Lehman Brothers Inc. and Lehman Brothers International (Europe) Announce Agreement in Principle – 12/10/2012

The Joint Administrators are pleased to set out below the details of the non binding heads of terms reached with Lehman Brothers Inc. (“LBI”) which were announced last week together with a preliminary statement on the potential impact of this for LBIE’s Omnibus claimants.

The Joint Administrators of LBIE and the Trustee for LBI under the Securities Investor Protection Act, jointly announced on 5 October in London and New York that an agreement in principle has been reached to resolve all claims among their respective entities totalling $38 billion.

The agreement is subject to documentation and approval by both the U.S. Bankruptcy Court and the English High Court. If approved, the agreement will allow the Joint Administrators and the Trustee to proceed with plans to allocate and distribute assets to their estates’ respective clients.

The resolution of LBIE’s claims relating to LBI will allow us to move the case forward materially, enabling us to focus on the client-side allocation of over $7 billion of client assets. Our immediate priority is to finalise the methodology for distribution of our Omnibus claim recoveries to LBIE clients.

Terms of agreement in principle

• LBIE’s Omnibus customer claim against LBI of circa $15.1 billion will be allowed in an amount of circa $7.5 billion (valued as of 19 September 2008) in securities and cash. This claim will be augmented by post-filing income estimated to be circa $600 million.
• LBIE’s House customer claim against LBI of circa $8.9 billion will be allowed in an amount of exactly $500 million in cash.
• LBI will stipulate a general property claim in the amount of exactly $4.0 billion for LBIE, and LBI’s unsecured claim against LBIE of circa $13.8 billion will be eliminated entirely.
• LBI’s Client Money claim against LBIE will be assigned to LBIE’s nominee.
• The parties have agreed to suspend scheduled litigation activity until mid-December 2012 to allow work to proceed in finalising this agreement.
• The agreement contains a binding reserving agreement which limits the amount of the maximum recoveries that each would make from the other's estate, from the claims asserted in the event that the negotiated settlement is not finalised in due course and the parties resume litigation of their claims.

If a final agreement between the parties can be reached before 15 December 2012, a U.S. Bankruptcy Court hearing seeking approval of the agreement together with certain other LBI estate matters can be anticipated in the first quarter of 2013.

Limited further disclosure on the heads of terms and the binding consequences of the capped recovery reserves will be included in the Joint Administrators’ forthcoming Eighth Progress Report.

Impact for LBIE Omnibus claimants

There are circa 300 individual LBIE clients for whose principle benefit the LBIE Omnibus customer claim is pursued. LBIE will receive cash and a pool of securities in significant but unequal amounts from LBI at some time following final approval of the above outlined transaction. There will continue to be a material mismatch of securities recovered from LBI as compared to those due to LBIE’s underlying clients caused by the differing commencement dates for the insolvencies and the manner in which trades were settled in the week of 15 September 2008. As a result, LBIE will not be in a position to return like for like securities to its clients.

Due to these circumstances and in light of the overall compromise agreed between LBIE and LBI, in all likelihood LBIE will need to liquidate the securities contained in its Omnibus determination with the realised proceeds being added to the cash contained in its Omnibus determination and thereafter being allocated to LBIE clients.

LBIE is developing a proposal to determine the allocation that will be made to each individual client based on the client’s trust claim against LBIE recognising that clients may have a range of views as to the relevant date for valuation purposes. LBIE anticipates this will be a single consensual approach accommodating both CRA and Non CRA claimants. LBIE believes this approach will considerably accelerate the return of assets to LBIE clients without the risks of protracted litigation.

At the same time as seeking US Bankruptcy Court approval for this settlement, LBI expects to apply to the Court to expunge the protective duplicate claims of circa $13billion filed directly against LBI by LBIE clients. This is intended to ensure that no unnecessary reserves are required to be made by LBI that will dilute distributions to bona fide, customer property claimants, and similarly ensure that claimants do not make a duplicate recovery.

We will make further limited disclosure to clients in due course and we hope to be able to make a comprehensive announcement to clients before the year end.

Finally, a circular containing updated client statements, including a June 2012 valuation of securities, will be sent to Omnibus claimants shortly.

Should you have any queries regarding this update, please contact LBIE's Communications and Counterparty Management team at generalqueries@lbia-eu.com. The Joint Administrators will continue to communicate with you through this website on all matters relating to the administration of LBIE.