This update concerns the questions submitted by creditors at the presentations made by the Joint Administrators to MFA and AIMA held on 8 and 9 October 2009 (the “Presentations”).

The objective of the Presentations was to provide members of the industry bodies who may have an interest in the strategy for the return of client assets held by LBIE.

For background information on the Presentations, please see the Client Asset Updates – Joint Administrators’ Presentation to Members of MFA and AIMA - 8 and 9 October 2009 and Strategy for Return of Client Assets - 05/10/09.

The answers to the creditor questions set out below (which were submitted by creditors, at or following the Presentations, in substantially the form set out) are based on the proposed Scheme of Arrangement (the "Scheme") as it was contemplated at 14 August 2009 and the contractual solution (“Contractual Solution”) currently being developed by the Joint Administrators.

However, please note that neither the terms of the Scheme nor the Contractual Solution have yet to be finalised and therefore the answers set out below are provisional and illustrative only and should not be relied upon as a definitive description of the position of any potential creditor or the effect of the proposed Scheme or Contractual Solution.

The questions and answers (the “Q&As”) set out below are intended to assist an interested person to understand the purpose, operation and effect of certain specific aspects of the Scheme and Contractual Solution, in respect of which queries where raised at the Presentations. They are intended as general guidance only and should not be regarded as advice in respect of the Scheme or Contractual Solution. This document is not a legal document and is not intended to create legal relations or to form the basis of any contract or agreement.

 The Q&As are NOT:

(i) a comprehensive description of the Scheme or Contractual Solution; or

(ii) a substitute for reading the Scheme documents. Please note that the full Scheme document and Explanatory Statement are not yet available and are subject to a Jurisdiction Judgment Appeal scheduled for the 26 of October. Click here for the Client Asset Update on the Jurisdiction Appeal; or

(iii) a substitute for reading the Contractual Solution documents, scheduled to be distributed to creditors in November.

Please note, the Joint Administrators were asked many questions, from various sources, which were not relevant to the Scheme or the Contractual Solution and, therefore, we have not sought to provide answers for these questions. These issues will be addressed in due course at the appropriate time. In addition, the Joint Administrators’ 6 month progress report has been sent to creditors and is posted on the website here. The progress report may address many of the questions asked at the Presentations.

Table of Contents

I. Contractual Solution/Scheme of Arrangement

II. Shortfalls/Rehypothecated Securities

III. Books/Records/Statements

IV. Affiliates/Intercompany

V. Bar Date

VI. Other

I. Contractual Solution/Scheme of Arrangement

1. Who is entitled to be a part of the Contractual Solution?

Answer: As with the Scheme, the Contractual Solution will be offered to creditors with claims to segregated client assets, but it is also proposed that the Contractual Solution will be offered to other creditors of LBIE who have financial contracts (i.e., custody, prime brokerage, derivatives and financing agreements) with LBIE, whether or not they have proprietary claims to trust assets held by LBIE in LBIE's client accounts. However, it will only be applicable to creditors who do not have such proprietary claims to the extent of the methods and processes of calculating their non-proprietary claims against LBIE and their liabilities to LBIE. As it is a prime objective of the Contractual Solution to expedite the return of segregated client assets, the minimum acceptance threshold requirement to bring the Contractual Solution into effect will be calculated based on creditors with claims to distributable trust property.

2.What if you dispute whether or not you have a trust claim?  Is there a process for resolving this?  And if you ultimately are deemed not to have a trust claim, how do the current plans benefit such claimants?

Answer: If you believe you have a trust claim against LBIE to client segregated assets and you did not receive an Interim Position and Balance Statement in September from the Administrators, you should contact the Administrators at the earliest opportunity. However, as stated in paragraph 1 above, it is proposed that the Contractual Solution will also be offered to unsecured creditors with financial contracts (i.e., custody, prime brokerage, derivatives and financing agreements) of LBIE who do not have trust claims and thus will be beneficial to these unsecured creditors as well.

3. What will the position be in relation to unsecured creditors who sign up to the Contractual Solution?

Answer: Unsecured creditors who had outstanding financial contracts (i.e., custody, prime brokerage, derivatives and financing agreements) with LBIE at the time of administration may sign up to be bound by the Contractual Solution. The Contractual Solution will provide a framework for the determination of a creditor’s unsecured claim. This is beneficial as it will expedite the formal admission of such claims in due course. However, as with the proposed Scheme, the Contractual Solution will not provide an immediate mechanism for making distributions in respect of unsecured claims and this will be the subject of a separate follow-up distribution process.

