Lehman Brothers International (Europe) (in administration) - Market update on Client Money - 18/12/08

The Joint Administrators continue to address the return of Client Money as a matter of urgency.  However, there are a number of significant issues affecting the return of Client Money, which need to be fully resolved to ensure fairness to all Client Money claimants.

Primary Pooling Event

Lehman Brothers International (Europe) ("LBIE") held Client Money in the ordinary course of business for certain clients.  LBIE used the "alternative" method of segregating Client Money, which was permitted under the FSA's Rules.  This method involves aggregating Client Money liabilities from LBIE business activities and segregating them as an equivalent cash amount.  The appointment of Administrators led to a 'primary pooling event' in relation to Client Money then held by LBIE under the FSA's Rules.   This means that Pre Administration Client Money held by LBIE is to be pooled into a single notional Client Money pool, and a client's entitlement is to a rateable share in this Client Money pool.

LBIE held client monies in banks, as well as clearing houses and others, 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.

Lehman Brothers Bankhaus AG

US$1 billion of client monies were deposited for LBIE with Lehman Brothers Bankhaus AG ("Bankhaus"), which was approximately 50% of the total Pre Administration Client Money held by LBIE.  Bankhaus is an affiliate of LBIE and had been used to deposit client monies over the preceding year.  On 12 November 2008 BaFiN announced that insolvency proceedings had been commenced in relation to Bankhaus.  There is currently considerable uncertainty surrounding the timing and extent of the recovery of the deposit of client monies.  However, the Administrators have been in contact with BaFiN, Bankhaus and the German insolvency administrator of Bankhaus to expedite the return of the Client Money.  Furthermore, it may also be possible to make a claim against the German Deposit Protection Fund.  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.  The initial Bankhaus creditors meeting held under German insolvency proceedings is expected to be held some time in March 2009.

Segregated Amounts

Work is ongoing to investigate whether the amounts segregated prior to the Administration as Client Money by LBIE were correctly calculated.  This work is going to take time and considerable resource, due to the complexities involved in LBIE's affairs.  In particular the treatment of any over-segregated or under-segregated amounts and the impact this may have on the Client Money pool is not yet clear, and may require extensive legal analysis.  A further issue that must be considered is the question of whether LBIE's complex calculations were correct in all aspects.  This could have an impact on the claims against the Client Money pool.

Legal Issues

In addition there are a number of other legal issues that need to be resolved prior to any distribution of Client Monies.  These include:

• valuation of clients' claims in the different currencies received by LBIE;
• how certain items included within Client Money in lieu of assets are to be treated; 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 Monies 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 Administrators are actively taking steps to establish legal certainty on these important issues.

Way Forward

Significant progress has been made by the Administrators in respect of identifying Client Monies, retrieval of those monies from banks and others and identifying Client Money claimants as per LBIE's books and records.  Work is ongoing to recover monies from Bankhaus and other third party sources, to understand the extent and potential impact on the Client Money pool of any over- and under-segregated amounts and to resolve a number of legal issues.

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, as a priority objective of the Administrators is to ensure that Client Monies are distributed as quickly as can be managed, and may include some form of interim 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.