Lehman Brothers International (Europe) (in administration) - client money and assets update
The joint administrators (the "Administrators") of Lehman Brothers International (Europe) (in Administration) ("LBIE") wish to update clients of LBIE about the position in relation to client monies and assets ("Client Assets") held by LBIE and what steps have been taken by the Administrators in this area. This update follows statements made by the Administrators on 21 and 26 September 2008.
In addition to addressing the issue of those Client Assets that in principle should be available to be returned to clients, the Administrators are very aware of the existence and issues faced by all of LBIE's unsecured creditors and their responsibilities to them. The Administrators have sought to adopt a system for dealing with Client Asset claims in an orderly and efficient manner and one which, while recognising the importance of dealing with Client Asset claims, enables them to act with proper regard to the interests of all creditors. In particular the Administrators wish to assure all creditors that their claims will be fairly and equitably treated.
This statement addresses only the position in relation to Client Assets. In order to ensure a planned and organized system for dealing with the large number of Client Asset claims the Administrators have designed a set of processes and procedures to deal with the claims in a logical, efficient and fair manner consistent with the performance of their primary functions of achieving a better result for LBIE's creditors as a whole than would be achieved on an immediate winding up.
The Administrators presented these procedures to the High Court on 7 October 2008, at which the FSA was also present, and have obtained an order approving these steps.
Background
Since their appointment, the Administrators have treated the identification and return of Client Assets of LBIE as a very important and urgent matter, recognising also that it is a complex, highly technical area. The Administrators fully appreciate the market issues being faced by counterparties and that subject to certain preconditions being met those assets that are properly Client Assets should be available to be returned to clients.
Against this background, the Administrators considered it appropriate to seek direction from the High Court on the development of appropriate procedures to be adopted to manage Client Asset claims.
The process
The process for the identification and return of Client Assets, which has been approved by the Court, is set out below.
General approach
The Administrators will:
i. identify and take appropriate steps to gain control of all property of or held in the name of or otherwise to the order of Lehman Brothers International (Europe) ("LBIE") (in administration), whether money, securities or other contractual rights, that may be subject to trust or proprietary claims (the "Trust Property");
ii. identify the entire population of counterparties that purport to have claims, rights or other interests in the Trust Property (the "Trust Claims");
iii. seek to reconcile all of the data and information available to LBIE and the Administrators from the pre-administration records in relation to the Trust Property with the information supplied by counterparties, custodians and any other appropriate sources;
iv. whether by agreement, directions from the Court or otherwise, reach a clear determination of the various legal issues that impact upon the validity of the Trust Claims and the rights of LBIE over the Trust Property;
v. subject to directions from the Court, agree a procedure for making interim distributions of Trust Property to counterparties with valid Trust Claims;
vi. determine the basis upon which the costs and expenses of the Administrators in dealing with and determining all issues in relation to the Trust Property can be discharged from the proceeds of the Trust Property and apply for directions on such matters, as necessary; and
vii. determine the most expedient method of communicating with counterparties in relation to the procedure being adopted by the Administrators, the progress made towards the achievement of the defined objectives and the directions that may be given from time to time by the Court.
Method
The Administrators will:
i. deploy dedicated resource comprising partners and employees from PricewaterhouseCoopers LLP and Linklaters LLP (the "Trust Property Team"), to take responsibility for the further development and implementation of a plan designed to achieve the objectives set out in paragraph 1 above; and
ii. set up a discrete sub-committee to monitor the construction and implementation of this scheme and the efficiency and fairness of the methodology. This sub-committee will also review the principles applicable to prioritising the determination of the claims of the particular counterparties by identifying, where appropriate, high profile problems or hardship issues, to ensure that the overriding objective of treating all counterparties fairly is not prejudicial to the interests of a minority or that there is not otherwise a problem that requires specific and accelerated attention. This sub-committee will meet periodically (initially daily) to review the prioritisation and refine the process as events develop.
Key steps
The Trust Property Team will undertake inter alia the following functions:
i. design and install a new IT system onto which it will upload all of the data available from the internal systems of LBIE relating to client deposits and securities that may be Trust Property;
ii. implement a process to reverse or amend the LBIE records for failed or broken trades as a consequence of the Administration, to enable the Trust Property to be more fully identified;
iii. identify the impact of termination notices that have been served post-administration, validate these events and other activities of third parties and either review the clients' valuation of the impact of the termination or undertake a valuation of the impact of termination on the rights of LBIE under various contracts; and
iv. agree a protocol in relation to the implementation of corporate actions that may need to be undertaken in relation to Trust Property, for example, the exercise of voting rights, receipt of dividends, rights issues and other pre-emptive offers, that will have an impact on the ultimate value of the Trust Property.
The Trust Property Team will contact all of the third party custodians, agents, counterparties, exchanges and clearing houses ("Depots") where Trust Property may be located to obtain confirmation of the securities that are being held and to agree a procedure whereby the Administrators can have online access in relation to data regarding the securities and seek to obtain formal written confirmation of the position by security and by Depot. The Administrators will also seek to establish that they have complete or adequate control over the securities for the ultimate benefit of the counterparties with Trust Claims or LBIE and that any liens asserted by the Depots are assessed and valued. Once the data is available, the Trust Property Team will reconcile the books of LBIE to those of the Depots, by security and by Depot, with a view to identifying and resolving discrepancies. Where appropriate, this process will take account of the interests of LBIE in its "house accounts".
The Administrators will write to all of the counterparties who may have Trust Claims to obtain from them full details of the rights and claims they believe they have in relation to all forms of Trust Property. The Trust Property Team will seek to reconcile all of the data that is obtained in relation to Trust Property as a consequence of the exercise outlined in the paragraph above with the information obtained from counterparties.
Whilst the data reconciliation process is being undertaken, the Administrators have instructed Linklaters to devise a programme to determine by reference inter alia to the various contracts utilised by LBIE in its dealings with all counterparties, the various categories of legal issues that will need to be determined before a proposal for the distribution of the Trust Property can be prepared. The Administrators will consider whether it is possible for this process to take place in parallel to the data collection exercises noted above, or whether it is more appropriate (in some cases) to wait until it is clear that all the legal issues identified need resolution in practice.
Prioritisation
The Administrators will, having taken due account of any views of the FSA, identify a set of principles that can be applied when considering prioritising claims, taking into account, where appropriate and consistent with their duties as administrators, the following factors, which include:
i. the quality and timing of data being available to the Administrators;
ii. the speed of response of counterparties in dealing with the Administrators' questions, coupled with the quality and accuracy of the data supplied, the complexity of the data and the legal issues relevant to the determination of a particular claim;
iii. the number of claims that may be made to a particular class or category of Trust Property; the risk of a shortfall of Trust Property;
iv. the cost efficiency and expediency of the relevant process; and
v. market stability and confidence.
Further Directions
The Administrators may from time to time need to seek further directions from the High Court on this process and on particular issues arising from it. We will continue to keep you advised of developments.
A copy of the evidence presented to the Court (redacted with the Court's permission) appears below
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