LBI pending trades claims determination deed update – 08/08/2012

Introduction

The Joint Administrators have been pursuing a consensual approach towards unsecured claims of creditors, which involves, where appropriate, offering to enter into a claims determination deed (“CDD”) to agree all or part of the unsecured claim of a creditor. A range of CDDs has been developed to cater for the additional requirements of creditors who are also client assets claimants (“Trust Creditors”).

Creditors who have had a claim agreed as an admitted claim under a CDD are eligible to participate in interim dividend payments (the first of which the Joint Administrators intend to make before the end of 2012) and may also be permitted to transfer their unsecured claims to third parties, subject to the provisions contained in their CDDs.

There are some Trust Creditors, however, for whom it has not been possible to formulate an offer due to uncertainty as to the settlement status and treatment of certain of their positions sub-custodied by Lehman Brothers Inc. (“LBI”).

The purpose of this website update is:

• to inform creditors of steps which the Administration is taking in order to allow certain Trust Creditors to agree part of their claim in the form of a CDD; and
• to explain why this interim solution will not be suitable for all affected Trust Creditors.

1. Trust Creditors with LBI Pending Trades
   
   1. LBI Pending Trades
      
      Lehman Brothers International (Europe) (“LBIE”) went into administration at 07:56 a.m. on 15 September 2008 (the “Time of Administration”). Its affiliate, LBI, did not commence liquidation proceedings (the “SIPA Proceedings”) under the Securities Investor Protection Act 1970 (“SIPA”) until 19 September 2008.  During the intervening period, LBI continued to process certain trades which LBIE had booked for its own account and for LBIE’s customers prior to going into administration but which had not already settled as at the Time of Administration. Such transactions are referred to as “Pending Trades” or “LBI Pending Trades”. As at the time that LBI entered into the SIPA Proceedings, the population of Pending Trades was approximately 200,000 in number. The settlement status of Pending Trades and the treatment of LBIE’s claims against LBI for positions that were or should have been sub-custodied on LBIE’s behalf continue to be areas of contention between LBIE and LBI.
   2. Uncertainty as to settlement status of LBI Pending Trades
      
      Because LBIE’s visibility of LBI’s clearance and settlement activities was significantly reduced after LBIE went into administration, LBIE has been unable to determine independently whether each Pending Trade in fact settled or failed.
      
      In the period since administration, LBIE has worked with LBI to obtain information about the settlement status of the Pending Trades population. While substantial progress has been made, this exercise has not eliminated all uncertainty attributable to the Pending Trades population.  LBIE is aware of counterparties who claim to have evidence (for example, from third party brokers) which contradicts some of the apparently reconciled positions. Separately, LBI continues to submit to LBIE a limited number of corrections to the settlement data that it has previously provided. 
      
      
   3. Uncertainty as to the treatment of LBIE’s claims against LBI
      Other substantial areas of uncertainty and disagreement remain between LBIE and LBI (including with respect to the composition and amount of LBIE’s claims on behalf of its underlying clients against LBI), and LBIE’s objections to LBI’s determination of LBIE’s claims (as brought on behalf of itself and its underlying clients) are subject to active litigation in the SIPA Proceedings. The ultimate outcome of this litigation may not be known for some time. 
      
   4. Prospects for Final Resolution.
      
      Notwithstanding the areas of uncertainty and disagreement described above, LBIE and LBI continue to try to achieve a consensual outcome. If LBIE and LBI are able to reach a settlement agreement, the implementation of any such settlement agreement may be subject to various conditions, including, without limitation, court approval in one or more jurisdictions.
      
      It is highly unlikely that the uncertainty regarding Pending Trades and the treatment of positions sub-custodied by LBI will be resolved before either a settlement with LBI can be implemented or the litigation has been finally determined.
      
      Until now, this uncertainty has prevented LBIE from agreeing the quantum of an affected Trust Creditor’s unsecured claims because the settlement status and treatment of a Pending Trade may change the nature and/or quantum of its claim (for example, from an unsecured claim to an asset claim or vice versa).
      
      
      
      
   
   
   
   
2. Potential Interim Approach for Trust Creditors with LBI Pending Trades
   
   
   
   Rather than waiting for the resolution of all outstanding issues between LBIE and LBI before commencing the process of agreeing an affected creditor’s unsecured claim, LBIE has developed a mechanism by which certain creditors will be able to have at least part of their claim agreed under the terms of a “Pending Trade CDD”. If agreed with the relevant creditors, this will allow them to participate in any interim dividend payments and may also enable them to transfer the agreed part of their unsecured claims to third parties (subject to the provisions contained in their CDDs), notwithstanding continued uncertainty surrounding the treatment of LBIE’s claims against LBI and the settlement status of Pending Trades.
   
   The Pending Trade CDD is intended to permit the agreement of the minimum, non-contingent amount of a Trust Creditor’s unsecured claim against LBIE after applying certain hypothetical assumptions regarding the settlement status of Pending Trades. These assumptions do not constitute an admission or denial by the Administration or the Trust Creditor that a Pending Trade, in fact, settled or failed. Moreover, the calculation of the minimum, non-contingent amount of a Trust Creditor’s unsecured claim against LBIE has no bearing upon, and is entirely without prejudice to, the claims being made by LBIE against LBI on behalf of itself and its underlying clients in the SIPA Proceedings, which include claims to assets or sale proceeds in respect of Pending Trades.
   
   In the section below, some questions regarding the Pending Trade CDD mechanism are answered. Click on the following links for the answers.
   
   
   
   

List of Questions

• How does the Pending Trade CDD work?
• If the Settlement Assumption proves to be correct and I do not have an unsecured claim from my Pending Trade, what type of claim do I have?
• What happens if the Settlement Assumption proves to be incorrect?
• What is the full list of Settlement Assumptions used in calculating the Minimum Net Financial Claim?
• Do the Settlement Assumptions change the nature of my claim for the Pending Trades?
• Why does the Pending Trade CDD not fix the unsecured claim that I would have if the Settlement Assumption proves to be incorrect?
• I believe that the Settlement Assumption for a Pending Trade is incorrect and LBI agrees. Why does LBIE still wish to use it in the Pending Trade CDD?
• Can I transfer my Minimum Net Financial Claim under the Pending Trade CDD to a third party?
• What happens if I refuse the offer of a Pending Trade CDD?
• Is the Pending Trades CDD available to both CRA and Non-CRA Trust Creditors?
• I have Pending Trades but have not been offered a Pending Trade CDD. Why not?

Should you have any questions regarding this update or should you require any other assistance with respect to this communication please contact the Communications and Counterparty Management team at generalqueries@lbia-eu.com.