4. Will Trust Property Clients have the ability to negotiate the Scheme or Contractual Solution before it is released?  If so, how would the Administrator recommend clients do so?

Answer: Both the Scheme and the Contractual Solution are collective arrangements and will not be capable of individual modification. The Administrators have been working with the creditors’ committee to define the terms of the Scheme and the Contractual Solution.  Creditors are reminded that a summary of the terms of the proposed Scheme can be accessed here.

5. Do you anticipate reserving the right to modify the Contractual Solution on a bilateral basis or will the contractual arrangement be identical for all customers?

Answer: The Contractual Solution will contain provisions to enable it to be modified by a certain majority of signatories.  To streamline the process in any given situation those signatories who are eligible to vote will be those affected by the proposed changes. It is intended to be a composite solution for all LBIE clients and therefore it will be identical for all clients.

6. To the extent that LBIE prevails in its appeal against the Scheme jurisdiction ruling, can that appeal ruling be appealed by LIBA?  If the appeal win is further appealed, how long could this legal process take?

Answer: If LBIE is successful in its appeal, LIBA could only bring an appeal against that decision with leave of the court. The timing of any further appeal would depend upon the court timetable and the availability of judges to hear that appeal.

7.If the Scheme is allowed to be initiated and receives 75% approval from clients, could creditors who did not vote for the Scheme pursue their claims in other jurisdictions rather than be bound by the Scheme?

Answer: In the event that LBIE is able to proceed with the Scheme all affected creditors will be bound under English law.  LBIE is also minded to seek judicial recognition of the Scheme in the relevant jurisdictions.

8. What is the estimated timeline for trust asset creditors under both the Scheme and the Contractual Solution?

Answer: LBIE can only launch the proposed Scheme if its appeal against the jurisdiction judgment is successful. The appeal hearing is scheduled to take place on 26 October 2009. If the appeal is successful, LBIE would need to apply to court to convene creditors’ meetings to vote on the Scheme. It is expected that the earliest the Scheme could become effective might be March 2010 and the Scheme bar date for trust property claims might be in May 2010. Alternatively, if the Contractual Solution is implemented and LBIE successfully obtains a court order granting a bar date for trust property claims, it is anticipated that the bar date could be at the end of January 2010.

9. If nearly the same result as the Scheme can be achieved through the Contractual Solution, why did the Administrators say it would take a decade or more to resolve the administration?  Was this an overstatement?

Answer: The Scheme remains the Administrators’ preferred method of facilitating the return of trust property as it would bind all creditors with proprietary claims to assets in LBIE’s client segregated accounts. The Contractual Solution cannot bind non-signatories, it cannot set a bar date which will enable LBIE to allocate and distribute such assets without regard to late claimants, nor can it apply the bar date to protect signatories who receive trust property against claims by non-signatories. All proprietary claims by non-signatories will have to be resolved on an individual basis and may require trust or directions applications to determine their treatment, which could involve lengthy court proceedings. In addition, the unsecured estate will remain to be distributed after the claims of trust property claimants have been resolved.

10. If the Contractual Solution is not possible, is a trust application combined with a scheme of arrangement a viable alternative to the current bilateral mechanism for returning client assets?

Answer: The task of putting together a scheme of arrangement which dealt only with clients’ non-proprietary claims and combining this with one or more trust applications would be very complex. In particular, the nature of the trust applications would pose questions as to which clients would have a right to be heard at such applications and which clients would be effectively bound by the court decisions. The Administrators are of the view that the Contractual Solution is preferable to a modified scheme of this nature.

11. Please could you explain why the Contractual Solution will have such a high acceptance threshold?

Answer: The Contractual Solution requires a high acceptance threshold in order to minimise the risk of challenges by non-signatories, as non-signatories may have the ability to challenge distributions of trust property in the hands of the recipient of that trust property. The more creditors sign up to the Contractual Solution, the more effective the Contractual Solution will be as it enables creditors’ claims to be dealt with on a uniform basis and minimises the risk of challenge.

12. You mentioned reserving the right to reduce the 90% acceptance threshold for the Contractual Solution.  Please confirm that it’s anticipated that the threshold would be a condition to acceptance of the contract and, therefore, approval of accepting parties would be necessary in order to reduce the threshold.

