? A. Q. Yes, I'm sorry. And what was the dollar value of that delta? MR. BOIES: THE COURT: Objection, Your Honor. Objection as to the dollar value of that

All right, maybe you can ask a few more

questions before getting into the dollar value of the delta. Q. Did there come a point, sir, where you learned the

difference between the dollar value that had been agreed and Lehman's marks? A. I received an e-mail from Martin Kelly early in the

morning of the 16th which indicated approximately that figure, the five billion. Q. Mr. McDade, in the book before you is a copy of Movant's Would you take a look at that, please?

Exhibit 7. A. Q. Yes.

And you see that that's an e-mail from Martin Kelly.

Did

you see this e-mail at or around it's dated, that is, the 16th of September? A. Q. A. The actual e-mail? Yeah. No, I saw -- I've seen this in reviewing for the

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grounds. THE COURT: Well, all he's said so far is it was a deposition. Q. You referred to getting an e-mail from Mr. Kelly

describing the delta we were talking about. A. Q. A. Q. A. Q. Right. Do you recall what that e-mail said? No, I misspoke. Okay. -- that Martin and I had with respect to this e-mail. Okay, tell us about the conversation that Martin and you I referred to the conversation --

had where you learned the delta between what Lehman's book showed and the agreed price. A. It -- it was simply -- it was a very short conversation.

It was -MR. BOIES: Your Honor, I'm going to object on hearsay

very short conversation. MR. BOIES: get to the substance. THE COURT: hearsay objection. MR. GAFFEY: Your Honor, I don't think what Mr. Kelly It comes Okay, well, we have an anticipatory I know, but I was afraid he was going to

says comes in for the truth of the matter asserted.

in for the state of mind of one of the negotiators, Mr. McDade. THE COURT: I think we can let it in on that basis.

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Objection's overruled with the understanding that to the extent he talks about what he was told, it doesn't indicate that what he was told was truthful. Q. A. What did Mr. Kelly tell you? Mr. Kelly simply told me that he reviewed the work that

had been done by the work streams and created a summary of that work. Q. And did -- in your conversation with Mr. Kelly, did you

come to an understanding of the amount of the difference between what was shown on Lehman's books and the price that had been agreed? A. I wouldn't describe it as we came to an understanding. He

was simply reporting he had heard in terms of the process. Q. A. Q. A. Q. What did he tell you? Exactly what I just -- what I just said to you. What number did he give you, Mr. McDade? What number? What was the number that he put on the difference between

the books and the agreed price? A. Q. The five billion. And did Mr. Kelly tell you anything else about the

economics of the transaction, apart from the difference between the book value and the agreed price? accruals? A. We didn't talk about accruals in that conversation. Did he talk to you about

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Q. Okay, in the course of your work that followed in

connec -- I take it you stayed involved in the transaction after this agreement was reached at around dawn on the 16th of September, right? A. Q. Yes, I did. Okay, and in the course of your work on the transaction,

did you work on the knowledge that Mr. Kelly had given you -on the basis of the knowledge Mr. Kelly had given you concerning the difference between the books and the agreed price? A. I worked on the knowledge of the process that we started

from the beginning, which is continuing to value the assets over the course of the week if you're speaking specifically to the balance sheets and the five billion figure. So I -- it was

very clear, given the markets, given the dynamic nature of the process, the time for approval in terms of the debt, we would continue on in a process and that this was simply marking a moment in that process. Q. And in the moment in that process, I'd like you to focus

on the 16th of September, was the agreed price with regard to the assets equal to the book value for those assets as of September 16th? A. I've described the book value as if that is the definition

used for the process that we went through Monday, Tuesday, in terms of the valuing.

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Q. If you understand book value to be the price that the

triggers came up with, then it would be accurate in your view? A. Q. Right. If it was in relation to the stated book value, that which

was shown on Lehman's books as of the 16th? A. I don't have specific knowledge of the stated book value

on the 16th. Q. And if you wanted specific knowledge of the state of

Lehman's book value on the 16th, who would you ask? A. I would have asked Ian Lowitt or I would have asked Martin

Kelly. Q. A. Q. A. Q. And why would you have asked Ian Lowitt? He was the CFO of the firm. And why would you have asked Martin Kelly? Controller of the firm. Okay, and as between yourself and Mr. Lowitt and Mr.

Kelly, who's got greater knowledge of what was reflected on Lehman's books as of the 16th of September, 2008? A. Q. Mr. Kelly. Now, you have some familiarity with mark-to-market

accounting, is that right, sir? A. Q. Yes, I do. And do you know if -- and Lehman kept its books on a mark-

to-market basis, is that right? A. Yes, they did.

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Q. And does the book value of securities on a mark-to-market

basis contemplate the sale of securities in bulk to your understanding? A. Q. Not in distress. And would book value of a financial institution reflect

moving the entire book the next morning? A. Q. No, it would not. And in the course of your discussions with Barclays, was

there any suggestion that it was their intention to move the purchased assets the next day in bulk? A. Q. Could you repeat that question? I'm sorry. Did Barclays

Let me shoot it and try something simpler.

say anything along the lines of they were going to resell the assets in bulk the day after they purchased them? A. Q. No. Had you, on the 16th, spoken to anyone who had told you

that Lehman had been unable to mark its books on the 16th? A. Q. A. Q. No, I had not spoken to anyone. Had you at the time? At the time, I had not spoken to anyone. And at the time, had you spoken to anyone who told you

Lehman was unable to mark its books as of the 15th of September? A. Q. No, I don't have that recollection. So as you sit here today, sir, do you know if Lehman's

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books had been marked as of the 15th and 16th of September, do you have any knowledge of that? A. Q. A. As I sit here today, I don't have knowledge. Was Paolo Tonucci involved in the negotiations, sir? Paolo Tonucci was the treasurer of Lehman. He was

involved as the week went on, not early on in the negotiations, to the best of my knowledge. Q. Now, I don't want to miss each other, here. With regard

to the negotiations, I take it there's ac -- let's be clear on what terms we're using, okay? With regard to the negotiations,

I'm not asking if they were involved in the haggling, in the horse-trading at the table. Do you know if Mr. Tonucci had a

role early in the week around those negotiations, you know, in any other role? A. Q. A. Q. I would have thought he would, yes. Why would you think that? Given his role as a treasurer. Okay, and let me ask you the same question with respect to Would he have had involvement around the

Mr. Kelly

negotiations? A. Q. Yes, he would have. And with respect to Mr. Lowitt in that early part of the

week, would he have had involvement around the negotiations? A. Q. Yes, he would. When you learned the terms of the transaction, sir -- when

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Q. the terms of the transaction were reached in the early morning of the 16th, what, if any, provisions in the structured agreement -MR. GAFFEY: Withdrawn.

When an agreement was reach early on the morning of the

16th, sir, were there any agreements with respect to Barclays' assuming liabilities for compensation or for trade payable cure? A. Q. A. Yes, there were. Could you describe them to the Court, please? Barclays would need to -- well, start with the cure.

Barclays would need to get a list of the contracts that heretofore Lehman had had responsibility for in terms of those that affected the running of the businesses that they were purchasing. And they agreed, in principle, to honor those --

those contracts after the process of being able -- given we were unable during the course of that week -- to actually start any integration process of any consequence. After they were

given the information, they were given a period of time, I believe sixty days, to be able to go through the process and understand those contracts and make the determination at that point in time whether or not those were necessary for running the business and franchise going forward. Q. The other part of that question had to do with

compensation, sir.

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A. Right. Barclays also assumed a two billion compensation

liability with respect to the combination of the employees' bonus process and the severance process with respect to -- they agreed to hire all of the Lehman North American employees, and then there was a period of time, I believe ninety days, that they had to make ultimate determination, in terms of whether or not those would become permanent employees of the -- of the bar cap going forward. Q. And at the time, around the 15th or the 16th -- I'm still

in that early part of the week -- was any number put up as an estimate of the amount Barclays would pay in trade payables? A. Trade payables, I believe the number at that point in time

was 2.25 billion. Q. A. And who calculated that number? They're not calculations. They're an attempt to extract

from the Lehman systems the list of those contracts and obligations. Q. That would have been Martin Kelly.

And did there come a time during the course of the week

where that number changed from 2.25? A. As information became clearer, that number changed from

2.25; I believe by Friday, it was 1.5 billion. Q. And in your understanding at the time, sir, was that an

estimate of an amount that Barclays actually would pay A. That was an estimate of an amount that Barclays had the

potential to pay.

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Q. And was any estimate done -- did you have any discussions you or anyone on the negotiating team have

with Barclays --

discussions with Barclays about whether Barclays intended to pay amount in that range? A. Q. No, I did not. Was it an issue that came up in the negotiations between

the Lehmanites and the Barclays side of the table at all, as far as you know? A. Q. Not that I was involved in. And who calculated the two billion dollar numbers -- the

two billion dollar figure for compensation? A. The compensation process, was a process that I would

describe where Lehman provided Barclays -- Lehman -- I believe it started in the work stream with the HR professionals. Lehman provided the data that existed on the Lehman accrual at that point in time, and then provided that data to -- an historical pay data -- historical pay data, as well, to Barclays and obviously cooperated in terms of all the flow of information that Barclays needed. It's certainly my

understanding that Barclays would have been the ultimate determiner given that it was such an important part of what they were buying, which is the services of the good employees of Lehman, that they would have reflected on that compensation process. So they would have been the ultimate determiners, in But given a lot of

my opinion, of the compensation figure.

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cooperation and a lot of information from Lehman. Q. And when you say ultimate determiner of the compensation

figure, are you referring to what compensation figure would be used in connection with making the agreement? A. Q. Correct. To your knowledge, did Mr. Kelly participate in the

estimation of -- did Mr. Kelly review Lehman's accruals for trade payables as part of the process of estimating the cure liability? A. Q. Yes. At the time, sir, did you have any knowledge whether or

not Mr. Kelly made transaction adjustments that wrote those numbers up? A. Q. A. No, I had no knowledge of that. Did you ever have a discussion with him along those lines? Around writing up the -- no, I have not -- did not have a

conversation with him. Q. A. Q. A. Would it have surprised you if he had? Absolutely. Why would it have surprised you? Because he's someone I worked with for many years and a

man of great integrity. Q. Was the process of attempting to estimate trade

liabilities meant to be a process to determine what Barclays was likely to pay once it bought the business?

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A. The process was to collect the data and make sure we There was no

understood the actual obligations needed to pay. process around the likely outcome of that figure. Q.

And with respect to the compensation number, was that an

agreed number, two billion dollars? A. Q. That was a number that was ultimately agreed, yes. Okay, if you would turn, sir, in your book to tab M2, or Are you with me on the document, sir,

2, Movant's Exhibit 2? Movant's Exhibit 2? A. Q. A. Q. Yes, I am.

