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The sprawling litigation between the Lehman Brothers estate and the banks that swooped in to pick over Lehman’s assets in September 2008 just keeps getting curiouser and curiouser. With Lehman’s $11 billion fraud case against Barclays finally in the hands of Manhattan federal bankruptcy court judge James Peck, the estate is now facing explosive counterclaims from JPMorgan Chase that also stem from Barclays’ purchase of Lehman’s brokerage unit. In a 49-page countersuit filed Tuesday in response to the Lehman estate’s adversary proceeding against it, JPMorgan and its lawyers at Wachtell, Lipton, Rosen & Katz accuse Lehman Brothers Holdings Inc. of colluding with Barclays to stick JPMorgan with more than $25 billion of debt secured by toxic securities. JPMorgan asserts that three days after Lehman’s Sept. 15, 2008, Chapter 11 filing, JPMorgan lent Lehman’s brokerage unit more than $70 billion to allow Lehman to repay its overnight financing. The bank alleges that Lehman misled JPMorgan into believing that Barclays would subsequently buy all of the securities backing the loans as part of its acquisition of the Lehman brokerage. Instead, JPMorgan’s lawyers claim, Barclays misled Judge Peck and JPMorgan about the terms of the sale and “cherry picked” only the best of the securities. According to JPMorgan, Barclays wound up paying $45 billion to acquire securities valued at $50 billion when it bought the Lehman brokerage later that week. “Thus, when the dust settled, JPMorgan was left holding the bag, with more than $25 billion of outstanding loans to LBI secured by a depleted collateral pool containing many of LBI’s worst securities,” Wachtell’s Paul Vizcarrondo alleges in the JPMorgan filing. As we wrote in May, the Lehman estate’s original claims against JPMorgan involved JPMorgan’s actions in the days before Lehman filed for bankruptcy. The estate alleged that JPMorgan improperly leveraged its position as Lehman’s clearing bank to extract about $8.6 billion in collateral from Lehman’s brokerage, hastening its collapse. JPMorgan says in its counterclaim that it applied the $8.6 billion in collateral to its post-bankruptcy loans to the Lehman estate. “Despite having deceived JPMorgan into making the massive loans to LBI that required JPMorgan to use much of the $8.6 billion in collateral that it received from Lehman, LBHI is now seeking to recover that very collateral,” Vizcarrando wrote in JPMorgan’s filing. The bank asserts that if it’s forced to repay any of that $8.6 billion, “JPMorgan will have suffered direct and proximate harm from LBHI’s fraudulent misconduct.” Interestingly, JPMorgan acknowledges in its counterclaims that it had “little or no clearance exposure to LBI” in the weekend leading up to Lehman’s Chapter 11 filing. Separately, the bank describes only turning to the $8.6 billion in Lehman collateral after the bankruptcy filing, due to events that no one could have foreseen. Since those assertions suggest that JPMorgan wasn’t counting on the collateral in its role as the brokerage’s clearing bank before Sept. 15, 2008, we won’t be surprised if Lehman’s lawyers at Curtis, Mallet-Prevost, Colt & Mosle latch onto to those details in future filings. Both JPMorgan lawyer Vizcarrando of Wachtell and Joseph Pizzurro of Curtis Mallet-Prevost declined to comment on the case.

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