Answer: It is proposed that the reduction of the acceptance threshold would require the approval of a significant majority of accepting parties.

13. Will indemnities or collateral be required by LBIE from signatories to the Contractual Solution?

Answer: LBIE will not require indemnities or collateral from signatories to the Contractual Solution in order to make distributions of trust property. It will be a term of the Contractual Solution that signatories release LBIE and each other from claims to assets distributed to other signatories in accordance with the Contractual Solution. However, it will not be possible to obtain such mutual releases from non-signatories and therefore non-signatories may have the ability to challenge distributions of trust property in the hands of the recipient of that trust property.

14. Does the Contractual Solution put clients in the same position they would be in if they were to exercise the contractual set-off rights contained in ISDA agreements?

Answer: The set-off provisions of the Contractual Solution are, in general, intended to reflect the rights that clients have under their ISDA or other agreements and, as such, also reflect the set-off regime that would be applicable if LBIE were to be in liquidation.

15. How does the claim valuation work in the Contractual Solution with regards to:

(a) long securities

(b) short securities

(c) cash collateral?

What date will be used? 15 September 2008?  Or the allocation date?

Answer: For long securities that are subject to trust property claims, they will be valued on the day falling 25 business days prior to the date that LBIE intends to give instructions for settlement of such trust property for the purpose of distribution and appropriation of such securities against any liabilities owed to LBIE. To the extent that a creditor has a residual unsecured shortfall claim to its trust property (comprising such long securities) after such distribution and appropriation, then they will be valued on the last business day before 15 September 2008. For the purpose of calculating the close-out amount under a derivatives or financing contract, the short securities will be valued on the last business day before 15 September 2008 and the cash collateral will be valued as provided under the relevant derivatives or financing contract (unless such derivatives or financing contract has not terminated by the time the agreement becomes effective, then it is proposed that such collateral will be valued as on the last business day of the month in which the creditor in question becomes a party to the Contractual Solution).

16. How would the Contractual Solution address circumstances where the value of securities has fallen below the amount the claimant owes LBIE due to post-administration market movements?

Answer: If there are any remaining liabilities owing to LBIE after being set off against the value of securities valued around the time of distribution, then such client will remain liable to LBIE for such outstanding liabilities.

17. Please confirm that under the Contractual Solution a client will be able to add the value of any client money shortfall to its general, unsecured claim against the LBIE estate and/or use it to offset a client’s liabilities to the LBIE estate.

Answer: If a client has a claim against LBIE in respect of its client money received by LBIE prior to 7.56 am on 15 September 2008 (pre-administration client money), then a client may use such client money (to the extent that it has been recovered by LBIE) to offset its liabilities to LBIE. If there is any shortfall in a client’s claim to pre-administration client money against LBIE, then LBIE would generally expect such shortfall to be admitted as a general unsecured claim against LBIE’s estate.

18. PwC has indicated that for clients with trust property, a “net” settlement amount will be determined valuing non-trust property as of September 08 and liabilities as of the same date, and adding or subtracting the resulting net claim or liability from the trust property recovery.  Is there any reason to worry that the administrators will take a different approach with respect to clients with no or a de minimis amount of trust property, i.e. that they would demand full recovery on liabilities and treat assets as separate unsecured claims, rather than netting assets and claims to come up with a net claim or liability?

Answer: For clients with financial positions (other than trust property) under derivatives and financing contracts, the Scheme/Contractual Solution provides a methodology to value the net contractual position of all claims and liabilities under these contracts. If a client owes a net liability to LBIE, then such liability will be set off against the trust property of such client and the client will remain liable for any outstanding liabilities to LBIE.There is no distinction for clients with de minimis property claims.

19. A client may want to set off their obligations against an unsecured claim instead of against Trust Property; does the Contractual Solution allow this?

Answer: Yes, as with the proposed Scheme, the Contractual Solution will give signatories the flexibility to defer set-off of any net liabilities so that they are applied first against either the unsecured shortfall claims or the asset claim at the choice of the signatory.

20. Since my short positions are governed under the existing GMSLA with LBIE, why are those positions not valued in accordance with that contract (i.e. the next business day following the day we sent a termination notice) instead of close of business on 12 Sept?

Answer: Under both the Scheme and the Contractual Solution, short positions will be valued on the last business day before 15 September 2008.  This is in the interest of fairness and efficiency in that all creditors will be treated in the same manner.

