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In re Lehman Bros., Inc.

United States Court of Appeals, Second Circuit

June 29, 2015

IN THE MATTER OF: LEHMAN BROTHERS, INC., Debtor, CARVAL UK LIMITED, as manager of CVF Lux Master S.a.r.l., the assignee of Doral Bank and Doral Financial Corporation, Claimant-Appellant,
v.
JAMES W. GIDDENS, as Trustee for the SIPA Liquidation of Lehman Brothers Inc., SECURITIES INVESTOR PROTECTION CORPORATION, Appellees.

Argued, February 26, 2015

Page 278

The appellant in this case seeks protection under the Securities Investor Protection Act (" SIPA" ) as a " customer" of the failed broker-dealer Lehman Brothers. The appellant's predecessor entered into a series of repurchase agreements, which involved the sale of securities to Lehman, coupled with an agreement to repurchase the securities back from Lehman at a future date. Before the securities could be repurchased, Lehman failed and entered liquidation under SIPA. We conclude that the appellant is not a customer for purposes of SIPA because our precedents require that a customer must have " entrusted" assets to a failed broker-dealer, and the repurchase agreements did not involve any entrustment of assets to Lehman. We accordingly AFFIRM the district court and bankruptcy court orders denying the appellant customer status in Lehman's SIPA liquidation.

LUC A. DESPINS (Bryan R. Kaplan, on the brief), Paul Hastings LLP, New York, New York, for Claimant-Appellant.

MICHAEL E. SALZMAN (James B. Kobak, Jr., Beatrice Aisha Hamza Bassey, Savvas A. Foukas, Kathleen A. Walker, on the brief), Hughes Hubbard & Reed LLP, New York, New York, for Appellee James W. Giddens, as Trustee for the SIPA liquidation of Lehman Brothers Inc.

KENNETH J. CAPUTO (Josephine Wang, on the brief), Securities Investor Protection Corporation, Washington, D.C., for Appellee Securities Investor Protection Corporation.

Before: KATZMANN, Chief Judge, WALKER and CHIN, Circuit Judges.

OPINION

Page 279

Katzmann, Chief Judge

This case presents the challenging task of fitting a decades-old statute to a financial arrangement of more recent vintage. Enacted in 1970, the Securities Investor Protection Act (" SIPA" ) seeks to protect investors who have entrusted their assets to a broker-dealer. If the broker-dealer runs into financial trouble, SIPA authorizes the speedy return of investors' property and ensures that investors will be made whole if the assets are lost. In this case, we must consider how SIPA treats an investor who delivered securities to a broker-dealer as part of a now-common financial transaction known as a repurchase agreement. We conclude that an investor who delivers securities to a broker-dealer as part of a repurchase agreement is not protected by SIPA because the investor did not entrust assets to the broker-dealer.

BACKGROUND

A repurchase agreement--commonly known as a " repo" --involves a matched purchase and sale. First, the " seller" agrees to sell assets, usually securities, to the " buyer" for a fixed price.[1] Second, the buyer agrees to resell those same assets back to the seller at a later date and for a slightly higher price--hence the name " repurchase agreement."

Viewed from the seller's perspective, repos offer a mechanism for converting idle securities into liquid cash for a limited period. The seller can then employ that cash for investments or other purposes, before returning the cash to the buyer in exchange for the securities at the conclusion of the repo. Viewed from the buyer's perspective, repos provide an outlet for excess cash, and for the temporary acquisition of attractive securities. Moreover, because the resale price is higher than the original sale price, the buyer retains the difference--known as the " repo rate" --as a fee for the transaction. When viewed from a buyer's perspective, the transaction is called a " reverse repo."

Between January 2000 and May 2001, Doral Bank and Doral Financial Corporation (collectively, " Doral" ) entered into six repurchase agreements, with Doral as the seller, and Lehman Brothers Inc. (" Lehman" ) as the buyer.[2] These transactions were governed by industry-standard Master Repurchase Agreements (" MRAs" ). Notably, the MRAs describe the relationship between Doral and Lehman as " contractual" and make not mention of a fiduciary relationship. The MRAs gave Lehman full legal title over the underlying securities, and Lehman was free--subject to its obligation to resell the securities on the repurchase date--to sell, transfer, pledge, or hypothecate the securities as it desired. Doral, for its part, ...


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