Have you seen the document before? Yes, I have. What were the circumstances under which you first saw the

document? A. This was a document that I described a little earlier that

became a guidance document for all the participants including advisors with respect to the deal and its structuring and coming together. Q. And when you first saw the document, were you with other

people? A. Q. I don't have a specific recollection of that. You see that the document's initialed in the upper right-

hand corner? A. Q. Yes, I do. Do you recognize the initials?

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A. Q. Steve Birkenfeld. Okay, and above that is the date, September 16th, '08 and Were you there when Mr. Birkenfeld put his

the word "final".

initials on the document? A. Q. I don't recall -- no, I don't think so. Okay, does this document bear any relation to the sale

transaction as you understand it, sir? A. Q. A. It has a strong resemblance, yes. Could you describe what you mean by that? This was, again, the guidance document used for the first

hearing in this courtroom. Q. And when you say the guidance document used for the first

hearing in the courtroom, is it fair to say these are the numbers upon which the deal was based on the 16th? A. Q. Yes. And on the asset side of this financial schedule, sir, who

generated those -- who or what process generated those numbers? A. That process that I described before of the different risk

partners from both organizations. Q. Okay, and the asset side numbers that total -- well, the

asset side numbers, are they the agreed numbers or are they numbers that are taken directly from Lehman's books? A. Q. They are the agreed numbers. And the asset side numbers on this schedule, sir, did they

have that same delta between the agreed number and the Lehman

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Q. A. books that we talked about before? A. Q. That's what I would understand. And would that be about that five billion dollar element

we talked about? A. yes. Q. A. Q. It would be in the range of five billion? Right. Now, do you know, sir, if Lehman's books were ever marked I don't have specific knowledge of the exact number, but

to reflect the agreed valuation by the usual mark-to-market methods? A. Q. that? A. Q. A. Q. Martin Kelly. Would you ask Mr. Lowitt, as well? Yes, he should've known. Did the agreed valuation that's reflected in Exhibit 4 I don't know that. And who would you ask if you wanted to know the answer to

include any kind of haircut to reflect market volatility? A. Q. A. I'm sorry, is this Exhibit 4? Yes. Okay. UNIDENTIFIED SPEAKER: I beg your pardon, 2. Could you repeat the question? I apologize. 2.

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Q. A. Q. Does the -Yes. -- calculation asset side here reflect any haircut to

reflect market volatility? A. It was the most unusual week in my twenty-five years of

market experience, so clearly they had to reflect -- the valuation in that process had to reflect that uncertainty of times. Q. Well, when -- would that have been consistent with your

understanding of the transaction, if the valuation that was agreed included a haircut to reflect market volatility? A. The transaction was an agreement for Barclays to purchase That negotiation would have included in a time and

the assets.

place where literally five million dollar trades in fixed income were unusual would have included all sorts of different assumptions in terms of the process. Q. Well, if there had been negotiations of a haircut, an

agreement to apply a haircut to reflect future market volatility, would that have been consistent with your understanding of the transaction? A. No, there weren't negotiations to agree to a haircut.

There were negotiations in the best sense that were possible in a forty-eight hour period, roughly speaking, at that moment when this -- or less -- when that moment was this -- this document was created. That reflected the ability to find a

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Q. price to transact. Q. And the price to transact was not Lehman's book value as Is that right?

of the 16th of September. A. Q.

To the best of my understanding, yes. Now, when Lehman did make mark to mark judgments on its

books, did it take illiquidity into account? MR. GAFFEY: Let me withdraw that.

When Lehman recorded marks on its books, was illiquidity

taken into account? A. Q. Yes, it was. Now, on the liability side of this schedule, sir, you'll

see at the lower right-hand corner, items for cure, payment and comp. A. Q. Do you see that? Yes, I do. And the comp number is put at 2.25. We understand this You

number to be billions, right, sir? said comp? A. Q. A. Q. A. Q. For cure.

These are billions.

The cure payment is put at 2.25 billion? Yes, it is. And comp is put at 2.0 billion. Yes. Yes, I see that. Is that right?

And is the 2.25 shown on that schedule the same 2.25 you

referred to a few moments ago? A. Yes, it is.

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Q. Q. And the two billion for comp is the same two billion you

testified about a few moments ago, correct? A. Q. Yes. Yes, it is.

Now, does this schedule reflect that those two components

were part of the price in the asset purchase agreement? MR. GAFFEY: Withdrawn.

Does this schedule reflect that those two components were

part of the price in the transaction that was agreed? A. Q. The price in the transaction, yes. Now, if the compensation accrual on that schedule, sir, of

two billion dollars was not a good-faith estimate of what Barclays would actually pay, would that be consistent with the deal that you made? A. Q. If it was not a good-faith estimate? Yes. If it was not a good-faith estimate of what Barclays

would actually wind up paying, would that be consistent with the deal that you made? A. Q. No. And were you taking any steps during the week, sir, to

ensure the accuracy of the estimates regarding cure payments? A. Q. A. Yes, I was. What were you doing in that regard? I actually recall having a meeting with Martin and Ian to

make sure that we had accurate information to deliver to Barclays.

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Q. And was one of the reasons that you wanted accurate

information, is that it related to the amount of value that Lehman had to give to Barclays in the transaction? A. It was just a core part of the actual -- one of the deal

imperatives, so we needed the accurate information with respect to what that number would be. Q. Well, apart from its accuracy, sir, my question is a And it is whether it was important that it

little different.

be accurate, because it related to the amount of value that Lehman was going to get from Barclays? A. Q. Yes. So in your mind, negotiating the transaction, coming up

with an accurate estimate of the cure payments that Barclays would assume, was an important component of the deal. right? A. An accurate estimate of the potential cure payments they Yes. Is that

would assume? Q.

And an accurate estimate of the comp that they were going

to pay? A. Q. Yes. Now, you mentioned before that the cure number dropped

from 2.25 down to 1.5, and you thought that was the number at the end of the week. A. Q. Yes, I do. And do you know why the number dropped from 2.25 to 1.5? Do you recall that?

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A. It -- I don't know the specifics. I can only guess that

given all of the challenges that we were having operationally, that would be one of the reasons. specifics. Q. Did there come a point during the week when Martin Kelly But no, I don't have the

told you that the trade payables were moving from a higher to a lower number? A. Q. A. Q. Yes. Do you recall that? Yes. Was that after -- do you recall at what point in the week

that happened? A. If I recall, it was later in the week, as more information

was available to him from his teams. Q. I know it was a pretty tumultuous week, sir, but was it

closer to Thursday or Friday, or closer to Monday or Tuesday? Do you have -- what's your best recollection of when during the week that happened? A. Q. A. It was closer to Thursday-Friday. And was it dropping below the 1.5? The figure was never an accurate number over the course of I don't have specific recollections in terms of what

the week.

each individual number, nor was I part of the process of collecting that from Martin. I knew we were having generally,

just a tough problem getting the actual ascertained data.

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Q. Now, do you agree, sir, that with regard to the

transaction you negotiated, that a drop in the cure number would mean the consideration Barclays was giving would go down? A. Q. Yes. Is there any reason you could think of, sir, that would

justify increasing the amount of the estimate for cure over the amount shown on Lehman's books? A. Q. There's no reason why. Now, with reference to the process you described before,

of looking at open trade payable contracts, trying to figure how many there were out there and coming up with a number, is it correct that -- at least as far as you understand, the amount that would have been accrued on Lehman's books would have reflected what it thought would be its trade payables, correct? A. Q. Yes. Yes.

So would there be any good reason you can think why, to

adjust with regard to this transaction, the accruals on Lehman's books for trade payables, would have to be increased to fit onto that schedule? A. Q. I'm not sure I understand your question. Well, the amount accrued on Lehman's books would show a

cap, would show a ceiling of what Lehman thought it would have to pay in trade payables, yes? A. Yes.

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Q. And if the amount ultimately agreed upon in this transa --

ultimately shown in this transaction exceeded that, can you think of any rational reason to go over that amount accrued on Lehman's books? A. Q. No, I cannot. Because there aren't going to be any more trade payable

contracts than Lehman's already got, right? A. Q. That's correct. Did you ever, in the course of that week, see any of Mr.

Kelly's work product in connection with estimating the cure number? A. Q. No, I did not. Did you ever see any calculations or work product

generated by anyone who worked for Mr. Kelly, with regard t that cure number? A. Q. No, I did not. Did Mr. Kelly ever talk to you about the process by which

he was estimating that cure number? A. Q. No, he did not. Now, you mentioned before, sir, that Exhibit M-2, this

financial schedule, bore a significant resemblance to the deal? A. Q. Yes. Do you mean a significant relation -- you don't mean it I mean, I just want to clear up

looked like the deal, do you? your phraseology here.

Was this part of the deal?

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A. Q. No, it was not part of the deal. Okay. And it informed the numbers that were brought to Is that your --

the Court the next day? A. Q. Yes.

And how is it you know it informed the numbers that were

brought to the Court the next day? A. This was the guiding document that all of the

participants, including advisors and lawyers, were using. Q. Did the lawyers involved -- when you talk about the

lawyers, I take it you're talking about Weil Gotshal, among other lawyers? A. Q. A. Q. A. Q. A. Q. Yes. And Simpson Thacher? Yes. And in-house lawyers? Yes. Would the in-house lawyers include Mr. Birkenfeld? Yes. To your knowledge, sir, did Mr. Birkenfeld or Weil Gotshal

or Simpson Thacher play any role in the values that wound up in that schedule? A. Q. On the values? No.

Well, did they play any role in calculating the assets or

liabilities that are shown on that schedule? A. No.

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Q. Did you ever have any discussions with anyone from Weil

Gotshal or Simpson Thacher or in-house counsel about the basis for the numbers shown on that schedule? A. Q. Could you elaborate on "the basis"? Why the number is 2.25 as opposed to something else? What was the process? Who

calculated it? A. Q. A. Q.

Oh, with respect to cure? Yeah. No. What about with respect to comp? Did you have any

discussions with the lawyers about the comp numbers along those lines? A. They were -- it was an open set of dialogue. So they -- I

specifically did not, but they would have been part of lots of those processes, would be my understanding. Q. Do you have any knowledge of who, if anyone, told them

what the basis of those numbers was? A. Q. No. If you would turn, Mr. McDade, to tab 1 in your book. And for good

It's Exhibit M-1, which is also Exhibit BCI-1. reasons, it's the asset purchase agreement.

Now, did you see -- the asset purchase agreement, Exhibit 1 in evidence, sir, did you see it at or around the time it was completed? A. Yes.

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Q. And take a look at the last page, sir, and you'll see that

it's signed for Lehman Brothers Holdings Inc.. A. Q. A. Q. A. Yes. Do you see that? Steve Birkenfeld. Did you review it before Mr. Birkenfeld signed it? Mr. Birkenfeld and I had a conversation with respect to Do you recognize the signature?

this document, yes. Q. My question, sir, was did you review the document before

Mr. Birkenfeld signed it? A. Q. Yes. Okay. And when you reviewed the document before Mr.