21. Will trust property positions that are turned into cash (i.e. that mature) have a statutory interest rate applied under the Scheme/Contractual Solution to prorate their value?

Answer: LBIE will account for cash redemption/maturity proceeds in respect of trust property received by or on behalf of LBIE after the time of administration as part of trust property claimants’ claims to the trust property from which the money was derived.  Interest will be applied as set out in the details of the Contractual Solution and as per the Scheme summary terms document posted on online in July.  Click here for the Scheme’s key terms document.

22. Costs- does the Administrator still intend to charge a fee of 1% on returned Trust Property in the Scheme or Contractual Solution?

Answer: The Administrators have to recover reasonable costs associated with the distribution of trust property and it is not in the best interests of the LBIE creditors as a whole for these costs to be borne solely by the unsecured estate. Under the proposed Scheme, costs of 1.00% (or 0.75% for Scheme Creditors who have assets claims to Custody Securities only) will be deducted from assets distributed to Scheme Creditors. The costs provisions of the Contractual Solution will incorporate these principles and will also be designed to encourage clients to sign up promptly to the Contractual Solution as costs may be higher for late signatories and non-signatories to the Contractual Solution.

23. What valuation date will be used for bilateral agreements if there is no scheme and no contractual solution for rehypothecated securities and terminated shorts?  Will there be set off?

Answer:  LBIE’s intention is that any such bilateral agreements would be no more favourable than the proposed provisions of the Scheme or Contractual Solution. In addition, any concessions to creditors available under the Scheme or the Contractual Solution may not be offered in bilateral agreements with individual creditors.

II. Shortfalls/Rehypothecated Securities

24. The Client Assets update of 5 October 2009 stated that of the $8.9bn assets under LBIE’s control there is a $300m shortfall; however the presentation slide states that there are $8.9bn stock line assets with no shortfall. Please can you clarify the shortfall position?

Answer: The total shortfall of stock line assets in LBIE’s books and records is approximately $300m.  This leaves total assets in LBIE’s possession at $8.9bn.

25. Is it possible that the shortfall could increase because some claimants may not come forward until after the Bar Date?

Answer: The Administrators have spent a great deal of effort in reconciling LBIE’s books and records with those of its custodians and depots where they have visibility of what is held by those custodians and depots to give the shortfall estimates indicated in the presentation slides. There remains a possibility of new claimants making themselves known after the Bar Date, however, the Administrators have been working to minimise this risk through the reconciliation exercise. To the extent that an unforeseen shortfall does emerge and if LBIE is liable for such shortfall, signatories to the Contractual Solution will have the option to set them off against their own liabilities.

26. How is the shortfall to client assets of $0.3 billion derived?  As of which date?  Is this the total shortfall from client assets, i.e. unsecured claim?

Answer:  The shortfall was derived as of 30 June based on stock lines in the LBIE controlled depots vs. LBIE’s books and records as of 12 September 2008.  There could be additional shortfalls in client assets which have not been brought under the Joint Administrators’ control (i.e., in non LBIE controlled depots.)

27. Will the Joint Administrators publish the line items where there are stock shortfalls?

Answer: At this point in time, LBIE will not be publishing the line items where there are stock shortfalls.

28. How will claims for rehypothecated assets be treated in the Contractual Solution?

Answer: The act of rehypothecation (whether or not it was permitted under the agreements with the customer) will have extinguished the segregated nature of the asset. The client may have an unsecured claim against LBIE in respect of LBIE’s failure to redeliver equivalent securities in respect of any rehypothecated assets. The Contractual Solution will not prejudice or compromise any proprietary claim a client may have to rehypothecated assets which remain in LBIE’s “house” (i.e. non-client segregated) accounts.

29. Does the Administrator still intend to value rehypothecated assets at 12 September 2008?  Given the market has rallied much higher than 12 September 2008 valuations, this now significantly favours the estate.  Will there be an alternative valuation method used to compensate for this market movement?

Answer: Under the proposed Scheme and the Contractual Solution, rehypothecated assets will be valued as at the business day before 15 September 2008.  There will be no adjustments to reflect subsequent-market movements.

30. How can prime brokerage clients make a meaningful decision absent a complete accounting by PwC showing rehypothecated securities on a fund-by-fund basis?

Answer:  The Interim Position and Balance Statement issued in September and the forthcoming Settled Position and Balance Statement to be issued in November provide information on rehypothecated assets.

