Client Money Update - Client Money Application - Appeal Judgment - 02/08/2010

This update concerns the application issued by the Joint Administrators on 1 May 2009 seeking directions from the Court concerning LBIE's obligations in relation to the handling of client money received prior to the time of administration (the "Client Money Application"). Further background to the Client Money Application can be found in earlier updates posted on the Client Money website.

As noted in the Client Money Update of 26 January 2010, four parties to the Client Money Application (specifically, CRC Credit Fund Limited, Lehman Brothers Inc., Lehman Brothers Finance AG and Lehman Brothers Holdings Inc.) appealed the judgments of Mr. Justice Briggs. Following a five day hearing in June 2010, judgment on the appeals was handed down by the Court of Appeal on 2 August 2010.  A copy of the judgment is available here.

Significantly, the Court of Appeal's judgment has overturned Mr. Justice Briggs' judgments on the following two issues:

1. The FSA's client money rules require identifiable client money held by LBIE (at the time of administration) outside its segregated accounts to be pooled with the client money held in its segregated accounts, such pool to be distributed to all of the clients entitled to claim against the pool (see 2 below).  Mr. Justice Briggs' judgments had held that (a) the pool was comprised only of the client money in LBIE's segregated accounts, and (b) that identifiable client money held outside such accounts should be returned to the specific clients for whom it was held.

2. All clients who ought to have had money segregated for them by LBIE as client money prior to administration are now entitled to share in the client money pool, regardless of whether or not LBIE did in fact segregate client money for them. In other words, both segregated client money claimants and unsegregated client money claimants (which may include certain of LBIE's affiliates) are entitled to claim against the pool.  Mr. Justice Briggs' judgments had held that only segregated client money claimants were entitled to claim against the pool.

The Court of Appeal's judgment upholds Mr. Justice Briggs' judgments on two other issues, specifically that:

(a) The statutory trust which attaches to client money attaches at the point of receipt of client money by LBIE, not at the point of segregation.

(b) Money which was due and payable by LBIE to a client but which had not been appropriated to that client by LBIE prior to administration (e.g. by segregation) is not client money and does not therefore form part of the client money pool.

The Joint Administrators are considering the judgment carefully to assess its implications for LBIE's client money claimants and creditors, including, in particular, on the likely timing and level of any distribution of client money. Client money claimants should note that the effect of the judgment on both of these issues may be significant.  A further update on these issues will be posted in due course.

Please note that it is not yet known whether any party to the appeal proceedings intends to seek permission to appeal to the Supreme Court.

The parties to the proceedings are currently seeking to agree the terms of an order reflecting the Court of Appeal's judgment. As the court vacation has now begun, the Joint Administrators do not expect any such order to be made by the Court of Appeal before late September/early October 2010. A copy of this order when made will be posted on the website.

Please direct any questions you may have with respect to the above to clientpositionresponses@lbia-eu.com .