Birkenfeld signed it, in your view, did it accurately reflect the terms that had been agreed between Lehman and Barclays? A. Q. A. Yes. Did you review it with that purpose in mind? I reviewed it with the purpose to make sure that the

concepts of what we had been negotiating were framed in the document. Q. Let me ask you first, sir, to turn to page -- well, to put

us in context, turn to page 34, which is Article IX of the asset purchase agreement entitled "Employees and employee benefits." A. Q. Do you see that, sir?

Yes, I do. And if I could direct your attention over leaf onto page

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A. Q. 35, which is section 9.1(c). A. Q. Right. And take a minute to familiarize yourself with it, sir.

But my question will go to the schedule that's referred to in this section. Let me know when you've had a chance to have a

look at the language there. (Pause) Okay. And you see, Mr. McDade, that there's a reference to --

this section covers bonuses, correct? A. Q. (c)? Yes, bonuses.

And severance is covered -- I see you turning back to page

34 -- severance is covered in 9.1(b), the prior section, correct? A. Q. Yes. And in the section on bonuses, 9.1(c), there's a reference

to a "financial schedule delivered to purchaser on September 16, 2008, and initialed by an officer of each of Holdings and Purchaser." A. Q. Do you see that?

Yes, I do. And to your understanding, sir, is the document we marked

as Exhibit M-2, the schedule we were just talking about, the same one that's referred to in 9.1(c)? A. No, it became a reference document, but it was not

actually the specific financial schedule delivered.

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Q. A. Q. A. Q. Would you take a look at your deposition, which is -Do I have that? Yes, it's in the book, sir. Yes. And turn to page 71. I think you've got the full text

there, right, full-size pages? A. Q. Yes. And directing your attention to page 71 line 14. Do you

recall that I asked you this question and you gave this answer, sir? A. Q. "Q. I do. Well, let me read it into the record, so it's clear. Within 9.1(c), you'll see -- let me read you the section 'On or after,' reading along with me

I'm thinking about here.

in section 9.1(c), 'On or after the closing, purchaser shall or shall cause its subsidiaries to pay each transferred employee an annual bonus in respect to the 2008 fiscal year, that in the aggregate, are equal in amount to a hundred percent of the bonus pool amounts accrued in respect of the amounts payable for incentive compensation, but not base salary, and reflected on the financial schedule delivered to purchaser on September 16, 2008.'? "A. Q. A. Right." Do you recall that question and answer? Yes, I do.

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"Q. next -THE COURT: MR. BOIES: MR. GAFFEY: THE COURT: MR. GAFFEY: MR. BOIES: MR. GAFFEY: MR. BOIES: MR. GAFFEY: How much more do you want read? From -- going through line 5 on page 73. Sure, Your Honor. Okay. Let's do that. A. Q. Q. So you were focused on the same section, 9.1(c) that I

just asked you about? A. Q. Yes. And then I asked this question at page 72, line 7 through

line 10: "Q. Is that schedule that's referred to in 9.1(c) the schedule

that's marked as Deposition Exhibit 19? "A. Yes, it is." Do you see that? Yes, I do. So the question I asked you -MR. BOIES: Your Honor, for context, could we have the

Is it line 5 on 73, David? Yes. Line 5 on 73 is an answer. Yes, going through there. Oh, I beg your pardon.

So it's your understanding that the amount to be paid in

bonuses pursuant to 9.1(c) was equal to the amount shown as the compensation accrual on Deposition Exhibit 19?"

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him. "A. MR. GAFFEY: Mr. Hume objects. I say you can ignore Answer at 19:

And ask and answer the question.

The accrual was based on a Barclays model which I don't

know how to contemplate and answer the question relative to their ultimate intent. "Q. Let me ask it this way, is the two billion number -- do

you know one way or the other whether the two billion number in the liability side of Exhibit 19 comes from the Barclays model? "A. Comes from all the data given to Lehman." MR. GAFFEY: MR. BOIES: BY MR. GAFFEY: Q. Sir, the question is, is the schedule marked as Exhibit 2 That was what you wanted read in? Yes.

the schedule referred to in 9.1(c) of the agreement? A. Q. A. Q. A. Q. It's a reference that was referred to, yes. It's the sa -It's a reference document. -- we're talking about the same document, yes? Yes. The one that I had on the screen before as Exhibit 2 is

the same document, in your mind, that's referred to in 9.1(c)? A. It's the same document, yes. THE COURT: Mr. Gaffey, I'm wondering whether or not

this would be a convenient time to take an afternoon break? MR. GAFFEY: I just turned to another Roman numeral,

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Your Honor. It's a perfect time to take a break. Good. We'll take a break. I'm not going

THE COURT:

to make a big deal about it, but we do have a cell phone policy that needs to be strictly observed. There's one person, and we

know who you are, whose phone went off, and it was embarrassing and it was intrusive and it's never going to happen again to anybody here. Because the first thing you're going to do when

you walk into the courtroom, if you have a cell phone with you, you shut it off. Clear? This is a policy that we are only now

experimenting with, and you can all cause us to lose the privilege if it doesn't work in this case. We'll take a break for fifteen minutes. MR. GAFFEY: Thank you, Your Honor.

(Recess from 3:32 p.m. until 3:52 p.m.) THE COURT: MR. GAFFEY: THE COURT: Please be seated. May I proceed, Your Honor? Yes.

RESUMED DIRECT EXAMINATION BY MR. GAFFEY: Q. Mr. McDade, do you still have the asset purchase agreement It's tab 1 in your book?

there? A. Q.

Okay. If I could ask you, sir, would you please turn to page 6

of that document, and in particular to subsection (d) in the definition of "purchased assets"?

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A. Q. Yes, sir. Take a moment and tell me when you've had a chance to read

through subsection (d)? A. Q. Yes, I have. And you see that in subsection (d) it refers to a --

what's defined as the "Long Positions", and it says, "Government securities, commercial paper, corporate debt, corporate equity, exchange-traded derivatives and collateralized short-term agreements with a book value as of the date hereof of approximately seventy billion." that? A. Q. Yes, I do. And you had an opportunity to see that before Mr. Do you see

Birkenfeld signed it, correct? A. Yeah. I've described a familiarity with this document

before he signed it, yes. Q. Now, when you reviewed the asset purchase agreement, did

you give any thought to whether the Long Position was properly described as book value? A. Q. I did not focus on those words, no. Do you know who was the proponent of the phrase, who put

that phrase in the agreement? A. Q. No, I do not. Did you have any discussion with Mr. Lowitt about the

description in the agreement that we're looking at?

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A. Q. A. Q. No, I did not. Did you have any discussion with Mr. Kelly about it? No, I did not. Did you have any discussion with Mr. Birkenfeld about that

definition before Mr. Birkenfeld signed the agreement? A. Q. No, I did not. At the time Mr. Birkenfeld signed the agreement, the 16th

of September, did you have any basis to know what Mr. Birkenfeld's understanding was of that definition? A. Mr. Birkenfeld was informed by all of the -- all of the

participants in terms of the process, would be my only -- a general basis of understanding. Q. A. Q. You did not have a specific -I did not have a specific. Did you have a discussion with anyone else? We talked

about Mr. Kelly, Mr. Lowitt, Mr. Birkenfeld.

Did you have

discussion with anyone else about that definition? A. Q. A. Q. No, I did not. And that includes the lawyers? Correct. Now, as a general matter, without regard to the agreement

itself, was it your understanding that the Long Position was being conveyed at a market value as opposed to book value? A. Q. That's correct. And that was the market value that the Lehman and the

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Barclays traders had come up with, yes? A. Q. Yes. Now, on the 16th, when this agreement was signed, did you

consider the transaction contemplated by the asset purchase agreement to be an equivalent exchange of assets and liabilities, a wash? A. Including all of the value of what was contemplated, yes,

approximately. Q. And did you understand that the deal was being made

pursuant to authority from the Lehman board? A. I understood that we did not have permission to proceed

without board authorization, yes. Q. Did you have any basis to think that the deal, as

contemplated on the 16th, was inconsistent in any way with the authority that the board had given? A. Q. No. Now, at any point in your dealings with Barclays in

connection with the transaction, had you ever been told it was imperative that the deal incorporate a first-day gain for Barclays? A. Q. No, I was not. Was it contemplated by the agreement that you made that

there would be a gain for Barclays on acquisition? A. Q. No, it was not. And in the deal, as you understood it, on Tuesday,

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September 16th, was there any embedded gain for Barclays on day one? A. Q. Using the total value of all that was included? In the deal as you understood it? The all-in deal, was

there an embedded gain for Barclays on day one? A. Q. No. Now, within the equivalent exchange of assets, it would be

included the 4.25 billion in assumed liabilities that we saw before on Exhibit M-2, correct? A. Q. That's correct. Now, in your view, was the -- when you were the senior

member of the team, was the value of the assets Lehman was going to transfer to Barclays a component -- a factor in this deal? A. Q. Yes, it was. Now, in between the signing -- well, did you understand

after you reviewed the asset purchase agreement on the 16th, and after Mr. Birkenfeld signed it, that it would be brought to the Court to be described? A. Q. Yes. Did you come to court on the 17th, the first time there

was an appearance? A. Q. A. Yes. Yes, I did.

Were you there for the whole hearing on the 17th? Yes, I was.

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Q. And on the 17th, were you still of the view that the deal

reflected or should have reflected an equivalent exchange of assets and liabilities, a wash? A. Q. An approximate equivalent of assets and liabilities, yes. And as you sat with the lawyers in court on the 17th, was

there anything that, to your mind, was inconsistent with the description of the deal as an equivalent exchange of assets and liabilities, a wash? A. Q. No. Now, after the asset purchase agreement was signed, the Is that right?

deal changed over the ensuing couple of days. A. Q. That's correct.

Now, did you come to understand, in the course of -- let

me put some milestones out there so we can be more specific on time. In between the hearing on the 17th and the sale hearing

on the afternoon of the 19th -- you attended that as well, correct? A. Q. A. Q. Yes, I did. You testified at it, right? Yes, I did. Okay. So in between your attendance in court on the 17th

and the sale hearing -- the commencement of the sale hearing on the 19th, did the deal change within those two mile posts? A. Q. Yes, it did. Okay. And in that time period, between the time you were

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in court on the 17th and the time you were in court on the 19th, did you come to understand that a certain repurchase agreement between Lehman and Barclays had come to play a role in the transaction? A. Lehman had had an existing repo agreement with the Fed.

The Fed had requested rather urgently that Barclays take the Fed's position in that repo. Q. So, yes, I understood that.

