Lehman Brothers sues Citigroup for $2.5B

Associated Press + More

NEW YORK (AP) — Lehman Brothers Holdings Inc. and its creditors are suing several units of Citigroup Inc. to recover $2.5 billion the failed investment bank transferred to a backup account at Citi months before seeking bankruptcy court protection.

In the complaint filed on Wednesday with the U.S. Bankruptcy Court for the Southern District of New York, Lehman claims that Citibank is wrongfully withholding the money as a potential source of funds in a dispute over derivative contracts.

Lehman also is asking the court to disallow what it says are $2 billion of "inflated and legally unsupported" claims that Citibank has asserted against it.

In a statement Thursday, Citigroup vowed to defend itself and its right to recover losses from Lehman's collapse. It called the lawsuit unjustified and accused Lehman of trying to renege on its obligations and claw back assets to which it has no right.

According to the lawsuit, Citi demanded on June 12, 2008, that Lehman transfer between $3 billion to $5 billion into an account to cover potential overdrafts by Lehman subsidiaries that were using Citi's clearing and settlement services.

Lehman agreed that same day to set aside $2 billion from its account at Citibank into a segregated account, on the condition that the bank would have no lien or other rights to the funds.

In its statement, Citi said that it tried to help Lehman prior to its bankruptcy filing, but needed to obtain the guarantees and cash deposits from Lehman in order to protect its shareholders from potential losses.

Lehman claims that by holding on to the $2 billion, Citibank is violating the U.S. bankruptcy code, state law and going against the conditions both agreed to when the funds were set aside.

In addition, Lehman asserts that Citibank has refused to return another $500 million in cash that was transferred into its broker-dealer subsidiary just hours before Lehman filed for bankruptcy protection.

Lehman's bankruptcy filing in September 2008 was the biggest in U.S. history and triggered more than 75 separate bankruptcy proceedings. The company listed more than $600 billion in debts when it filed.

Lehman Brothers Holdings is the company that controls what's left of the investment bank's assets.

Citigroup shares ended regular trading down 57 cents to $33.66 on Thursday. The stock slipped another 8 cents to $33.58 in extended trading.

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