Client Money Update - Application filed to the Supreme Court for Permission to Appeal - 27/09/2010

This update concerns the application filed 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.

The Court of Appeal's judgment on the directions sought by the Joint Administrators was handed down in August 2010. Further information in respect of that judgment can be accessed here: Client Money Update of 2 August 2010.

As explained in the Client Money Update of 12 August 2010 the Joint Administrators, together with Lehman Brothers Holdings Inc. ("LBHI"), GLG Investments Plc Sub-Fund: European Equity Fund ("GLG") and Lehman Brothers Inc. ("LBI") sought permission from the Court of Appeal to appeal the judgment to the Supreme Court.  Those applications were turned down by the Court of Appeal for the reason that the Supreme Court was best placed to judge whether the matter should come before it (although the Court of Appeal considered that the applications were worthy of consideration). Accordingly, the Joint Administrators, GLG and LBI have now sought permission to appeal directly from the Supreme Court.

The Joint Administrators decision to continue with their appeal is based on the following:

• The Court of Appeal recognised that the issues in question raise difficult, important and arguable points of law.
• The consequence of the Court of Appeal's decision is that, contrary to the objectives of the CASS distribution rules, the Joint Administrators will not be able to make a timely return of client money.  Instead, prior to making any meaningful distribution from the client money pool, the Joint Administrators will have to embark on an exercise that will involve identifying entitlements to client money.
• The Court of Appeal's judgment also requires the Joint Administrators to trace identifiable client money to add to the client money pool.
• The Joint Administrators believe that such consequences could not have been intended by CASS and MiFID, and that the correctness of the judgment should therefore be tested by the Supreme Court. 
• Finally, the Joint Administrators are troubled by the potential impact of the Court of Appeal's decision on the General Estate. 

As a result of the Court of Appeal's decision, the Joint Administrators will have to embark on a difficult exercise to identify entitlements to client money based on LBIE's client contracts. The judgment also places the onus on the Joint Administrators to identify client money in unsegregated bank and transaction accounts. In addition, establishing client money entitlements and applying the legal tracing principles to identify client money will likely require further court directions. Taken together, the Joint Administrators expect these tasks to result in significant delay, possibly years, and additional cost in making any distribution of client money.

It is not yet known when the Supreme Court will decide on these applications for permission to appeal. A further update will be posted when the Supreme Court's decision is known. As always, the Joint Administrators will continue to communicate with you through this website on all matters relating to LBIE's administration. Should you have any questions regarding this update, please contact the Communications and Counterparty Management team at clientpositionresponses@lbia-eu.com.