And did you have an understanding at the time, of what

repurchasing arrangement was made as between Barclays and Lehman after the Fed expressed that concern? A. Yes. Q. Did you have enough knowledge at the time to know the Just a general knowledge. Not specifically involved.

amount of money that Barclays advanced under the repurchase agreement? A. Q. A. Q. Approximately. How much was it? Forty-five billion. And did you have enough knowledge at the time to have an

understanding of how much collateral Lehman gave to Barclays in connection with the repurchase agreement? A. Q. A. Q. Approximately. And how much was that? Fifty billion. Now, did you have an understanding -- and again, I'm

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between those two mile posts, that is the end of the hearing you attended on the 17th and the beginning of the hearing that you attended on the 19th -- did you have an understanding as to whether the repurchase agreement had become in any way a component -- a center point of the deal? A. Well, certainly Barclays was in a different position now But a component -- a significant change, it

in the repurchase.

was simply a different financing structure relative to most of the original assets, albeit at a smaller figure. Q. So by the time of the sale hearing on the 19th, did you

still consider the asset purchase agreement to be the governing document about the transaction? A. Q. Yes. We had -- we had -- yes.

You heard at the sale hearing on the 19th, there was some

descriptions of changes in the deal, correct? A. Q. That's correct. Apart from the changes in the deal that you heard -- and Do you

you heard them described by Lori Fife of Weil Gotshal. recall that? A. Q. Yes, I do.

And apart from the changes in the deal that you heard

described by Lori Fife, were there any other changes in the deal of which you were aware on the 19th of September? A. Q. Not that I recall. Did you have any direct involvement in the steps that

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followed the Fed's expression of concern with regard to entering into a repo with Barclays? A. Q. No, I did not. Okay. Who did? Who was directly responsible in those

issues? A. Q. Paolo Tonucci and Ian Lowitt. Now, did there come a time, sir, when Barclays expressed

the view to the Lehmanites that it was uncomfortable with the value of the assets in the repo? A. Q. Friday morning. Can you describe to the Court the setting in which you

first heard Barclays' concern about the value of the assets in the repo? A. Very early morning on Friday, a meeting between Rich

Ricci, Michael Klein, the advisor, Michael Keegan, one of the senior risk partners involved from Barclays, me, Alex Kirk, Ian Lowitt -- I vaguely recall Paolo Tonucci, perhaps, being there. Q. And what was it that the Barclays folks said about their

concern with the value of the assets in the repo? A. Continued deterioration in the markets; some change in

terms of the actual assets as a result of the -- for example, the residential assets now being included; some confusion around JPMorgan and Barclays with respect to certain assets being included; and broadly speaking, they asked very specifically in terms of a need for finding more assets in

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order to close the transaction. Q. So when Barclays expressed the need for more assets in

order to close the transaction, did you have any knowledge, sir, as to who had conducted the valuation of the collateral in the repo? A. Q. A. Q. Michael Keegan -- on the Barclays side? Yes, sir. Michael Keegan. And did Michael Keegan or anybody from Barclays share with Michael Keegan.

you or anybody from Lehman the valuation that was the basis -the express basis of their concerns? A. He was describing more generally certain of the collateral

that was -- he was finding it difficult to find information with respect to it. target. Q. Now, beyond telling you that he was having trouble getting So no, he didn't provide a specific

specific information on some of the collateral -- I take it the "him" we're talking about is Mr. Keegan? A. Q. Yes, sir. Beyond Mr. Keegan telling you that he was having trouble

getting information about specific collateral in the repo, did anyone from Barclays, Mr. Keegan or otherwise, give you any information about what the nature of their perceived gap was? How big it was or how they had come to that value? A. Large enough gap not to close the transaction, but not a

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specific target. Q. A. Q. Did they put a number on the gap? They did not put a number on the gap. Did they tell you how they -- the methods that they had

used to determine whether there was a gap? A. Q. The specific methods? No.

Did they show the Lehman folks any analysis or calculation

of the -- of a shortfall between Lehman's value on the collateral and Barclays' view of the collateral? A. Q. A. Q. A. In that meeting? No.

Did they do it at any other time? Not that I'm aware of. Did you ask them for it? We had been going through that process from the beginning

of the week, so it was a continuation of the same process. Q. Do you know if Barclays' expressed view about a shortfall

on the repo was based on its own valuations? A. Q. A. Q. Certainly based on their views, yes. And did you see the valuations that Barclays conducted? I did not see them specifically. Do you know if anyone at Lehman saw the valuations that

Barclays conducted? A. Q. I do not. Now, you've said that Barclays expressed the view that

there was a gap -- that may be my word not yours, sir -- but

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Barclays expressed a view that there was a gap sufficient that it was doubtful whether it would close. A. Q. That's correct. And how explicit was Barclays about saying it would not Is that right?

close if this gap could not be filled? A. Q. A. Q. A. They used those words. And who used those words? Michael Klein and Rich Ricci. And who is Michael Klein? Michael Klein was the advisor to Barclays -- investment

banker. Q. And he had been one of their primary negotiators? Is

that -A. Q. A. Yes, he had. All week.

And who is Rich Ricci? He's -- I don't know his senior -- his title at that time,

but he was a significant member of the Bar Cap senior team working directly under Bob Diamond. Q. That's more what I'm asking about. He was another one of

their negotiators? A. Q. Yes, he was. Okay. And as best you recall, what did Mr. Klein say and

what did Mr. Ricci say by way of saying we're not going to close unless more value is added to the deal? A. Those were the words they used.

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Q. A. Q. I got them right? Those were -- yes, you did. Now, and when they said they wouldn't close unless more

value was added to the deal, they didn't give you a number that had to be reached? A. Q. No, they did not. Okay. Do you know if they gave anybody at Lehman a number

that had to be reached in order for Barclays to go ahead and close? A. Q. I don't know that. Did you ever ask that question of anyone else, Mr. Lowitt,

Mr. Kelly, Mr. Tonucci, any of the other people we've been talking about? A. Q. No, I did not. Now, what was the nature of the gap, as you understood it, There was a gap between the amount

as opposed to its number?

of value that Barclays was expecting to receive, correct? A. Q. That's correct. As measured against the amount of liabilities it was going

to assume, correct? A. Q. Exactly. And was it your understanding that the gap needed to be

filled in order to put the deal back in that rough equivalent of assets and liabilities that had been contemplated back on Tuesday?

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A. Q. Yes. Was it your understanding that additional value had to be

added to the deal in order to bring Barclays over that balance, so that there would be a gain for Barclays? A. Q. No. Would such a project have been consistent with your

understanding of the deal as you made it and as you heard it described to the Court, that is, where Barclays would get more than the liabilities it was assuming? A. Q. That would not have been consistent. And the liabilities that we're talking about at this point

where a gap is being filled, those included the compensation and cure liabilities we talked about before, correct? A. Q. Yes. Okay. Now, these conversations that you've told us about

that took place early on Friday morning; after that Friday morning meeting, did you have any more conversations with folks from Barclays about the gap? A. I did not. I left the headquarters and went over to the

office of Weil to prepare for the court hearing. Q. And did you give anyone the task of dealing with this

issue? A. I gave Alex Kirk and Ian Lowitt the task of working

through the issue. Q. Okay. And did you come to find out whether they had

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worked through the issue? A. We found two assets that potentially -- one of the

challenges we had was determining whether or not we even had opportunities or options. We found two assets. One was

something called a 15c3, and secondarily we found unencumbered assets in the clearance box -- the Lehman's clearance box. Q. And do you have knowledge, sir, now, as to the amounts of

15c3 and unencumbered box assets that were added to the deal? A. I do. 15c3, 769 million; and unencumbered assets, 1.9

billion. Q. So the 769 million in 15c3 and the 1.9 billion in

unencumbered box were, in essence, added to the collateral in the repo that would be transferred to Barclays, correct? A. Q. That's correct. Did you ever see a calculation of what the total effect

was of taking the collateral in the repo and adding on to it the 15c3 and the unencumbered box? A. Q. A. Q. No, I didn't. Did you ask anyone to do that? No. Did you know the basic -- did you have an idea, sir, on

the Friday before the sale hearing, what the value of the repo was in the collateral, as shown on Lehman's books? A. Q. The value of the repo? Of the repo collateral?

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A. Yeah. It would have equated to approximately -- again, But it would

the basket of securities had changed slightly.

have equated to the process that we went through the week in terms of valuing those assets. Q. I think we're missing each other. My question went more

to a number.

Did you have an idea on the Friday of what the

repo collateral -- what Lehman thought the repo collateral was worth? A. What Lehman thought the original repo, what the nominal

value of the repo was? Q. A. Q. Yes. It was fifty billion, approximately. Had Lehman's view of the value of that collateral changed

by Friday, just before the sale hearing began? A. Yes. We were part of that process of valuing with the Yes.

significant changes over the course of the week. Q.

Do you know the criteria that was applied to the repo

collateral in order to determine its value? A. Q. The specific criteria? No.

And as far as you know, no one on the Lehman side was told

the criteria that Barclays had applied to arrive at its idea -its view of the value in the repo. A. Q. Is that right?

Its criteria versus the actual -Market value, book value, some other measure? That's what

I mean by criteria.

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A. They were certainly using market value in terms of --

which is what all the risk operators had been using all week. Q. So market value was used for -- as you understood it,

market value was used for the collateral in the repo and the unencumbered box and the 15c3 asset? A. Q. Yes. And no other measure was used besides market value? That

was your understanding? A. I would qualify that 15c3 was unchartered territory, and

so the concept of market value for a customer deposit for segregated claim. Q. Okay. That's a good point. So for a clear record, let's

just talk about the two aspects, the two repo and the collateral and the assets in the unencumbered box. As far as

you understood, before you came into court for the sale hearing, those assets were being measured at market value? A. Q. A. Q. A. Q. A. Q. Yes. Yes? Yes. Not book value? That's correct. Not liquidation value? Market value. Now, if Barclays doesn't give you a number, there's no

target, and you give folks the task of finding additional

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value, how do they know when to stop, sir? What's the measure

for when they should stop adding value to the deal? A. We went through the same process over the course of the

week, so that the ultimate determination, find options, found the two options; 15c3 was still, in our minds, of potentially questionable, given it needed regulatory authority to be able to be transferred over. So really we were focusing on making

sure that we got appropriate value for the unencumbered assets. Although, obviously, both were in the transaction. The process at the end was the team at Lehman at that point in time, finishing the process in terms of the ultimate determination of the -- you know, whether or not to include, and "was there enough". There were no other assets. Lehman

was extremely motivated -- we were extremely motivated, given what had happened in the marketplace and in the marketplace to us, to move assets in this transaction, because we were in no position to risk-manage assets, given all that had happened to us, by market participants, and given the changes in our personnel over the course of the week. Q. Okay. There were some assets, that was contemplated by Under the

the transaction, would be left behind, correct?

original asset purchase agreement, it wasn't Barclays taking all the assets? A. Q. I believe it was customer -- some sort of customer assets. Okay. And there comes a point on the Friday morning where

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Barclays says in sum or essence, this repo collateral is worrisome, we need more. A. Q. A. Q. That's correct. And if we don't get more, we're not going to close, right? That's correct. And you give Mr. Kirk, who enlists Mr. Lowitt and Mr. Right?