31. Assume LBI only delivers cash back to LBIE to satisfy Trust Property held per its sub-custody account.  Under the proposed Scheme/Solution, how will clients’ claims be calculated for that cash?  Will it be considered the value of the positions when the cash is delivered to the Trust Property client and will it include post-administrative cash payments?  Finally, if there is a claim shortfall, will this be considered an admin expense of LBIE, an unsecured claim of LBIE or does LBIE feels it is not a claim at all under the Scheme/Solution?

Answer: In this event, it is LBIE’s intention to follow whatever method of allocation of such cash is used by LBI. If distributions from LBI do not fully satisfy a client’s customer property claim, in general LBIE would be liable for the difference between that distribution and the client’s trust asset claim against LBIE as an unsecured claim.

III. Books/Records/Statements

32. There are a large number of corporate actions which were applied to those positions reflected on the 6/30/09 statement sent to us.  Is there any worksheet or other information which the Joint Administrators will provide to clients which can show us the corporate actions applied to the respective positions as of 9/12/08 close?

Answer:  The Interim Position and Balance Statements issued in September reflect creditors’ positions and balances as at 12 September 2008 and the corporate actions in such statements were valued as of 30 June 2009.  The Joint Administrators will issue a further Settled Position and Balance Statement in November and such statement we will provide a valuation of corporate actions as of 30 September 2009 based on the positions and balances as of 12 September 2008.

33. What is the progress on resolving discrepancies in client June 30 statements recently provided by the Joint Administrators?

Answer:  The client management team is reviewing all queries with respect to the IPBS that were sent out in September and posted on the Client Information Portal.  A Settled Position and Balances Statement will be available in mid November through the Portal for all client asset creditors which will reflect any resolved discrepancies.

34. How confident are you in the current distinction between rehypothecated and non-rehypothecated assets in the reports sent to trust asset holders?  Specifically, many U.S. assets (such as government bonds and liquid equities) are listed as non-rehypothecated, which seems unlikely.

Answer:  Rehypothecated assets identified in the Interim Position and Balance Statements sent out on 4 September are a reflection of LBIE’s books and records as of 12 September 2008 and reflect those positions of which LBIE is currently aware.  However with respect to LBIE assets not listed on LBIE books and records, LBIE currently has no access to the information and records in non-LBIE controlled depots and as such has no information on rehypothecation in such depots.  Therefore, neither the Joint Administrators nor LBIE accept any liability arising out of any inaccuracies or deficiencies in the information provided.

IV. Affiliates/Intercompany

35. When will the judgments between LBI and LBHI be handed down? Will LBHI’s claim be subordinated?

Answer: LBIE does not have any specific visibility on the LBI claims process as it relates to other claimants against LBI.

36. Please could you explain the status of redemption proceeds from bonds held by LBIE for its clients through LBI?

Answer: The status of dividends and coupons received by LBI are subject to a judicial determination and the LBI Trustee may be considering redemption proceeds to also be subject to such judicial determination.  The Administrators’ understanding is that the LBI Trustee considers that such dividends, coupons and redemption proceeds should (subject to that court determination) be treated as “customer property” by LBI.

37. A number of US funds have signed various documentation with both LBIE and LBI. It is not always clear under which documents securities are held. If US securities are held by LBIE are they in an account with LBI? Have any securities been re-hypothecated to LBI?

Answer: The Interim Position and Balance Statements sent out by LBIE in September 2009 to clients with client asset claims reflect the asset holdings of each client with LBIE, including that client’s claim to client assets which LBIE held through LBI, according to LBIE’s books and records. These statements also contain details of the client’s assets which were rehypothecated. LBIE rehypothecated these assets in the general course of its business to counterparties who may have included its affiliates.

38. Please could you outline the timeframe for the conclusion of a protocol in relation to client assets between LBIE and LBI?

Answer: At present there is no set timeframe for signature of a protocol with LBI, however, discussions are ongoing between LBI and LBIE regarding the protocol and good progress has been made.  The Joint Administrators are continuing to progress the reconciliation of LBIE’s omnibus claim with the Trustee.

39. Has LBSF started to reconcile its position with LBIE?

Answer: The Joint Administrators have commenced discussion with LBSF, however, no bar date has been set by LBSF and the process, being complex, is not yet completed. 

40. Our fund clients want to sell out of their LBI positions; however no proofs of debt have been submitted. Is it still possible to make assignments?

