Client Money Update - Client Money Application - Judgment - 15/12/09

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 PwC Client Money website here.

Judgment on the Client Money Application was handed down on 15 December 2009. A copy of the judgment is available here, together with a summary of it prepared by the Judge. For ease of reference, links have also been included here to the list of issues, which the court was asked to address, and the statement of assumed facts (the "SAF") [1], on the basis of which the court was asked to proceed.

In summary, the court has decided that:

The pool of pre-administration client money (the "client money pool") consists of those bank accounts and transaction accounts used by LBIE in order to segregate client money. These are the accounts referred to in paragraphs 2.20.1 and 2.43 of the SAF, the balances of which at the time of LBIE's administration totalled approximately USD2.1 billion. You should be aware that the Joint Administrators may not recover all of these balances. See in this regard paragraph 2(c) below.
LBIE is not required to top up or adjust the client money pool, whether:
1. for clients for whom no or insufficient money was segregated at the time of administration;
2. for movements between the time of last segregation (being the morning of 12 September 2008, based on figures at as close of business on 11 September 2008) and the time of administration; or
3. to make good any credit loss shortfall including, for example, the shortfall arising by reason of the insolvency of Lehman Brothers Bankhaus AG (with which LBIE had deposited USD1 billion of client money on 12 September for repayment on 15 September 2008).
The client money pool is to be distributed to those clients for whom LBIE had segregated client money at the time of its administration. These will generally be those clients who have already received information from the Joint Administrators advising them how much client money LBIE's books and records indicate was segregated for them by LBIE at the time of administration. If you have not received any such information, it is likely LBIE did not segregate any client money for you at the time of administration. If so, the judgment does not permit you to claim against the client money pool.
Clients' client money entitlements are to be calculated at the time of administration by reference to what was segregated by LBIE for them at that time. For many clients, this will be the same as that which was segregated for them at the time when LBIE last conducted its reconciliation and segregation of client money on the morning of 12 September 2008 (which it did using data as at close of business on 11 September 2008). However, for some futures clients, the amount segregated for them in respect of certain of their futures' positions was adjusted between close of business on 11 September 2008 and the time of administration to reflect fluctuations in the value of those futures' positions. Those clients' client money entitlements will therefore reflect that adjustment. Further, please note that the judgment does not address whether clients for whom LBIE segregated sums in respect of depot breaks or unapplied credits have a client money entitlement in respect of those amounts. That issue is expected to be dealt with by way of a short addendum to the judgment.
Clients will be required to give credit for client money paid to them by LBIE (or its affiliates on LBIE's behalf) prior to the time of administration. Where LBIE segregated money for clients in respect of fails and those clients have subsequently received the relevant securities, clients will also be required to give credit accordingly.
In the absence of an agreement to the contrary, LBIE may not exercise any right of set-off or retention against clients' distributions from the client money pool in respect of debts owed by those clients to LBIE.
Please note that the judgment does not decide whether particular clients may or may not be able to bring claims against the general estate in relation to pre-administration client money, whether as unsecured creditors or for the return of identifiable client money held by LBIE outside the client money pool. However, the court did address some of the principles that would apply to any such claims. You should therefore refer to the judgment and seek independent legal advice if you believe it to be necessary.

At the handing down of the judgment on 15 December 2009, six respondents to the application sought and have been granted permission to appeal the judgment. Those respondents are Lehman Brothers Inc., Lehman Brothers Holdings Inc. and Lehman Brothers Finance AG (all of whom are affiliates of LBIE's), CRC Credit Fund, Limited (one of the representative respondents for unsegregated client money claimants), and Goldman Sachs GSIP Master Company (Ireland) Limited and Paragon Capital Management Fund Limited (two of the representative respondents for segregated client money claimants). If any or all of these respondents decide to appeal, they are required to file their appeal notice on or before 15 January 2010.

If the judgment is appealed, the breadth of the issues that may be the subject of that appeal is such that the appeal is likely to impact on the Joint Administrators' progress towards making a distribution of client money.

A press release relating to the outcome of the Client Money Application has been issued by the Joint Administrators and is available here.

A further update will be posted once it is known whether or not the judgment has been appealed.

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

[1] Note: Paragraphs 4.5 and 4.6 have been redacted at the request of one of the parties