Kelly and some others, the task of going to find more for Barclays, right? A. Q. A. Q. That's correct. And they go and look for more for Barclays, yes? Yes. And in the meantime, you're headed down to this courthouse

for the sale hearing, correct? A. Q. here? A. I traveled with Weil. I had been at Weil's office. I That's right. And did you travel with your lawyers, or did you meet them

traveled with Weil. Q. A. Q. Okay. And who at Weil did you travel with?

Tom Roberts, Harvey Miller, Lori Fife. And at some point you learn, here in the courthouse, that

the project of adding additional value has been completed, correct? A. Q. Correct. And did you learn the amount that had been added?

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A. Q. A. Q. I learned the amount of the unencumbered assets. So you learned 1.9? Um-hum. Did you learn about the fact of the 15c3, if not its

amount? A. Q. The fact, yes. Okay. And did you learn that any other assets had been

added apart from unencumbered box and 15c3? A. Q. No. And did there come a point where you, sir, were

comfortable now that enough value had been added? A. The team -- given I was part of a separate process now --

the team had become comfortable, yes. Q. Based on the process that you've described, sir, where

Barclays doesn't give a target, isn't it necessary that Barclays is the arbiter of when people should stop looking for more value? How does Mr. Kirk, Mr. Tonucci, Mr. Kelly and the

others know when to stop looking for more value? A. I would again, just repeat my previous answer, which is,

number one, we had no other assets; number two, so we had found all the options; and number two (sic), we'd gone through that process of working through and valuing the assets over the course of the week. So there would have been a consistency in Clearly we were not in a great But it's the same

terms of the approach.

negotiating position, as you described.

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consistent approach in terms of making sure that we went through a process of trying to ascertain the value of those assets that would be due. Q. Well, speaking of negotiating position, I know it was a But did you have less

tough week from tough to finish.

leverage by the end of the week than you had at the beginning? Did you have less leverage just before the sale hearing began than you had overnight from Monday to Tuesday? A. We had very little leverage. I wouldn't describe -- I

don't know how to describe it as we started with an empty tank and ended with one. Q. You would agree with me that overnight from Monday the

15th into the early morning of the 16th, there was back-andforth on price, wasn't there? A. Q. There was always back-and-forth on price. Okay. On the Friday morning, when additional assets were

being added, was there back-and-forth between Lehman and Barclays as to how much more needed to be added? A. Q. To the best of my knowledge, yes. And was there ever a point where Barclays demanded more

and Lehman refused, saying no, that ought to be enough for you? A. Q. No. Not in ultimately how the deal got done.

Did you receive any communication from Mr. Kirk, giving

you a progress report on whether Barclays would be satisfied by the additional assets?

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A. Q. A. Q. A. Q. Right as I arrived here, I received an e-mail. Okay. Would you turn to tab 51 in your book, please?

Sorry, five-one? Five-one, yes, sir. Now, Exhibit 51 in evidence, sir, is

an e-mail to you from Alex Kirk at 8:09 p.m. -- I beg your pardon. Take a look at the e-mail on the bottom of the chain.

It's from Alex Kirk to you, Friday, September 19th at 3:39 p.m., subject: Box. And it says, "Rich Ricci just told me he

won't blow up this trade by being a pig." Is that the e-mail you were referring to? Yes. And you received that e-mail just before you walked into

court? A. Q. Correct. Was there any other measure of Barclays' satisfaction as

to how many more assets needed to be added other than as described by Mr. Kirk? A. Q. A. Q. Measure, directly to me? Yes. No. And did you understand when you received Mr. Kirk's e-mail

that the asset addition project was finished? A. Q. Yes. And so you understood it was finished by the addition of the 1.9 billion in unencumbered box, yes?

two components:

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A. Q. A. Q. Yes. And the -- what turned out to be 769 million in 15c3? Yes. And to your knowledge, sir, were there any other

categories of assets added as part of the addition of additional value on Friday? A. Q. A. Q. There was a true-up of the exchange-traded derivatives. And do you have a number you can put on that? I don't have a number, no. Now, did the -- as you -- you attended the sale hearing

from start to finish, I take it? A. Q. A. Q. I did. Long day? Yes, sir. At any point in your attendance at the hearing, did you

hear described to the Court the addition of these categories of additional value, that is, 15c3 or 1.9 billion dollars in unencumbered box assets? A. Q. A. Q. The specific words? Yes, sir. Not to my recollection. As the sale hearing progressed, sir, from approximately

three something in the afternoon until shortly after midnight on the 20th, did your view change about the transaction, that it was something other than an equivalent exchange of assets

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and liabilities? A. Q. No, it did not. And did your view change at any point that the measurement

of an equivalent exchange of assets and liabilities included the liabilities to be undertaken by Barclays for comp and cure? A. Q. Just to be specific, could you repeat that? Well, by Friday the 19 -- let me withdraw that question Your understanding on Friday the

and put another one to you.

19th at the sale hearing was that the comp obligation -- the comp liability still remained that agreed number of two billion dollars. A. Q. Yes. And the cure liability was still measured at 1.5 billion Is that right?

dollars? A. Q. A. Q. A. Q. Yes. As had been described to the Court on the 17th, when -Yes. -- you were at the first hearing, right? Yes. And your view that the deal was still a balanced exchange

of assets and liabilities was premised on your understanding of the value of the assets and your understanding of those values of the undertaken liabilities, correct? A. Q. Correct. So if those assumed liabilities were lower than 1.5 and 2,

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that would affect the balance that you thought the deal was supposed to achieve, correct? A. Q. That would have affected the rough balance, yes. Okay. And at any point, sir, during the course of the

sale hearing, before it concluded, had your view changed that there was no -- that it was inconsistent with this transaction that there be an embedded first-day gain for Barclays? A. Q. At -- you have to repeat -- at no point -Let me try and rephrase it. Did you still believe it was

inconsistent with the transaction that you had made, if Barclays made an embedded first-day gain? A. Q. A. Q. Yes. And you believed that throughout the sale hearing? Yes. Did anything you heard at the sale hearing disabuse you of

that notion? A. Q. No. Had you heard anything during the course of the sale

hearing that made you think or understand that it was imperative to Barclays, as a condition of closing, that it have such a first-day gain? A. Q. No. And if it had been described as a deal that was not in

balance, would you, as the client, have wanted that to be corrected, to be described to the Court?

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A. Q. Yes, I would. In the discussions on the morning of Friday the 19th, when

Barclays was saying it would not close without additional assets being added, did anyone from Barclays say to you anything you understood to mean that if Barclays didn't take more than a balance -- if Barclays didn't have a gain, it was not going to close? A. Q. No. If you would turn in your book, sir, to tab 3, that's

Exhibit M-3 in evidence, which, for the record, is also BCI Exhibit 5 -- it's the same document. document before, sir? A. Q. A. Q. Yes, I have. What do you recognize it to be? A clarifying letter. And were you involved in any of the negotiations of this Have you seen that

document? A. Q. Yes. What was the nature of your involvement in those

negotiations? A. Just continued work through the weekend, in terms of -- at

a conceptual level. Q. deal? A. Amend the deal? In your mind, sir, did this letter agreement amend the

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A. Q. Yeah, did it amend the deal? (Pause) I think in concept it was meant to reflect on the changes

that had happened from Friday and the lack of timeliness in terms of the ability to communicate in the specific new document to the Court. So I don't believe, in concept, it

generally amended the deal. Q. It was -- among its purposes was to include references to

the unencumbered box and the 15c3 that had not been mentioned specifically in court. A. Q. That's correct. Now, I bet I know the answer to this, but did you have Is that right?

anything to do with actually drafting the language of the letter? A. Q. No, I did not. Okay. Did you review drafts of it as drafts came and went

over the weekend? A. Q. I reviewed -- familiarity with the document, yes. And would you turn to paragraph 1(c) of Exhibit M-3, the And that's within its definition of Do you see that, sir?

clarification letter? "Purchased assets." A. Q.

No, what page is that? On the very first page of the document, there's paragraph

1 "Purchased assets excluded assets." A. Yes.

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Q. ii -A. Q. Right. -- there, you see that there's a reference to the Do Are you with me? And then in subsection (ii) -- Romanette

definition of purchased assets in the original agreement. you see that? A. Q. Yes. And you understand that to mean the asset purchase

agreement? A. Q. Yes. And without taking all your time to go through the

language of it, you understand that this paragraph had to do with the definition of purchased assets in the sale transaction, correct? A. Q. Yes. And did you have any involvement in the drafting of that

provision? A. Q. No. And if you would turn, sir, to paragraph 13 -- well, let

me ask you first, did it ever come to your attention, sir, that the repurchase agreement between Lehman and Barclays had been terminated on Friday when LBI filed? A. Q. No, it did not come to my specific attention at that time. Did it ever come to your attention that the repo had been

terminated?

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A. Q. Not at that point in time. Did there come a point when you did learn that the repo

had been terminated? A. Q. A. Q. Yes. When was that? Through the process of reviewing -- looking back. Just so we're clear, we're not talking about over the At some point after?

weekend? A. Q. A. Q.

Correct, after the weekend. Okay. Months. Months, okay. So over the weekend, when you're involved Weeks, months?

in the negotiation of the clarification letter, are you not aware that the repo's been terminated? A. I was not specifically aware that it had been technically

terminated, no. Q. Take a look, if you would, at paragraph 13 of the

clarification letter, entitled "Barclays repurchase agreement." And as I've asked you before, sir, just take a look through it sufficiently to tell me you've read it through and have some idea of its terms. A. Q. A. Q. Yes, I see it. Got a chance to do that? Yes, I have. Did you focus on that paragraph of the clarification

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letter, at any point over the weekend of the 20th and the 21st of September 2008? A. Q. Just the fact that it had been included. Apart from noting that it had been included, did you have

any discussions with anyone from Barclays about the need for that paragraph? A. Q. No, I did not. Did you have any discussions with any lawyers representing

Lehman about the need for that paragraph? A. Q. No, I did not. Was there any discussion with anyone about the need for

that paragraph? A. Q. No. If you would turn, sir, to -- let's take it all the way Now, the sale hearing has been held. You understood

through.

that an order had been issued by Judge Peck approving the transaction, correct? A. Q. That's correct. And then through the weekend that followed, the 20th and

the 21st, you worked on the clarification letter, correct? Yes? A. Q. A. Q. Yes. Did you go to the closing? I did not go to the closing. Okay. Were you in touch with Mr. Kelly over that weekend

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at all? A. I don't recall if Mr. Kelly was at the offices of Weil on

Sunday. Q. A. Q. Okay. I don't have a recollection of that. Just so we're in -- connecting here sir, were you in touch

with him at all over the weekend, Weil Gotshal's offices or otherwise? A. him. Q. A. Q. A. Q. A. Q. A. Q. Were you in touch with Paolo Tonucci? Yes, I was. Were you in touch with Gerard Reilly? No, I was not. Were you in touch with Brett Beldner? I don't know that individual, no. Were you in touch with Ian Lowitt? Yes, I was. And at any point, did Mr. Lowitt or Mr. Kelly inform you Right. I don't have a recollection of being in touch with

that they were working on an opening balance sheet along with folks from Barclays to reflect the financial consequences of the transaction, as they understood it? A. Q. No. Okay. Would you take a look at Exhibit 74, it's tab 74 in Have you had a chance to look at that

your book there.