Answer: LBIE will not facilitate assignments of clients’ positions; however, LBIE will not actively obstruct such assignments.  It is each Client’s responsibility to take advice as to the options they may have in this regard.

41.Please could you provide a summary of LBIE’s position in relation to LBJ as regards client assets?

Answer: LBIE holds assets which LBJ asserts belong to its clients. LBJ holds assets which LBIE is claiming on behalf of itself and its clients. Discussions between LBIE and LBJ are ongoing regarding the mutual return of assets held by each for the other’s clients. 

42. Do you have records, by client, of what positions exist (per your Settlement Date Reconciliations) at LBI on 15 September 2008?

Answer:  The Joint Administrators continue to work with LBI trustees to obtain full disclosure. Over 90% of securities lines have been reconciled between the LBIE and the LBI books and records as at 12 September 2008. We have been advised by the LBI Trustee that there are a significant number of book entries in LBI’s records between 12 and 19 September 2008, the effective date for the SIPC claim. The LBI trustee is continuing his investigation as to the nature of the accounting entries during this period as part of the process of agreeing LBIE’s omnibus SIPC claim.

43. Given the house assets on hand and the quantum of intercompany claims asserted by LBIE what are the prospects of a full recovery for creditors?

Answer: There is no clarity on this point at the current moment.  Most affiliates have not yet given any indication of their likely expected dividend rates.

44. My prime broker agreement names LBI and LBIE as the counterparty.  Now that US$ assets are held at LBI, it could be argued that the Trust Property is a direct claim against LBI rather than LBIE.  Please provide your view of these issues as it relates to the Scheme or Solution.

Answer: Such a creditor should have taken independent legal advice on where to submit its claim and on whether it had a right to submit its own SIPC claim. The Joint Administrators filed an omnibus claim on behalf of all clients shown on LBIE’s books and records that had securities, commodities, cash, or other property held with LBI on 12 September 2008. However as stated in the SIPC update dated 20 January 2009 LBIE has faced issues including missing or inaccessible records and IT data that complicate the compilation of claims.  Consequently, LBIE cannot guarantee that the omnibus claim that it filed on behalf of certain of its clients will identify every client with securities, cash or other assets held by LBI through LBIE and neither the Administrators nor LBIE accept any liability arising out of any inaccuracies or deficiencies in the information provided. The Joint Administrators are continuing to progress the reconciliation of LBIE’s omnibus claim with the Trustee.

45. Last August, you had reconciled 90+% of client positions with LBI.  Now, you are telling us that 90% of client positions had record movements.  Please explain this record movement as you know it.  We are a large US$ denominated prime broker with over $1 billion of positions.  We did not trade these during month of Sept 2008.  Thus, how could 90% of Trust Property be moved?

Answer: Over 90% of securities lines have been reconciled between the LBIE and the LBI books and records as at 12 September 2008. We have been advised by the LBI Trustee that there are a significant number of book entries in LBI’s records between 12 and 19 September 2008, the effective date for the SIPC claim. The LBI trustee is continuing his investigation as to the nature of the accounting entries during this period as part of the process of agreeing LBIE’s omnibus SIPC claim.

46. Can you address, once again, the “most likely” timing of “Client Assets” held by LBI being returned to LBIE and by them to clients?  Is it, or is it not, likely to be resolved in time for the Q1 2010 distribution?

Answer:  Currently LBIE does not have any specific information on the timing of the LBI claims process resolution.  Discussions are ongoing between LBI and LBIE regarding the protocol and the Joint Administrators would hope to be in a position where LBIE itself is has the structure and process in place by Q1 2010 to pass on any LBI distribution to LBIE clients when such distributions are forthcoming. However, there is no indication of when LBI will make its first distribution against LBIE’s omnibus claim.

47. Has LBIE engaged with LBLux?

Answer: Yes, LBIE has started discussions with LBLux but due to lack of personnel and resources at LBLux these discussions are progressing slowly.

48. At the last conference held with MFA last August, you disclosed that all US$ denominated Client Trust Property was held in a sub-custody account at LBI.  Please explain the exact relationship of this sub-custody account.  Is LBIE treated the same as every other custody account of LBI and protected by SIPA and SEC customer protection rules?  Or did LBIE have an alternative agreement with LBI given both LBI and LBIE were affiliates of Lehman?  If there was an alternative agreement, will you disclose what exactly the agreement is to Trust Property Clients?

