Client Assets Update - Securities Investor Protection Corporation (‘SIPC’) Customer Omnibus Claim - 21/07/2011

This update concerns LBIE's SIPC Customer Omnibus Claim ("Omnibus Claim") against Lehman Brothers, Inc. ("LBI").   For further information on LBI and the SIPC process, please refer to the previous updates, including our 30 September 2010 update and the Joint Administrator’s six monthly Progress Reports. 

As previously communicated, LBIE received an initial determination of its Omnibus Claim from the SIPA Trustee of LBI (The “Trustee”) on 16 September 2010 (the "Determination").  The Determination stated that the Omnibus Claim for securities had been allowed for a defined list of securities and quantities valued by the Trustee at $6.2 billion.  The Trustee deferred his determination in respect of cash balances owed to LBIE clients for a minimum of 30 days and, with respect to commodities and futures, LBIE's claim was denied.  As a result of this determination LBIE previously stated that a substantial amount of work would need to be undertaken, in conjunction with the Trustee’s advisors, to complete the remaining reconciliation of the securities component of the Omnibus Claim with the Determination.

Over the last nine months significant further progress has been made towards completion of the securities reconciliation.  LBIE has continued to cooperate with the Trustee’s advisors in order to analyse the vast majority of over 6,000 customer related securities and reconcile the settlements between 12 and 19 September 2008 and the resulting positions.

LBIE received a revised Letter of Determination from the Trustee on 19 May 2011 (the "Revised Determination") which replaces the previous Determination.  The Trustee has valued his Revised Determination at $8.3 billion, subject to significant conditions.  The Revised Determination has allowed the Omnibus Claim for a longer defined list of securities and quantities than the previous Determination.  In addition, the Revised Determination also includes, for the first time, amounts in respect of the cash component of the Omnibus Claim.

The Trustee continues to emphasise that the Revised Determination does not imply that there is an entitlement to the return of the actual securities listed.  Neither does it suggest that all of securities in question are under the control of the Trustee.  In addition the timing and eventual level of payout against the Omnibus Claim remains unknown and is likely to be uncertain for some time to come.

The SIPC rules allow LBIE to object to the Revised Determination.  The Trustee has extended the deadline for LBIE to object to the Revised Determination until 31^st October 2011 thereby allowing both estates to continue to co-operate in resolving a number of outstanding matters. 

Ongoing Challenges

The Revised Determination represents significant progress, however, a number of important matters remain open and will require further work to resolve.  The most significant of these challenges are as follows:

1. Allocation

The Revised Determination as delivered by the Trustee relates to aggregate positions and is not broken down by individual clients.  There is therefore a substantial reconciliation exercise which LBIE has been undertaking, with its clients, to allocate the securities listed and the cash amounts in the Revised Determination.  In order to complete this exercise, the remaining open items and information requests relating to the Revised Determination referred to below will need to be resolved.

2. Cash Reconciliations

LBIE has requested substantially more detailed information with regard to the cash determination in order to reconcile it to the Omnibus Claim and then attribute the cash amounts back to underlying clients.  Since the Revised Determination the Trustee’s team has provided substantial additional information which LBIE is in the process of reconciling and will likely give rise to further differences that will require follow up in both estates.  As soon as the allocation is prepared, LBIE will disseminate the cash and/or securities data to individual clients for their own reconciliation.

3. Securities Reconciliations

The remaining open items in the securities reconciliation need to be resolved.  Answers to a small number of queries raised by LBIE will need to provided and there are a number of securities templates to be received from LBI (these impact a significant proportion of the LBIE client base).  Deloitte, who are the Trustee’s professional advisors, are assisting LBIE with both these matters.  Once additional information is received and reconciled by LBIE, the Administrators will share this data with clients.  To date LBIE has provided data for over 30,000 security positions to its client base.

4. Composition of the $8.3bn 

The Trustee has valued the Revised Determination at up to $8.3 billion.  The amount allowable for securities has been reduced from $6.2 billion in the original Determination to $6.1 billion, despite allowing for a longer defined list of securities and quantities than previously.  However, no line by line valuation of the securities has been provided.  In addition, the Trustee is allowing up to $2.2 billion in cash in respect of the cash component of the omnibus customer claim, subject to conditions.  

5. Distribution

The timing of any recoveries from LBI remains contingent on the resolution of a number of issues by the Trustee.  The Trustee has indicated that it is likely that litigation will be necessary to resolve several of the major categories of claims in dispute, and these disputes will take substantial time to resolve.  There are also other major contingencies in the LBI estate including any appeal of the Barclays decision and the allocation of estate property between “customer property” and the “general estate”.  (See the Trustee’s Fifth Interim Report dated 22 April 2011, page 3)

The Administrators expect to provide a further update on progress in November.

In the meantime, LBIE will continue to pass through any newly reconciled securities and/or cash data to clients and will continue to work with them to progress their claims and ultimately agree an allocation of the Omnibus Claim against LBI.

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.