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document, sir? A. Q. Yes, I have. Do you recall I showed you a copy of that document at your

deposition? A. Q. Yes, I did. And that was -- it seems like so long ago, sir, but it was

September 2, 2009? A. Q. Yes. Prior to September 2, 2009, had you ever seen the opening

balance sheet? A. Q. I had no recollection of seeing it prior to that. And prior to September of 2000 -- at or around the time of

the closing, did you see any opening day balance sheets that were prepared to reflect any gain or loss that Barclays might have on the transaction? A. Q. I have no recollection. I'm going to ask you take a look at Exhibit 74, which is

in evidence, which is also BCI Exhibit 269, for the record, and ask you first to look at the names across the top, to whom the e-mail is addressed. A. Q. No, I do not. And if you take a look at the balance sheet, sir, you'll Do Do you know Gary Romain or James Walker?

see that the total assets shown are 52.88 billion dollars. you see that? A. Yes, I do.

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Q. Was that your conception of the total value of assets that

had been transferred to Barclays from Lehman as part of the sale transaction? A. Q. A. Q. Not including the cash. Okay. The cash would be inaccurate. And you see a calculation for accrued bonuses that goes Do you see

across the line to show a two billion dollar item. that? A. Q. Yes, I do.

And you see a line for cure payments that goes across the Do you see that?

line to 2.25 billion dollars. A. Q. Yes, I do.

Do you recognize those two items to be the values that

were put on comp and cure in the original September 16th financial schedule? A. Q. Those reflect the original, yes. Okay. Now, the calculations of this opening day balance

sheet show an equity position for Barclays of 3.38 billion dollars. A. Q. Do you see that?

Yes, I do. Now, if there had been an equity component in the deal on

the opening day of 3.38 billion, the deal would not be in balance. A. Is that correct?

The deal would not be in balance using all of the assets

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and liabilities as we collectively defined the total value of the transaction. Q. A. Q. That's correct.

And the deal you made was one to be in balance, correct? That's correct. So if the opening day balance sheet for the deal reflected

that Barclays had 3.38 billion in equity, that would not be consistent with the deal you made, would it? A. That's correct. But these numbers don't reflect the

specific parts of that deal. Q. Did Mr. Kelly ever inform you or anyone else, as far as

you know, that he was working on an opening day balance sheet for Barclays? A. Q. He did not inform me, to the best of my knowledge. And just turning your attention back to Exhibit 74, sir,

to the balance sheet itself, do you see the item for cure payments? A. Q. A. Q. I'm just directing your attention to that line.

In the same document? Yes, sir. Yes. Do you see after that it says, "Placeholder for actual Do you have any idea what that meant? I've not seen the document, so I can't --

accrual"? A. Q. No.

At any point during that week, had it ever come to your

attention that the number for cure was just a placeholder for the actual accrual?

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A. No. We were trying to determine the accurate figures, as

I described before. Q. And the accurate figure would be the amount that Barclays

was most likely going to have to undertake? A. Q. Potential to undertake. Okay. And the accrued bonuses of two billion dollars, it Do you have an idea of what

says "assumed to be all accrued." that would mean? A. Q. No, I do not.

At any point during the week, from the time that you were

involved in the initial negotiations through the sale hearing, had you had any concept or had anybody ever said anything to you that that two billion dollars was anything other than a full requirement for Barclays to pay? A. Q. It was a full requirement. If you would turn your attention, sir, to tab 100 in your

book, which is Exhibit M-100 in evidence, also BCI Exhibit 132 in evidence. for 2008. You'll see it's a Barclays results announcement

If I could ask you, sir, to turn to page 95 of that And again, I'll ask you to just skim,

results announcement.

sir, directing your attention to the item marked number 11, "Acquisitions." If you'd just read through it enough to become There's a particular provision to Let me know when you've

roughly familiar with it.

which I want to direct your attention. had a chance to look at that.

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A. Q. (Pause) Okay. Directing your attention, sir, to the penultimate I'll read it into the record: "The

paragraph on that page.

excess of the fair value of net assets acquired over consideration paid resulted in 2.262 billion pounds sterling of gains on acquisition." I'll represent to you, sir, that that translates to about 4.2 billion dollars on that day. Was a 4.2 billion dollar gain

derived from excess of the fair value of net assets acquired over consideration paid on acquisition, contemplated by the deal you made? A. Q. No. Did anybody ever suggest otherwise to you in the period

between September 15th, when the negotiations began, and the conclusion of the sale hearing, at shortly after midnight on the 20th of September? A. Q. No. Did anybody ever suggest otherwise to you in the period

between the end of the sale hearing, shortly after midnight on the 20th of September and the closing on the 22nd of September? A. Q. A. No. Did anybody ever suggest that to you at any other time? The first I saw it was when we talked about it at the

deposition.

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Q. A. Q. That would be September of 2009? Correct. Now, in that provision, sir, there's a reference to the Was that part of your calculus in

fair value of net assets.

determining whether or not the deal was a wash? A. Q. A. Q. I can't comment on the term used in Barclays document. I think I'm confusing the picture here. Okay. Shut the book. Let's not talk about that document. I

want to get -- I want to know what your conception was, Mr. McDade. When you had reached your conclusion that the deal was

a wash, that it was a rough equivalent exchange of assets and liabilities, you took into account that the liabilities had some value, correct? A. Q. That's correct. So the deal couldn't be done irrespective of the value of

those liabilities, correct? A. Q. That's correct. And the formula you had to determine whether it was an

equivalent exchange of assets and liabilities took into account the value of the assets, correct? A. Q. Yes. So the deal that you agreed couldn't have been done Is that

irrespective of what the value of the assets was. correct?

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A. That's correct. MR. GAFFEY: CROSS-EXAMINATION BY MS. TAGGART: Q. Good afternoon, Mr. McDade. I'm Erica Taggart from Quinn I have nothing further, Your Honor.

Emanuel Urquhart & Sullivan, and I'm representing the committee. I think we met at deposition.

I'd like to begin by -- get a little bit of a better understanding of how the balance sheet that you spoke to corresponds to some of the categories in the asset purchase agreement. MS. TAGGART: So if you can bring up the asset

purchase agreement, and that I believe is M-1. Q. And in particular, if you can look at page 6. I believe

that's where Mr. Gaffey took you through some -- one of the definitions of purchased assets. And if you'd look at Exhibit

D, that was the part that talked about a number of assets: government securities, commercial paper, those collectively the Longs that was approximately seventy billion dollars. see that? A. Q. Yes, I do. But there were other assets that went over into the deal Do you

to Barclays, even as contemplated in the asset purchase agreement, right? And I'll help. If you look right after that That's the

in subsection (e), it talks about other assets.

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fifty percent of each position in the residential real estate mortgage securities. A. Q. Yes, I do. And as of the deal, at least, of September 16th in the Do you see that?

asset purchase agreement, was it contemplated that both those assets described in (d) that says -- described as the book value of seventy billion, and the assets in (e), the fifty percent of the residential real estate mortgage securities, would be going to Barclays? A. Q. That's correct. So now I'd like to turn to the balance sheet that you And so I believe that's Trial Exhibit 2 and M-2 And I think you testified to Mr. Gaffey that

spoke about.

in your binder.

these are the numbers that the deal was based on, as of the 16th. A. Q. Is that right? That's correct. And in this deal, are also the value of the fifty percent

mortgage securities that are defined in that section (e) also reflected in this balance sheet? A. Q. The 2.7 represents the fifty percent. Okay. So looking -- that's on the third category under Is that what

"Assets", there's a listing, "Mortgages 2.7." you're referring to? A. Q. Yes, I am.

And does that show the value that at least was subject to

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this agreement that you testified, about the fifty percent mortgages, was 2.7 billion dollars. A. Q. That's correct. So, in order to get to the 72.65 that's the total assets Is that right?

at the bottom, would you be taking the 70 billion of the Long Positions plus the 2.7 mortgages, and that's how you get that 72.65, right? A. Q. That's correct. And as of the 16th, you still were contemplating, as it Assets were going to equal

shows, this balanced transaction? liabilities? A. Q. A. Q. Um-hum. Is that right? Yes.

And I just want to confirm, then, that includes, with all

the purchased assets in subsection (d) and in (e), including the residential mortgages securities, all those assets, it was still contemplated those would be balanced by liabilities, right? A. Q. Yes. Okay. Now, I want to talk -- switch gears to when you

talked about later in the week where the -- where Barclays takes over the Fed, right? And they take over the Fed

repurchase agreement and they end up owning basically the same securities that were pledged as part of that repurchase

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agreement. A. Q. Yes. You testified that as of Thursday, September 17th, Lehman Do you remember that?

thought the repo collateral was worth the nominal value of fifty billion dollars, right? A. Q. Correct. And I think you told Mr. Gaffey, but then there was part

of a valuation process reflecting significant changes over the course of the week, and that happened the next day, right? A. No. You'll have to repeat that question. We started that

process at the beginning of the week. Q. But there was a process on September 19th where there was

a negotiation between Lehman and Barclays of what was the value of the collateral that Lehman received when it took over the Fed repurchase transaction, right? A. Q. That's correct. And if I remember right, you were involved in the

process -- setting up the process, but then you weren't involved in the negotiations, right? A. Q. That's correct. You, I think -- you set up early-morning some people to

take care of it, like you were directing traffic, and then you had other things to deal with, right? A. Q. That's correct. And Alex Kirk was one of the people that you directed to

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deal with it? A. Q. Yes, he was. What was the number that was reported back to you as the

result of the negotiations that Lehman had determined, after negotiating, it was going to assign to the value of the repo collateral that went to Barclays? A. Q. A. Q. That Lehman had determined? Yes. Prior to those negotiations? No, after. If I remember right, the -- on Thursday when

they take over the Fed, Lehman thinks the nominal value is fifty billion dollars, right? A. Lehman no longer thinks. Lehman's had a process with

Barclays over the course of the week with the valuing of those assets. Q. A. Q. Yeah. But the assets are --

That's -Well, let me talk about -- what was the time when you told

Mr. Gaffey what Lehman thought the repo collateral is worth was a nominal value of fifty billion dollars? is that? A. The original repo done with the fed had a nominal value of What point in time

fifty billion dollars. Q. Okay. And do you know what time that valuation was? The

fifty billion valuation?

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A. I believe that happened Monday morning, that repo.

