Hearing Date and Time: To be obtained by Trustee

Objection Date and Time: To be determined

SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP

Four Times Square
New York, New York 10036
(212) 735-3000
J. Gregory Milmoe
Andrew M. Thau

Attorneys for BlackRock Financial Management Inc.

and Certain of its Affiliates

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

In re
Case No. 08-01420 (JMP) SIPA
LEHMAN BROTHERS, INC.,

Debtor.

OBJECTION TO TRUSTEE’S DETERMINATION OF CLAIM

BlackRock Financial Management Inc. and its advisory affiliates,1 as

investment advisors (collectively, in such capacity, the “Advisor”) on behalf of

BlackRock Mortgage Investors Master Fund, L.P. (together with the Advisor, the

“Customer”), hereby submit this objection to the denial and reclassification of the

Customer’s claim number 900007961 (the “Claim”) filed against Lehman Brothers Inc.

(the “Debtor”), and in support thereof respectfully represent as follows:

1
Including, but not limited to, BlackRock Investment Management LLC, BlackRock Advisers LLC,
BlackRock Capital Management, BlackRock Japan Co. Ltd., BlackRock (Channel Islands) Ltd.,
BlackRock Investment Management (Australia) Ltd., BlackRock Investment Management (UK) Ltd.,
State Street Research & Management Company, BlackRock Fund Managers Ltd., and BlackRock
International.
 BACKGROUND

1. Beginning on September 15, 2008, Lehman Brothers Holdings Inc. and

certain of its affiliates filed voluntary petitions under chapter 11 of Title 11 of the United

States Code, as amended (the “Bankruptcy Code”).

2. On September 19, 2008 (the “Commencement Date”), a proceeding was

commenced under the Securities Investor Protection Act of 1970, as amended (“SIPA”),

15 U.S.C. §§ 78aaa - 78lll, with respect to the Debtor, a securities broker-dealer. James

W. Giddens was appointed as trustee (the “Trustee”) under SIPA to liquidate the Debtor’s

assets.

3. The Customer filed a timely proof of claim, attached hereto as Exhibit A,

asserting that the Claim, which arose from pre-Commencement Date transactions, is

entitled to “customer” status under SIPA.

4. On or about October 12, 2009, the Trustee served a notice (the

“Determination Notice”), attached hereto as Exhibit B, upon the Customer denying

“customer” status and reclassifying the Claim as a general creditor claim. The

Determination Notice does not specify a rationale for denying “customer” status to the

Claim.

5. The Customer objects to the Determination Notice and asserts that the

Claim is entitled to “customer” status under SIPA.2

2
The Customer and the Trustee negotiated a consensual extension of time to respond to the
Determination Notice.

2
 THE CLAIM

6. The Claim arises from the Customer’s financing transaction with the

Debtor in which the Customer agreed to transfer to the Debtor certain securities (the

“Securities”)3 against the transfer of funds by the Debtor, with a simultaneous agreement

by the Debtor to transfer to the Customer such Securities at a later date (the “Reverse

Repo”). The Reverse Repo was documented pursuant to a Master Repurchase

Agreement, dated as of October 25, 1994 (as amended, supplemented or modified, the

“MRA”).

7. On August 8, 2008, the Customer entered into the Reverse Repo with the

Debtor for settlement on August 12, 2008 and pledged the Securities to the Debtor as

collateral.4 The Securities were delivered to the Debtor’s Depositary Trust Company

(“DTC”) participant number 636 under DTC repo code 220 (open) (“Open Repo Code”).

Because the Securities were delivered with Open Repo Code, the Customer, as deliverer

of the Securities, retained “economic ownership” of any future interest and principal

payments made on the Securities. Accordingly, DTC should have transferred any interest

and principal payments made on the Securities to the Customer.

8. The Reverse Repo was closed on September 15, 2008 with the Debtor

returning the Securities under DTC repo code 230 (close) (“Close Repo Code”). The

Close Repo Code did not affect the Customer’s entitlement, as economic owner, to

3
The Securities consist of (a) $9,639,000, in principal amount, of CUSIP 52521LAC8 notes,
(b) $19,583,000, in principal amount, of CUSIP 52521LAB0 notes, (c) $21,830,000, in principal
amount, of CUSIP 17309AAE9 notes, and (d) $36,446,000, in principal amount, of CUSIP
17309VAH6 notes.
4
Due to a typographical error, the Customer’s proof of claim states that the Securities were not
transferred to the Debtor until August 30, 2008 but such transfer actually occurred on August 12, 2008.
August 30, 2008 is the record date for the September 25 Payments (as defined below).