Answer: LBIE used a number of Lehman affiliates as sub-custodians.  Whether LBIE’s arrangements with LBI are such that LBIE’s claims will be treated as customer claims and qualify for distributions from the LBI customer property pool is subject to determination by the LBI trustee.  The Joint Administrators filed an omnibus claim on behalf of all customers shown on LBIE’s books and records that had securities, commodities, cash, or other property held with LBI on 12 September 2008. However as stated in the SIPC update dated 20 January 2009 LBIE has faced issues including missing or inaccessible records and IT data that complicate the compilation of claims.  Consequently, LBIE cannot guarantee that the omnibus claim that it filed on behalf of certain of its customers will identify every customer with securities, cash or other assets held by LBI through LBIE and neither the Administrators nor LBIE accept any liability arising out of any inaccuracies or deficiencies in the information provided.

49. A U.S. fund with mostly U.S. stocks may have virtually all of its “Client Assets” held by LBI.  Where does LBIE’s effort to recover such assets from LBI stand.  Why should a fund caught in this situation sign on to the “Contract”?

Answer:  The Joint Administrators filed an omnibus claim on behalf of all customers shown on LBIE’s books and records that had securities, commodities, cash, or other property held with LBI on 12 September 2008. The benefits of becoming a signatory to the Contractual Solution would be 1)  to crystallize and agree a trust creditor’s claim for future distribution from LBIE 2) to expedite the process for passing on distributions once LBI has passed these on to LBIE 3) for creditors with positions at LBI, to utilise some of their customer potential shortfall in their LBI property claims in discharge of their liabilities to LBIE and 4) to benefit from a lower cost structure for signatories to the Contractual Solution.

50. Post Administrative Cash at LBI – Last August, the Administrator stated that it only owes to US$ prime broker clients what it receives back from LBI.  As you can imagine, this view will face significant opposition from US$ Trust Property clients who believe LBIE owes them for the full value of Trust Property and post administration payments.  Will the Scheme or Contractual Solution deal with this issue?  If this is LBIE’s view, does the Administrator have any incentive to fight for a strong recovery from LBI, including receiving all post administration money?  Please assure us that all US$ Trust Property including post administration cash will at least follow the same treatment as UK Trust property and will not be compromised by any shortfalls from LBI.

Answer: LBI is subject to the Securities Investor Protection Act (“SIPA”) process and LBIE cannot influence how LBI treats post-administration cash.  The LBI Trustee will seek approval from the US Bankruptcy Court for any proposals regarding customer and general estate property. However, to the extent that LBI distributes cash to LBIE, LBIE will return that cash to creditors under the Scheme and the Contractual Solution in accordance with its legal obligations.

V. Bar Date

51. Under the Scheme there was a hard bar date, what is the basis upon which the bar date will be effected under the Contractual Solution?

Answer: The original bar date concept proposed under the Scheme had the effect that a creditor who did not submit a claim until after the bar date would only have an unsecured claim against LBIE, unless there were “surplus” assets of the same kind available within LBIE after allocations to all creditors who submitted their claims by the bar date. This is effective as all creditors are bound under the Scheme. The type of bar date available to LBIE for incorporation into the Contractual Solution only binds signatories and also has the effect that a client who submits a claim after the bar date cannot take action against LBIE in respect of assets which LBIE has already distributed. However, such client would be entitled to a share in any client assets of that type still held by LBIE. In addition, non-signatories may have the ability to challenge distributions of trust property in the hands of the recipient of that trust property.

52. What will happen if the court does not grant an order permitting a bar date to be set or if the Contractual Solution does not achieve the acceptance threshold? Is there a “plan C”?

Answer: LBIE will continue the existing process of bilateral returns of client assets. If the Contractual Solution is not accepted, LBIE would still make a court application for a bar date to assist with bilateral returns, however, this will only be a “soft bar date” in that it allows distribution of assets on the basis of information available at the time but does not prevent subsequent claims arising.  LBIE may also make further court directions applications in order to determine the basis for stock and shortfall allocation.  However, the bilateral return process would not enable automatic termination and valuation of contracts so that a client’s claims could be determined in the aggregate. This process would therefore be extremely time consuming and provide less finality than either the proposed Scheme or the Contractual Solution.

