March 29, 2020

DealBook: Lehman Estate to Sell Archstone for $6.5 Billion

The deal that helped sink Lehman Brothers is now playing an important role in paying off the failed investment bank’s creditors.

The Lehman estate agreed on Monday to sell Archstone, the sprawling apartment complex company, to Equity Residential and AvalonBay Communities for about $6.5 billion in cash and stock.

Under the terms of the deal, the Lehman estate will receive $2.685 billion in cash, as well as shares in Equity Residential and AvalonBay worth about $3.8 billion. The two apartment companies will also assume Archstone’s roughly $9.5 billion in debt.

By selling Archstone, the Lehman estate will dispose of its single biggest asset, as it continues its efforts to wind itself down and pay off the firm’s legions of creditors. And it will signal the latest twist for a property that has played an important role in Lehman’s demise.

Lehman bought Archstone in 2007, paying more than $22 billion to buy the apartment complex operator at the very height of the housing boom. That leveraged buyout piled even more debt onto an already overburdened firm, significantly contributing to its demise in the fall of 2008.

Since then, however, Archstone has become regarded as one of the crown jewels in the Lehman estate’s pile of assets. And as the estate has sold off a number of its other properties, from the asset manager Neuberger Berman to sundry other real estate holdings, the apartment company was held out as the best opportunity for a major payday.

Such was the Lehman estate’s zealousness that it bought out its partners in Archstone, Bank of America and Barclays, earlier this year, spending a total of $2.88 billion. The goal then was to prevent the firms from selling their holdings to Equity Residential too cheaply.

The stock component of the transaction announced on Monday will give make the Lehman estate the single biggest investor in Equity Residential, with a 9.8 percent stake, and in AvalonBay, with a 13.2 percent stake.

The purchase price represents a roughly 17 percent premium to what the Lehman estate had valued the apartment complex operator.

“The sale of Archstone to Equity Residential and AvalonBay is a very positive outcome for our creditors,” Owen Thomas, the chairman of Lehman’s board of directors, said in a statement.

Equity Residential, which is run by the billionaire Samuel Zell, will own about 60 percent of Archstone’s assets and liabilities. AvalonBay will own the remainder.

Lehman was advised by Gleacher Company, Citigroup, JPMorgan Chase and the law firm Weil, Gotshal Manges.

Equity Residential received advice from Morgan Stanley and the law firms Hogan Lovells and Morrison Foerster. AvalonBay was advised by Greenhill Company and the law firm Goodwin Procter.

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DealBook: On Witness Stand, Former Analyst Describes Insider Trading Scheme

Anthony Chiasson, left, a co-founder of the Level Global Investors hedge fund, and Todd Newman, once a portfolio manager.Mike Segar/Reuters and Charles Krupa/Associated PressAnthony Chiasson, left, a co-founder of the Level Global Investors hedge fund, and Todd Newman, once a portfolio manager.

In 2008, Jesse Tortora, a junior tech-stock analyst, made $2.25 million, his best year at the hedge fund Diamondback Capital Management.

“It was a very good job,” said the defense lawyer Stephen Fishbein during his questioning of Mr. Tortora in Federal District Court in Manhattan on Thursday.

“How would you define that?” Mr. Tortora asked.

“You liked being there,” Mr. Fishbein responded.

“No, I did not,” Mr. Tortora snapped back.

The fresh-faced Mr. Tortora, 35, also did not like being at the criminal trial of Todd Newman, his former boss at Diamondback, and Anthony Chiasson, the co-founder of the hedge fund Level Global.

But he sat in the witness box over two days this week, testifying dutifully as one of the government’s key cooperators in the case. Federal prosecutors have accused Mr. Newman and Mr. Chiasson of being the most senior members of an eight-person insider trading conspiracy that earned about $70 million by illegally trading technology stocks. Both men have denied they were part of any conspiracy and say that their underlings are using them as scapegoats to curry favor with the government and avoid prison.

Mr. Tortora, who has pleaded guilty along with five others, is the centerpiece of the government’s case against Mr. Newman. On Thursday morning, Mr. Totora described in his direct examination how Sandeep Goyal, a former tech-stock analyst at Neuberger Berman, fed him secret financial information about the computer maker Dell that he then passed on to Mr. Newman. Mr. Tortora said that Mr. Newman knew the information was confidential.

In perhaps the most incriminating part of Mr. Tortora’s testimony, he told the jury how Mr. Newman helped facilitate $175,000 in “consulting payments” to Mr. Goyal’s wife. Mr. Goyal had been unable to accept the payments directly because he was not allowed to receive outside compensation while employed at Neuberger.

During cross-examination, Mr. Fishbein, a lawyer for Mr. Newman, sought to portray Mr. Tortora as a disgruntled employee with an ax to grind. When the F.B.I. knocked on his door in late 2010, Mr. Tortora had already left the firm and had every incentive to throw his boss under the bus to protect himself, Mr. Fishbein suggested.

“Isn’t it true you understood that your ticket to freedom was to give evidence against Todd Newman?” Mr. Fishbein asked.

“No, that’s untrue,” Mr. Tortora said.

Mr. Tortora said that he resigned from Diamondback in April 2010 after the firm refused to give him “his own book” – a term for letting him manage his own pool of money. He also said that Mr. Newman was an “abusive boss” and that their relationship had deteriorated by the time he left.

There was testimony about a nasty phone exchange between Mr. Tortora and Mr. Newman around his departure date. Mr. Tortora acknowledged that he told Mr. Newman during the call, “You’re going to have to see me at conferences.”

Mr. Fishbein suggested that Mr. Tortora meant that as a physical threat, but Mr. Tortora denied that he meant it in that way.

The defense also tried to attack Mr. Tortora’s credibility by focusing on a disputed expense report that Mr. Tortora had submitted around the time he left. Mr. Tortora had claimed about $7,500 for a business trip to San Francisco, but the fund told him that it was only going to cover $6,100. Mr. Tortora acknowledged that his girlfriend traveled with him, accompanying him on many of his work excursions.

“We cannot reimburse you for magazines such as Life Style and OK magazine,” wrote a Diamondback official. “Lastly, we do not reimburse for movies.”

Mr. Tortora said that Diamondback had never before had a problem with his expenses, but in the end agreed to reimburse the fund. “In the end, I accepted it and moved on,” he said.

After Mr. Tortora agreed to cooperate with the authorities, he recorded conversations with several of his friends in an effort to entrap them, he acknowledged. On one those calls, Mr. Tortora told Danny Kuo, a Los Angeles-based tech-stock analyst who has since pleaded guilty, that the government wanted to make Mr. Newman “the fall guy” and they wanted his help investigating him. Mr. Tortora testified that he was sticking to a “fictional” script fed to him by the F.B.I.

“You pushed the blame to Todd Newman,” Mr. Fishbein said. “You made stuff up, didn’t you?”

“I told the truth,” Mr. Tortora said.

As with nearly every trial, the testimony was plodding at times. The tedium apparently led a juror to request an extra jolt of caffeine. As Judge Richard J. Sullivan, who was overseeing the trial, excused the jury for their 10-minute afternoon break, he told Juror No. 1 that he had fulfilled his request to stock the jury room with Red Bull.

The trial resumes on Monday with more cross-examination of Mr. Tortora.

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