3
distributions on the Securities declared as of record during the term of the Reverse Repo.

Rather, it merely reversed the Open Repo Code for distributions on the Securities with a

record date after September 15, 2008.

9. August 30, 2008 (the “Record Date”) was the record date for the

scheduled September 25, 2008 interest and/or principal payments, in the aggregate

amount of $605,589.08 (the “September 25 Payments”),5 on the Securities. On August

30, 2008, the Debtor was the record holder of the Securities but the Open Repo Code

status of the Securities would have nonetheless caused DTC to transfer such September

25 Payments on the Securities to the Customer. However, on the Commencement Date,

DTC removed all “repo code” links on the Securities in response to the commencement

of the Debtor’s SIPA proceeding. The removal of the “repo code” links on the Securities

nullified the Open Repo Code that made clear the Customer’s entitlement to the

September 25 Payments as economic owner of the Securities. As a result, the September

25 Payments were inappropriately made to the Debtor, as the holder on the Record Date,

rather than to the Customer in accordance with the terms of the Reverse Repo.

10. As such, the Customer’s Claim seeks the payment of the September 25

Payments to which the Customer is entitled.

ARGUMENT

11. The Customer seeks a determination that it is a “customer” under SIPA

and, therefore, the Claim constitutes a “customer” claim under SIPA. See 15 U.S.C. §

78lll(2). Under SIPA, “customer” claims are entitled to (i) recover against “customer

5
The portion of the September 25 Payments relating to each of the Securities is set forth in the
Customer’s proof of claim.

4
property,” id. § 78lll(4) on the basis of their “net equity,” id. § 78lll(11) and (ii) receive

advances from a fund maintained by the Securities Investor Protection Corp. (the

“SIPC”).

12. With respect to a SIPA debtor, a “customer” is

[A]ny person (including any person with whom the debtor deals as
principal or agent) who has a claim on account of securities received,
acquired, or held by the debtor in the ordinary course of its business as a
broker or dealer from or for the securities account of such person for
safekeeping, with a view to sale, to cover consummated sales, pursuant to
purchases, as collateral security, or for purposes of effecting transfer.

Id. § 78lll(2). Further, this definition “includes any person who has a claim against the

debtor arising out of sales or conversions of such securities.” Id.

13. The Securities giving rise to the Claim are clearly “securities” under

SIPA.6 The Debtor’s financing trade with the Customer was clearly within the “ordinary

course of its business” as a “broker or dealer.” Id. § 78lll(2). The Securities have been

acquired “from or for the securities account” of the Customer. Moreover, the Debtor

received, acquired and held the Securities with a view to their resale back to the

Customer. Therefore, the nature of the relationship created by the MRA fits squarely

within the definition of “customer” under SIPA.

14. We believe that denying the Claim “customer” status is inconsistent with

SIPA, the legislative intent embodied by SIPA, and with prior case law. The primary

purpose of SIPA is “to provide protection for investors if the broker-dealer with whom

they are doing business encounters financial troubles.” H.R. Rep. No. 91-1613, at 1

6
SIPA’s definition of “security” includes “any note, stock, treasury stock, bond, debenture, evidence of
indebtedness, any collateral trust certificate . . . any certificate of interest or participation in, temporary
or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase or sell
any of the foregoing, and any other instrument commonly known as a security.” 15 U.S.C. § 78lll(14).

5
(1970), as reprinted in 1970 U.S.C.C.A.N. 5254, 5255. The Second Circuit has observed

that SIPA’s legislative history uses the term “‘investors’. . . synonymously with

‘customers,’ indicating that, in the eyes of Congress, [SIPA] would protect capital

markets by instilling confidence” in investors. SIPC v. Morgan, Kennedy & Co., 533

F.2d 1314, 1317 (2d Cir. 1976).

15. SIPA’s definition of “customer” is strikingly similar to the definition of

“customer” in the stockbroker liquidation provisions of the Bankruptcy Code. Compare

15 U.S.C. § 78lll(2) with 11 U.S.C. § 741(2). As such, it is significant, as noted by a

bankruptcy court in this District, that "[t]he sole legislative statement addressed to the

[Bankruptcy] Code definition of 'customer' reveals that such descriptive term

comprehends ‘anybody that interacts with the debtor in a capacity that concerns securities

transactions.’” In re SSIW Corp., 7 B.R. 735, 738 (Bankr. S.D.N.Y. 1980). Indeed, the

Reverse Repo transaction, in which the Customer and the Debtor engaged, and which

forms the basis of the Claim, was related to trading in the securities market.

