A FINRA arbitration panel awarded a large cash award - about $5.5 million - to former clients who bought structured products from Neuberger Berman.   Neuberger, it seems, marketed the products as a safe way to invest in sectors like energy or financials - however, they failed to tell the clients that the products were secured by Lehman’s own debt. In their statement of claim, the clients charged that Neuberger failed to conduct its own due diligence, leaving its clients holding the bag when Lehman filed for bankruptcy, the largest in American history.  Lehman Brothers collapsed in September 2008, and Neuberger Berman - the asset manager Lehman owned - was successfully spun out.  Apparently, Neuberger hasn't been able to completely shake its connection to Lehman. Claimants' 2010 Statement of Claim. In 2010, former California clients Ira Robb and Leonard and Kimberly Almalech, along with Wisconsin-based client Edward Leshin filed the arbitration claim against Neuberger.  Mr. Robb got his start in the car rental business and in 1980 sold it to Enterprise Rent-a–Car. Mr. Leshin was in the trucking business and eventually landed a senior position at a logistics company. Mr. Almalech, who is married to Kimberly, is an executive at Enterprise. He was referred to Neuberger by Mr. Robb.  All four individuals dealt with the same Neuberger financial adviser, Brian Hahn.

"The defendants say they thought they were buying a safe play on the commodities market and the financial sector by buying products tied to an index, with protection.  What they did not know is that because the products were backed by Lehman debt, they were assuming the credit risk of Lehman itself, leaving them with unsecured Lehman debt that became essentially worthless when the company filed for bankruptcy. Claimants called Neuberger’s actions with regard to these products known as “principal protected” an “egregious breach” of fiduciary duty.  The former clients say one was marketed as fully protected;  the other as partially protected.  However, in the end, the products simply allowed Lehman to easily raise money in the months before it failed without going forward with a more complicated general bond issue, which they say would have revealed inherent weaknesses at the firm.  The further contended that Neuberger stepped up its sale of structured products after Lehman bought it in 2003.

“We feel Lehman was using the issuance of new structured products as a checkbook.” -- Alan Block, claimants counsel. “By using the structured products as opposed to traditional debt offerings, Lehman was, as respondents knew, able to conceal its enormous debt load and essential transfer funds from the claimants accounts to Lehman without any accountability whatsoever.” Mr. Hahn “failed to comprehend the risk” and Neuberger “failed to properly educate Hahn” on what he was selling, the statement of claim said. Mr. Hahn did not respond to a request for comment.

Response to Statement of Claim. In its written response, Neuberger said the individuals involved directed all the trades in question, noting:  “Respondents have manufactured a number of far-fetched claims alleging, among other things, that Lehman operated as a criminal racketeering enterprise and respondents stole claimants’ money through criminal acts of mail and wire fraud. Claims vs. Awards. The four claimed compensatory or actual damages of about $7.6 million and punitive damages in excess of $20 million.  They received an award of $5.2mn, plus interest - currently at about $350,000.    [DealBook, 7/18/11]