U.S. judge rejects Lehman workers' claims on stock awards

NEW YORK (Reuters) - Former senior employees of Lehman Brothers Holdings Inc [LEHLO.UL] who once commanded seven-figure pay packages failed to persuade a federal judge to restore hundreds of millions of dollars of stock awards that become worthless after the Wall Street bank's collapse.

In a decision made public on Thursday, U.S. District Judge Richard Sullivan said the awards should be classified as equity, subject to being wiped out, rather than as contract claims entitling the workers to cash payouts from Lehman's estate.

The decision covers an estimated $200 million or more of restricted stock units (RSUs) that Lehman awarded as an incentive to perform well over the long-term, before its Sept. 15, 2008 bankruptcy helped trigger that year's global financial crisis.

Sullivan ruled less than two weeks after the federal appeals court in Manhattan rejected a bid by former Lehman workers to hold onetime Chief Executive Richard Fuld and others liable for losses in an employee stock ownership plan.

The RSUs entitled workers to Lehman common stock if they stuck around for five years and met performance targets.

Most workers holding unconverted RSUs saw them wiped out, but more than 100 told Sullivan in seven lawsuits that they should be treated like Lehman creditors who got at least some of their money back.

But the judge called the RSUs "materially indistinguishable" from "securities-based compensation" previously deemed low in the capital structure of other companies that went bankrupt, including Enron Corp, MF Global Holdings Ltd and WorldCom Inc.

He said the RSUs counted as equity because they were "issued and treated as ownership shares in Lehman - shares that, while inferior to Lehman common stock, nevertheless carried similar benefits and risks."

The decision upheld a November 2014 ruling by U.S. Bankruptcy Judge Shelley Chapman in Manhattan, who oversees Lehman's Chapter 11 case.

Richard Schager, a Stamell & Schager partner representing many Lehman workers with RSUs, in an interview called Sullivan's decision "disappointing," and said an appeal is possible.

"When Lehman filed its bankruptcy petition, it listed 20,000 former employees and told them they had contract claims," Schager said. "It wasn't until the big creditors took over Lehman's shell that the squeeze of employees began, including the recharacterization of contract claims as securities claims."

Ralph Miller, a Weil, Gotshal & Manges partner representing Lehman, did not immediately respond to requests for comment.

Among the seven lawsuits is Adler et al v. Lehman Brothers Holdings Inc, U.S. District Court, Southern District of New York, No. 15-01326.

(Reporting by Jonathan Stempel in New York; Editing by Richard Chang)

By Jonathan Stempel