FAQs For Trust Property 19/3/09

Client Money (held at the date of administration)

1. What process have the Joint Administrators adopted to return client money?

Client Money held by LBIE prior to administration ("Pre Administration Client Money") was held in a number of different accounts. Under FSA Client Money Rules,  LBIE's administration constituted a 'primary pooling event', which means that Pre Administration Client Money held by LBIE was pooled into a single Client Money pool. Each client's entitlement is to a pro-rata share of this Client Money pool. This means that if there is any shortfall in the Pre Administration Client Money pool, then all clients who have a share in that pool will incur the shortfall proportionate to their original entitlement.

The Joint Administrators are actively working to ensure that all Client Money is appropriately identified and has been segregated in accordance with FSA Client Money Rules.

Investigations are continuing to determine whether the amounts segregated as Client Money by LBIE prior to the Administration were correctly calculated, in particular in relation to the treatment of any over-segregated or under-segregated amounts and the impact this may have on the Client Money pool. 

In addition, the Joint Administrators are working to identify and review all underlying documentation regarding all business activities in respect to Client Money balances and to reconcile all data received with clients' claims of entitlement to such money.

There are also a number of legal issues that need to be resolved prior to any distribution of Client Money. These include:

• valuation of clients' claims in the different currencies received by LBIE;
• the treatment of certain items constituted of Client Money held in lieu of assets; and
• the appropriate level of costs to be borne by Client Money claimants (i.e. the split of costs between the Client Money pool and the General Estate).

These issues will all have an impact on the timing and extent of the return of Client Money to relevant clients.  Until these and a number of other legal issues are resolved, it will not be possible to make any distributions to clients.  The Joint Administrators are actively taking steps to establish legal certainty on these important issues. (See Client Money question 5.)

2. What progress has been made in recovering the Client Money?

LBIE held Client Money in banks, clearing houses and other institutions, as permitted by the FSA's Rules.  The process to recover monies from these various sources into a centrally administered pool is ongoing and considerable progress has been made.  Approximately US$1.0 billion from a total of US$2.1 billion segregated prior to LBIE's Administration has been recovered to date.  Of the remaining US$1.2 billion, US$1 billion relates to Lehman Brothers Bankhaus AG.  (See Client Money question 3.)

3. What issues have arisen in recovering the Client Money?

There continues to be considerable uncertainty surrounding the timing and extent of the recovery of the deposit of approximately US$1 billion of Client Money with Lehman Brothers Bankhaus AG ("Bankhaus"). A claim on behalf of LBIE clients was filed with the Bankhaus administrators on 3 February 2009 to recover this deposit. The initial Bankhaus creditors assembly held under German insolvency proceedings was held 17 March 2009 and considerable uncertainty remains in relation to the recovery of the US$1 billion. (See also Question 6 below)

The FSA is aware of the situation and all appropriate steps will continue to be taken in relation to the recovery of the Client Money deposit. 

In addition, issues have arisen with the recovery of other smaller deposits of Client Money with other third parties.  The Joint Administrators are actively working to resolve these issues.

4. If the Joint Administrators are unable recover all of the money held as Client Money how will this impact on the return of my money?

Due to the continuing uncertainty surrounding the recovery of Client Money from some third parties, we are not yet in a position to understand the extent to which we will recover all of the Client Money held by LBIE, and therefore the effect this will have on the total Client Money pool. In addition we will not be in a position to determine how much Client Money will be distributed and to whom until the net position is known and the legal issues described below are resolved.

In addition, FSA Rules provide that the proper costs of distribution of the client money pool will be borne from that pool on a first priority basis. This means that, even if all client monies are ultimately recovered, clients will bear a pro rata share of the distribution costs and therefore will normally experience some degree of shortfall.

5. What other challenges exist that may impact the amount of money and timing of money being returned?

Investigations are continuing to determine whether the amounts segregated as Client Money by LBIE prior to the Administration were correctly calculated in accordance with the FSA's Client Money Rules.  There are a number of legal issues that require legal and/ or Court determination in order to arrive at final client entitlements.

Prior to the implementation of the Market in Financial Instruments Directive ("MiFID"), affiliates' money did not have to be treated as Client Money due to a group exemption.  However, the FSA Rules did not expressly carry forward this exemption upon the implementation of MiFID on 1 November 2007.  Prior to the Administration, LBIE's policy was to segregate monies as Client Money that it understood to belong to the underlying customers of affiliates, but not the monies that belong to the affiliates themselves.  Depending upon legal interpretation of the Client Money Rules post MiFID, namely whether there is a requirement to segregate affiliates' monies as Client Money, there could be a potentially significant under-segregation in relation to affiliates' Client Money entitlement.

These issues have been raised with the FSA and may lead to a Court direction.  The aim will be to establish whether there was a requirement, post the implementation of MiFID, to segregate affiliates' monies as Client Money, and if so, whether such affiliates have any claim to the pre-administration Client Money pool (US$ 2.1 billion), potentially therefore further reducing the Client Money available for distribution to clients.

Investigations are also targeted at identifying other specific incidences where amounts were not segregated for other clients of LBIE, resulting in further potential for under-segregation of Client Money prior to the Administration.

There are other legal issues (such as application of interest and foreign exchange liabilities) that may require Court determination in order to deduce the final client entitlement.

For the reasons outlined above it is unlikely that any form of Client Money distribution will be made within the next few months.  The aim is to resolve these matters as quickly as possible, ensuring that any distribution of monies is in accordance with the FSA Client Money Rules and applicable legal rulings.  In order to facilitate this, the Joint Administrators will circularise clients to agree their Client Money position and obtain other administrative information prior to any distribution.

Regular updates will continue to be made on the Client Money pages of the LBIE (in administration) website as progress is made on the relevant issues.

6. How will the insolvency of Bankhaus impact on the amount of money returned to me?

US$1 billion of Client Monies were deposited for LBIE with Bankhaus, which was approximately 50% of the total Pre-Administration Client Money held by LBIE.  Bankhaus is an affiliate of LBIE and was used to deposit Client Money.  On 12 November 2008 the German regulator BaFiN announced that insolvency proceedings had been commenced in relation to Bankhaus. 

The Joint Administrators have been in regular contact with Bankhaus in regards to the recovery of these Client Monies. In addition, the Joint Administrators are pursuing other means of recovery of the monies, including the making of a claim for compensation from the German Deposit Protection Fund. 

As noted above in Client Money question 1, the Pre Administration Client Money held by LBIE is pooled into a single Client Money pool, and a client's entitlement is then to a pro-rata share of this Client Money pool. This means that if there is any shortfall in the Pre Administration Client Money pool caused by the non-recovery of Client Money deposited with Bankhaus, then all clients who have a share in that pool will incur the shortfall proportionate to their original entitlement.