Sometime Monday. Q. Okay. There was a process, though, that happened on

Friday that started, I believe, with -- Barclays' negotiators came and said they weren't comfortable with the amount of value that was in that repo. A. Q. Yes, I do. And I think you were at the beginning of the meeting where Do you remember that?

you started discussing how we're going to have negotiations and what are we going to assign the value of the collateral that now Barclays has taken over in the repo, right? A. Q. Right. And going into the sale hearing later that day, you do

hear a result from your team about the value of the assets determined in a negotiation process for what the value of the collateral that Barclays took for the repo, right? A. Q. A. That's correct. What was that number? I don't hear a specific number. So the repo had been

valued by the two teams at approximately the forty-five billion going into Friday morning, the repo collateral, and there was new collateral which wasn't a hundred percent consistent with the original balance sheet which caused the new Barclays' view plus the continued changes in the marketplace, no specific number was put because Mr. Keegan and his partners were having

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a touch time determining some of the new collateral that was included from the confusion around J.P. Morgan and the clearing bank confusion. But the ultimate determination, now to get to

your answer, had to be that the team, who wasn't there, had to determine that the 1.9 and the 15c3 was the difference in the value of the collateral. Q. I want to know about the forty-five. Putting aside the

15c3, the unencumbered box, isn't it right that your deal team and Barclays' deal team went through a process to value the assets that went to Barclays as part of the Fed repo and concluded out of that process the value was forty-five billion dollars? A. Q. To the best of my knowledge, yes. Okay. And that is -- when you heard it, it was your

understanding that that was the market value of that collateral, is that right? A. Q. That's correct. And your understanding of market value is the ability to

transact securities of a normal lot size in the marketplace, is that right? A. Q. That's right. Now, I want to show you an exhibit. And I'm afraid,

because Mr. Gaffey didn't use it, it wasn't in your binder, but I have a copy. MS. TAGGART: May I approach?

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evidence. THE COURT: MR. BOIES: MS. TAGGART: truth of the matter. Are there any objections? Objection on hearsay grounds, Your Honor. I think that I'm not using it for the I am using it for the state of mind of THE COURT: THE WITNESS: MS. TAGGART: Yes, you may. Thank you. And I'm showing the witness what's been

marked as Movants' Trial Exhibit 694. Q. And first, I just want you to identify this. At the top,

is it an e-mail from Alex Kirk dated November 19th, 2008? A. Q. Yes, it is. And it is forwarding an e-mail from Daniel Flores (ph.)

that copies you, Bart McDade, is that right? A. Q. A. Q. A. Q. A. Yes, it does. And that one's of Thursday night, September 18th, 2008. Um-hmm. Is that right? Yes. And who's Daniel Flores? I don't -- he's a Lehman employee. I don't know his

specific role. Q. Okay. MS. TAGGART: I request that this exhibit be moved in

Mr. McDade, in particular, the information that he received

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Q. before he went into the sale hearing and the basis of his testimony, not the truth of what's said here. MR. BOIES: that grounds. THE COURT: MR. BOIES: I'm sorry. What? Your Honor, we withdraw the objection on

We withdraw the objection if that's the

limited purpose for which it is offered. THE COURT: All right. Fine. It --

So I'd like to draw your attention to -THE COURT: MS. TAGGART: THE COURT: MS. TAGGART: THE COURT: Would you like me to admit it? Excuse me? It's admitted. -- then as Movants' Trial Exhibit 694? Okay. I know you're eager to get to the Yes. May I admit this

next question but it's admitted. MS. TAGGART: Okay. I am eager.

(E-mail from Alex Kirk dated 11/19/08 was hereby received into evidence as Movants' Trial Exhibit 694, as of this date.) BY MS. TAGGART: Q. Okay. So I'd like to look at this e-mail. Let's take the

top paragraph.

And it says "Alex Kirk suggested we contact

each of you to help us understand, on a theoretical basis, what would happen in a fire sale liquidation of the securities that are being transferred to Barclays as part of the proposed transaction. The question is what these securities could be

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sold for such a scenario." A. Q. Yes, I do. And Alex Kirk, in fact, is the person that you gave your Do you see that?

proxy to negotiate with Barclays on the issue of value, isn't that right? A. Q. A. Q. As of Friday morning. Yes. Yes. Yes. But it was your understanding when you testified at Was it your Is that correct?

the sale hearing that Alex -- well, I'll ask.

understanding when you testified at the sale hearing that Alex Kirk had actually used a fire sale process to calculate the positions for the different categories of assets? A. Had used a fire sale process. We used a process with

Barclays.

Alex Kirk wasn't part of any of that process up

until Thursday evening when I asked him to help because I knew I had to be in court the next day. So Alex Kirk was not part

of any process over the course of the week. Q. But Alex Kirk was part of the process on September 19th

that had your proxy to calculate the value of the Fed repo collateral, isn't that right? A. He was part of a -- he was part of the process and had my

proxy to finish off the process that had already begun and continued through the week. Q. Before the hearing on the 19th when you testified, did you

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have any knowledge of a project where Alex Kirk suggested that fire sale liquidation prices be calculated for the top hundred positions of those different categories? A. Q. A. Well, I see I'm CC'd on this e-mail, yes. But that was -- sir, go ahead. But that's the entire basis of -- and I have no

recollection of the specific process. Q. And was there any discussion that your testimony at the

sale hearing was to address fire sale prices for securities? A. No. MS. TAGGART: MR. MAGUIRE: CROSS-EXAMINATION BY MR. MAGUIRE: Q. Mr. McDade, Phil Maguire for the SIPA trustee. I'd like That's all. If it please the Court.

to follow-up, sir, on some questions that Mr. Gaffey asked you on the subject of what have I done on the Friday in terms of finding additional sources of value or additional assets for Barclays. And if I understand, there were -- your team, in the

course of its work on that day, found two additional assets that they felt could be provided to Barclays. A. Q. That's correct. Of course, Barclays, all this time, was doing due But the Is that correct?

diligence, continued due diligence on the entire sale. two additional assets were the c3 asset and what you've

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referred to as the unencumbered box -A. Q. A. Q. That's correct. -- is that correct? That's correct. With respect to the c3 assets, I believe you mentioned

that you were in unchartered waters, that there were some regulatory issues? A. Yes. It was a new term to me and all of the front end

risk business operators, this whole concept of the comfort cushion. So we had started a process as we had tried to

identify all potential opportunities earlier on in the week. It became quickly apparent that we would need regulatory approval for any such -- a contemplation of any such transaction. Q. And when you refer to regulatory approval, is there anyone

in specific that you had in mind? A. Q. The SEC. You understand that 15c3 is a rule that's promulgated by

the SEC? A. Q. Yes. And when you say SEC, we're referring to the Securities

and Exchange Commission. A. Q. Yes. I'm sorry. Can you tell me what

You referred to "comfort cushion".

you're referring to there?

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Q. A. It's just my term for what I understood the segregated

assets, the broker dealer needed a requirement in terms of having a deposit or a cushion with respect to those segregated assets. Q. And you understood that the assets that were segregated in

the c3 account were assets that were held by Lehman for the exclusive benefit of customers? A. Q. Yes, we did. Sir, I'd like to show you a document that we have marked

as Movants' Trial Exhibit 453. MR. MAGUIRE: THE COURT: Your Honor, if I might approach? Yes. Thank you.

Sir, is this exhibit an e-mail that you received on or

about 12:59 a.m. on Monday, September 22nd -A. Q. A. Q. Yes --- 2008? Yes, it is. So this is just a few hours before the closing of the

transaction? A. Q. A. Yes. And can you tell us who is Chris O'Meara? Chris O'Meara was the chief risk officer at the time at

Lehman. Q. A. The subject of this e-mail is 15c3-3? Yes.

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Q. You understood that to be referring to this additional

asset? A. Q. Yes. Mr. O'Meara reports to you "Good progress on this day. Can you tell us to whom you We

just gave Ian the download."

understand the reference to be there? A. Q. Ian Lowitt, our CFO. "The lawyers say they have enough to go on. The Lehman

regulatory team and the Barclays regulatory team have had two meetings on this today and will have one more tonight once the remaining big reconciliation break has been solved. Barclays'

reps are much more comfortable than this AM, but still substantial challenges. I think they are manageable.

We spoke with SEC as well to tell them the plan and explain that some amount of the excess, 15c3-3 lockup, is part of the purchase price consideration." Sir, can you please tell us whether that summary that Mr. O'Meara gave of his presentation or discussion to the SEC is consistent with your understanding of the deal? A. Q. Yes, it is. It was your understanding that what was proposed here was

to provide some amount of the excess, 15c3-3 lockup, as part of the purchase price consideration? A. Q. Yes. Can you please tell the Court whether that deal, that --

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what was described to the SEC just hours before the closing, whether that ever changed? And specifically, whether Lehman

ever agreed unconditionally to give Barclays any assets from the 15c3 account? A. To the best of my knowledge, the deal did not change. And

certainly, Lehman was in no position either with other assets or touching a segregated client asset. It obviously needed

regulatory approval for anything that we did with respect to this as any consideration in the transaction. Q. Sir, I'd like to ask you some questions now about Lehman's

relationship with the Depository Trust & Clearing Corporation. You understood that the DTC, or DTCC as it's sometimes referred to, was in a position to shut Lehman down? A. Q. A. Yes, I did. Can you explain how that was? Over the course of late into the week, DTC had become

concerned with Lehm -- the combination of Lehman's own abilities to operate and the potential risk from the hundreds of thousands of trades that were in front of the DTC in normal course of business. They had also, I think, become concerned

with respect to J.P. Morgan starting to make clear that they were not, as our clearing bank, going to be proceeding to help clear transactions. So the combination of the two made it

pretty apparent to our finance and operations team of senior professionals that we would, in effect, be completely shut from

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being able to transact, they being the -- if you will, the lifeline of all market settlements. Q. And did there come a time when you understood that

Barclays offered DTC a limited guaranty of 250 million dollars against the liabilities that Lehman had to the DTCC? A. DTC asked Barclays to step into the shoes of Lehman.

Barclays' initial response -- I learned that, yes, over the weekend. Barclays' initial response was to cap that exposure

at 250 million. Q. And can you explain to the Court how the DTC's insistence

on getting an unlimited guaranty and Barclays' willingness to provide only a 250 million dollar limited guaranty threatened the transaction over the weekend? A. There were many points during the day on Sunday where

despite the court hearing and approved process where I and the team felt that we were not going to close the transaction as a result of this issue. Q. Did you come to learn that Barclays had secured a separate

agreement with the DTCC? A. The Lehman team was excluded from all the dialogue with But, yes,

DTC, Barclays, the regulators with respect to this.

I came, in general terms, to learn that that was the case. Q. A. And can you tell us when you came to learn that? That would have been some combination of the day Sunday

turning into Monday, late, if not early, Monday morning.

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Q. And when you say your Lehman team was excluded from this

process, can you explain what you mean by that? A. Q. A. Q. Put in a room. And can -Moved out of the conversation. And can you tell us physically how that happened, how you Not allowed to be part of the process.

were not part of the conversation? A. Weil. Q. And was it made clear to you that you were not invited We were asked to sit in a different conference room at

into the room where any of the DTC discussions were going on? A. Q. A. Q. Extremely clear. And who made that clear? The Barclays team. Sir, I'd like to ask you a few questions about Lehman's And by margin assets, what I'm referring to is

margin assets.