VI. Other

53. Out of the $9 billion of “house cash”, how much of it potentially could be transferred into “client cash” depending on the outcomes of the pre-and post-administration client money applications?  How much of that pre-admin cash is potentially owed to affiliates?  Is there a reason why LBHI, LB Finance AG and LBI are the only affiliates that are participating in the pre-administration client money application?

Answer:  Judgment has now been handed down in the post-administration client money application, as to which see the answer to question 55 below.

In relation to the pre-administration client money application, directions are being sought from the Court as to what money held by LBIE forms part of the pre-administration client money pool available to be distributed to pre-administration client money claimants. In particular, directions are being sought on whether LBIE is required to top-up the client money pool so that money is segregated for any clients for whom LBIE should have segregated client money prior to administration but did not. Accordingly, until directions are given by the Court in this application, it is not possible to comment on how much “house cash”, if any, LBIE could be required to transfer to the client money pool.

LBHI, LB Finance AG and LBI were the only affiliates who sought to be appointed as respondents to the application and were so appointed by the Court.

54. What is the distinction in the presentation between the $9.6 billion of “house recoveries” and the $8.8 billion of “house cash”?  What’s the current value of “house inventory”?

Answer: The difference represents the costs of recovering the receipts and running administration.  More detail is available in the Joint Administrators’ Progress Report.

55. What is the current view on the ownership of LBIE’s post-admin dividends/coupons/receipts from trust assets – trust or general unsecured estate?  Is there any uncertainty in this regard?

Answer:  In general post-administration receipts are deemed as trust assets, however, in any particular case, the status of post-administration receipts will depend upon the terms of the original contract. In particular, the Administrators issued an application (the post-administration money application) to the High Court seeking directions on the treatment of certain money (for example redemption proceeds, dividends, coupons) received by LBIE after the time of administration for clients who are party to the standard form of Charge IPBA.  Many of the Charge IPBAs contain language intended to ensure that all cash received by LBIE under the agreement is received under a total title transfer arrangement.  This means that, where this language is present, any cash received by LBIE will not benefit from client money protection or otherwise be held on trust and any recovery would be against the general estate. The post-administration application asked the Court the extent to which the provision should apply to money received after administration. Mr Justice Briggs gave judgment on the post-administration money application on 21 October 2009.  He found that money (which is the subject of the post-administration money application) received by LBIE post administration in respect of securities held by LBIE as custodian under the Charge IPBA is held on trust by LBIE for the relevant client, and should not be treated as LBIE money forming part of the general estate.

56. Did the Client Money letters circulated in May include clients’ claims to money held by LBIE under title transfer arrangements?

Answer: The client money letters circulated in May were only sent to those clients for whom it appears from LBIE’s books and records money was segregated by LBIE for them as client money prior to the time of administration. For more information on the specific Client Money letters sent in May, please click here.  Where agreements between LBIE and its clients contained total title transfer provisions, LBIE did not generally segregate money held for such client pursuant to those agreements. Accordingly, such clients would not generally have received the client money letters circulated in May.  Note that these letters referred only to clients’ entitlements to client money and not to the actual client money available to satisfy such claims, which is unknown pending the outcome of the pre-administration client money application.

57. Is there a possibility that legislation could be introduced to deal with claims by LBIE customers to client assets?

Answer: This is possible, however,any legislation to deal specifically with the return of client assets of an insolvent bank or other corporate trustee would probably require a lengthy time to prepare and bring into force. In addition, it is unlikely that any such legislation would be given retrospective effect such that it could be utilised by LBIE.

58. Has LBIE made a claim on the German Deposit Protection Fund yet in respect of its claims against Lehman Brothers Bankhaus AG?

Answer: Yes.An omnibus claim has been made by LBIE on behalf of its clients.

59. What factors are taken into account regarding the process for hardship applications?

Answer: LBIE will consider each case individually on its own merits and there are no specific public parameters. However, factors that LBIE will consider include the percentage of the client’s total assets that are held by LBIE, whether the assets in question are within LBIE’s control, and the likelihood of competing claims to the assets and whether the client has unsatisfied liabilities to LBIE. LBIE requires an indemnity and may require credit support as protection against competing claimants before the return of any assets. The Administrators have dealt with the most compelling cases already, however, the hardship application process is still continuing.

60. Is a hard copy of the PowerPoint presentation just given available somewhere?

Answer: The 8/9 October presentation to members of MFA and AIMA is posted on the website and can be viewed here.