16. The Bevill, Bresler court noted that Congress enacted SIPA to “protect

individual investors from financial hardship, insulate the economy from the disruption

which can follow the failure of major financial institutions, and to maintain public

confidence in the capital markets.” See In re Bevill, Bresler & Schulman Asset Mgmt.

Corp., 67 B.R. 557, 602 (D.N.J. 1986). Focusing on “the size and economic importance

of the repurchase market,” the court determined that providing “investors in this market

with the protections afforded ‘customers’ under SIPA will significantly advance” SIPA’s

goals. Id. As the Customer is clearly a participant of the repurchase market, the result

should be no different here.

6
 17. Several courts have held that parties to repurchase transactions are

“customers” under SIPA. See id. at 602 (holding that repo and reverse repo participants

were “customers” of a debtor broker-dealer under SIPA); see also City of Elkins v.

Davidson (In re Swink & Co.), 142 B.R. 874, 878-79 (Bankr. E.D. Ark. 1992) (holding

that the parties to a repurchase transaction had contemplated a relationship in which they

would trade in securities as broker-dealer and customer and that the broker-dealer had

acted in a fiduciary capacity).

18. In holding that parties to reverse repurchase agreements were “customers”

under SIPA, the court in Bevill, Bresler noted that (i) reverse repurchase agreements were

an integral part of the broker-dealer’s ordinary course of business, (ii) the broker-dealer

maintained computerized accounts for each reverse repurchase customer in which

purchases and sales pursuant to reverse repurchase transactions were duly recorded, and

(iii) the securities underlying the reverse repurchase transactions were received and/or

acquired by the broker-dealer with a view to their resale back to the reverse repo

participants on a predetermined future date. Bevill, Bresler, 67 B.R. at 597-98. The

Customer’s relationship with the Debtor satisfies each of these requirements.

19. A number of courts have construed a claimant’s status as a “customer” or

a creditor as dependant on whether the claimant entrusted cash or securities to the broker-

dealer debtor. See, e.g., SIPC v. Executive Sec. Corp., 556 F.2d 98, 99 (2d Cir. 1977)

(per curiam). In the present situation the Customer is clearly a “customer” of the Debtor,

not a creditor. In the Bevill, Bresler case, the court reasoned that the reverse repurchase

transaction participants were not creditors of the debtor because the risks and potential

rewards of the transactions were “unquestionably market-related risks and rewards which

7
are entirely distinct from and additional to any credit risk associated with the solvency of

the broker as a financial intermediary.” See Bevill, Bresler, 67 B.R. at 601.

20. The Customer entrusted the Securities to the Debtor by transacting with

the Debtor, as a dealer. Therefore, the Customer’s ability to receive the benefits of its

investments depended on the Debtor fulfilling its obligations pursuant to the MRA terms

and a well-established course of dealing. The Customer was entitled to receive interest

and principal payments that were made on the Securities. However, the Debtor instead

received these amounts, due to the post-Commencement Date removal of the Open Repo

Code by DTC. Thus, the Debtor owes the amounts, set forth in the Customer’s proof of

claim, to the Customer.

21. For all of the reasons stated above, the Claim should be allowed as a

customer claim for purposes of SIPA.

[Remainder of Page Intentionally Left Blank]

8
 RESERVATION OF RIGHTS

22. The Customer reserves all rights with respect to the Claim asserted herein.

The Customer further reserves all rights to amend or supplement this Objection or file a

reply to any response to this Objection filed by the Trustee.

Dated: New York, New York

November 25, 2009

Skadden, Arps, Slate, Meagher & Flom LLP

By: /s/ J. Gregory Milmoe

J. Gregory Milmoe
Andrew M. Thau
Four Times Square
New York, New York 10036
Telephone: 212-735-3000
Facsimile: 212-735-2000
E-Mail: gregory.milmoe@skadden.com
andrew.thau@skadden.com

Attorneys for BlackRock Financial

Management Inc. and Certain of its
Affiliates

9
Exhibit A
 Exhibit B

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