Lehman's cash, cash equivalents and government securities that it posted as collateral at clearing firms. A. Q. Okay. Can you please tell the Court whether Lehman's margin

assets were included in the sale? A. Q. They were not intended to be included in the transaction. Did you ever authorize any agreement with anyone at

Barclays to include any Lehman cash margin in this sale? A. No, I did not.

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Q. If I could ask you to turn to Movants' Exhibit 2 which you

have referred to a number of times in your testimony today. And if you look, sir, at the "Assets" side, you'll see just close to the bottom of the first half of that column on the left, you see "Derivatives", four and a half billion dollars. A. Q. A. Q. Yes, I do. That's exchange traded derivatives? Yes. And if you look over -- it's not quite in line but just a

line below, under "Liabilities", you'll see another entry for "Derivatives", four and a half billion dollars. A. Q. Yes, I do. Can you explain for the Court, please, what is the

difference between exchange traded derivatives that are worth four and a half billion dollars on the "Asset" side from exchange traded derivatives that are a liability on the "Liability" side? A. Q. Those are long and short inventory positions. And if you look just below "Derivatives" on the "Asset"

side, sir, you'll see a reference to "Cash". A. Q. A. Q. A. Yes. And that's in the amount of 700 million dollars? Yes, it is. And what was the deal with respect to that cash? The retained cash in the original form was going to be

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part of the consideration that, at that moment in time, was our -- Tuesday morning before court on Wednesday -- that was the assumed amount of cash at that point in time. Q. So under the original deal, there was not only a purchase

of assets but there was also, at least to this minor extent, a purchase of Lehman cash? A. Q. A. That's correct. And what happened to that retained cash? That retained cash was ultimately moved away from Lehman

during the course of the week as a result of market activities. One specific activity that would have affected would have, it would have been the CME -- liquidation of the CME positions that we had had. So that cash was affected by any transaction And so, it ended

that took place over the course of that week. up at zero by the time of the sale hearing. Q. A. Q. When you say "it", you're saying -Cash.

-- in terms of Lehman's obligation to provide any of its

cash to Barclays, that was zero by the time of the sale hearing? A. Q. Yes. I'm sorry. Yes.

And apart from this retained cash which was ultimately

taken out of the deal, was there any Lehman cash, cash equivalents, government securities that you understood were being transferred to Barclays?

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A. No. MR. MAGUIRE: THE COURT: Thank you, sir. No further questions.

In terms of scheduling, I don't know if we But it's

have a long cross-examination of this witness or not. five after 5 and I need to stop today at 5:30.

We can either

go for twenty-five minutes and break at a logical place or we can come back tomorrow morning. MR. BOIES: THE COURT: twenty-five minutes. MR. BOIES: CROSS-EXAMINATION BY MR. BOIES: Q. A. Q. Good afternoon, Mr. McDade. Good afternoon. I don't think we've met but my name is David Boies and I Okay. Thank you, Your Honor. Your Honor, whatever the Court prefers. If you're ready to go, let's use the

represent Barclays. A. Q. Nice to meet you. Let me begin by asking you to look at a document that's in It is Movants' Exhibit 74. Do you have that?

your book. A. Q.

Yes, I do. And it is a cover e-mail and then there is an attachment.

And let's go to the attachment because that's mostly what you were asked about. You said in response to a question that Do

there were parts of the deal that were not reflected here.

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you recall that? A. Q. A. Q. Not reflected accurately, yes. Not reflected accurately. Yes. And would you tell me what parts of the deal either are

not reflected or not reflected accurately on this schedule? A. Cash, 15c3, cure payments. And there was no concept of

equity. Q. Now, did you ever see a copy of this in the regular course

of business? A. Q. No, I did not. Do you have any understanding at all how this erroneous

schedule got to be prepared? A. Q. No, I do not. If somebody had shown you this at the time, you would have

said this is erroneous, is that correct? A. Q. That's correct. Let me turn next to the document that was just handed up Do you have that?

to you which is Movants' Exhibit 694. A. Q. Yes, I do.

Now, this is a document that you did get.

You don't

recall receiving it but you have no doubt you got it, correct? A. Q. I have no doubt I got it. And is there anything here that is in any way inconsistent

with anything the Court was told while you were present?

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A. Q. No. With respect to the reference of liquidation values, would

it be the case that, in general, liquidation values would be materially less than what you refer to as fair market value? A. Q. A. You talking about distress values or liquidation values? Liquidation values. It really depends on the asset class. So if you're

talking about liquidation value of a government security, it should reflect -- it should reflect -- it just depends on the liquidity of the asset class and the market divisions. Q. Let's talk about the asset classes that Lehman had the Now, with respect to those

week of the 15th of September 2008.

asset classes, were some of those asset classes liquid and some of those asset classes illiquid? A. Q. Yes, they were. And what percentage of Lehman's assets at the time of the

Barclays transaction were represented by illiquid assets? A. Q. Inventory of all of Lehman? All of the assets that were subject to the Barclays

transaction. A. Q. I would say approximately twenty percent. And with respect to those assets, would the liquidation

value be materially less than what you would refer to as the fair market value? A. Yes.

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Q. With respect to the eighty percent of Lehman's assets that

were not illiquid, according to your testimony, am I correct that the liquidation value would be approximately the same as what you refer to as the fair market value? A. In normal times. That week was an unusual week in terms

of the nature of what was not happening in terms of the markets away from Lehman. Q. And the unusual character of the markets would affect both

the calculation of fair market value and a calculation of liquidation value, correct? A. Q. Yes. I would agree with that.

And given the unusual characteristics of that week,

although both might have been affected, would both liquidation value and fair market value have been approximately the same for the eighty percent of Lehman's assets that were illiquid? A. It would have been closer than in normal times. It's hard

for me to speculate in terms of the specifics of your question. Q. When you say "closer", can you just explain what you mean

by that? A. It would have been a further move away from the normal Lower.

fair market price for execution of a transaction. Q. Okay.

I think I understand but I want to be clear.

Because of the unusual circumstances of the week of September 15th, even with respect to liquid securities, the liquidation value of those securities would be lower compared to fair

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Q. market value than would be the case in ordinary circumstances, correct? (Pause) Your hesitation suggests I've got it wrong. And I don't

mean to suggest an answer. A. I believe if you ask five market participants they'll give

you different definitions of the terms that we're using. That's why I'm struggling. A liquid asset class in normal

times would trade reasonably efficiently, type it all for large volume. And that would imply a reasonably close execution to In this week, if

these liquid assets to the fair market value.

you're asking me the question does that relationship no longer hold for liquid assets, the answer is yes. It would be

closer -- it would be a wider bid offer on those transactions -- on those securities and therefore more erosion from fair market value in a negative sense. Q. I think I understand but I'm going to try it again. And I

am, in fact, going to say something that was the opposite of what I said before. Are you saying that in the unusual times

of the week of September 15th for liquid assets the liquidation value is closer to fair market value than it would be in ordinary times? A. Q. Yes. Thank you. Is that also true for illiquid assets? That

is, there would be this differential but there will be less of

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a differential between fair market value and liquidation value than it would be in ordinary times? A. Q. That's correct. And I think, but correct me if I'm wrong, that must mean

that the unusual market circumstances of September 15th had a proportionally greater effect of depressing fair market value prices than it did depressing liquidation value prices. A. Q. I think that's a fair statement, in a general sense, yes. During the time that you were involved throughout the week

of September 15th up until closing and, indeed, beyond closing, did you always act in what you thought was the best interest of Lehman? A. Q. Yes, absolutely. As you sit here today, knowing everything that you know,

are you aware of anyone who was employed by Lehman back in September of 2008 who did not act in the best interest of Lehman? A. Q. No, I am not. At the time that the transaction was presented to the

Court, based on everything you know now, do you believe that the transaction was presented to the Court in a fair and balanced way? A. Q. Yes, I do. Based on everything that you know now, do you believe that

the transaction that Lehman did with Barclays was the best

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them. MR. GAFFEY: That would be my office right now, Your Honor. THE COURT: MR. GAFFEY: Sure. Mr. Boies and I are both puzzled as to We've got break? THE COURT: Absolutely. I'm going to try to rule on And transaction that Lehman had available to it at its time? A. Q. Yes. And do you believe that the Barclays transaction that was

done by Lehman in September of 2008 was better for Lehman, its creditors and everyone else than any alternative that was available? A. Yes, I do. MR. BOIES: Your Honor, is this a convenient time to

the remainder of the discovery dispute tomorrow morning.

will collect my thoughts and provide a ruling at about 9:30 tomorrow which is when we will be resuming. the rule applies to Mr. McDade. MR. GAFFEY: One quick housekeeping matter, Your And, of course,

what you want us to do with the original exhibits. books all over the place.

Do you want us to give them to your We don't want a

clerk or hand them up at the end of the day. mess at the end of two weeks. THE COURT:

I think the National Archives would like

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Honor. THE COURT: I don't have a particular idea because at 694 which was just

this point -- I'll give you an example.

used in questioning is an exhibit that was handed up by the committee. You never gave me a copy. So I haven't seen that I was

document which everybody admitted could be in evidence. looking at it on the screen.

So while we are in the process of

talking about exhibits, maybe we can have a housekeeping conversation, not on the public record, as to how to deal with those documents. But for tonight, everything stays where it is

unless you want to box them up. MR. GAFFEY: plan, Judge. THE COURT: tomorrow morning. (Proceedings concluded at 5:17 PM) Okay. Give me a plan. And I'll see you We'll figure something out and give you a

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Movants PARTY BCI NO 473, 765, 766, 770, 771, 773, 789 694 E-mail from Alex Kirk dated 11/19/08 226 E X H I B I T S DESCRIPTION Various drafts of minutes of September 16th Lehman board meeting ID. EVID. 104 WITNESS Michael Ainslie Michael Ainslie Michael Ainslie Michael Ainslie Bart McDade Bart McDade Bart McDade Bart McDade T E S T I M O N Y EXAM BY Mr. Gafffey Ms. Taggart Mr. Boies Mr. Gaffey Mr. Gaffey Ms. Taggart Mr. Maguire Mr. Boies PAGE 75 94 96 139 143 218 228 237 LINE 19 12 24 12 9 5 15 14 I N D E X

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Date: April 28, 2010 Veritext 200 Old Country Road Suite 580 Mineola, NY 11501 I, Clara Rubin, certify that the foregoing transcript is a true and accurate record of the proceedings.
Digitally signed by Clara Rubin DN: cn=Clara Rubin, o, ou, email=digital1@veritext.com, c=US Date: 2010.04.28 15:40:35 -04'00' ___________________________________

C E R T I F I C A T I O N

Clara Rubin

Clara Rubin AAERT Certified Electronic Transcriber (CET**D-491) Also transcribed by: Lisa Bar-Leib (CET**D-486)

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