Client and money assets update - High Court application and FAQ's 15/06/09

This update concerns:

• the application issued by the Joint Administrators on 1 May 2009 concerning LBIE's obligations in relation to the handing of client money received prior to the time of administration (the "Application"); and
   
  
• questions raised by clients and creditors prior to the 12^th June 2009 deadline for notifying the Administrators if they intended to make representations in connection with the Application.

The Application

The Administrators are currently considering the notifications received from clients and creditors interested in making representations to the Court in respect of one or more of the issues which are the subject of the Application.  The Administrators have received a significant number of queries and notifications from clients and creditors, and certain of these have requested further time to consider their position.  The Administrators wish to proceed with the Application as quickly as possible so that they may proceed to make an interim distribution of client money.  However, to accommodate requests for more time, the Administrators will be seeking permission from the Court to reschedule the hearing which is currently fixed for 19 June.  The Administrators hope to be able to announce a new hearing date shortly, which, it is hoped, will be in the second half of July.

In the meantime, the Administrators will be liaising with those clients and creditors who have indicated an interest in making representations.  Where a number of parties have indicated interest in putting forward the same or similar arguments in respect of the same issues, the Administrators will be seeking to identify one party to act as a representative respondent.

A further announcement will be made once a new date is set for the hearing.

If you have notified the Administrators of your interest in making representations, the Administrators' representatives will contact you shortly.

FAQ's

A number of similar queries have been raised by clients and creditors in connection with the Application.  The purpose of these FAQs is to address some of the common questions that have arisen. 

1. I believe I am entitled to pre-administration client money held by LBIE, but I have not received a letter of 12^th May 2009 or a letter of 29^th May 2009.

The letters of 12^th and 29^th May 2009 were sent by the Administrators to clients for whom it appears from LBIE's records LBIE had segregated client money prior to the time of administration. If you did not receive either letter (and have confirmed that no such letters were sent to you by LBIE - you can confirm this by e-mailing clientpositionresponses@lbia-eu.com), this is likely because, according to LBIE's records, LBIE had not segregated client money for you at the time of administration. 

The Administrators would remind clients and creditors that LBIE was not always required to treat the money it held for clients as client money.  In particular, the Administrators understand that many clients had agreed that their money was transferred outright to LBIE as collateral and should not therefore be treated as client money.  Examples of contracts under which clients typically agreed that monies would be held by LBIE as collateral include:

• International Prime Brokerage Agreement (IPBA)
• Margin Lending Agreement (MLA)
• Fixed Income and Foreign Exchange Prime Brokerage Agreement (FIPBA)
• ISDA
• GMRA
• Overseas Stock Lending Agreement (OSLA) (except in relation to dividends, rebates and fees)
• Master Equity and Fixed Income Stock Lending Agreement (MEFISLA)
• Master Gilt Edged Stock Lending Agreement (GESLA)

If you believe that client money should have been segregated by LBIE, the Administrators would encourage you, with your legal advisers, to review your documentation with LBIE, as well as the FSA client money rules to assess whether such money should in fact have been treated as client money.

2. I received the letter of 12^th May stating that I may be entitled to client money, but I have not received the letter of 29^th May.

If you did not receive the 29^th May letter (and have confirmed that no such letter was sent to you by LBIE - you can confirm this by e-mailing clientpositionresponses@lbia-eu.com), this is likely because, according to LBIE's records either (i) client money was received during the course of 12th September and, as a result, would not have been included in LBIE's segregation exercise performed on the morning of 12th September or (ii) the only client money segregated for you on the 11^th September was in relation to depot breaks and which would no longer have been required to be segregated for you on the 12^th September.

3. I have received both the letter of 12^th May and the letter of 29^th May, but the range of client money indicated is not as much I as expected to be segregated on my behalf.

The range indicated reflects only the amount of money that, according to LBIE's records, it appears was segregated by LBIE on your behalf on 12^th September 2008 (based on data as at close of business on 11^th September).  There may be other money that you held with LBIE, but which was not afforded client money protection (e.g. because such money was transferred outright to LBIE as collateral) - see in this regard the answer to question 3 above.  In respect of such money, you may have a claim against LBIE as an unsecured creditor.

If you believe that other money should have been treated by LBIE as client money and should therefore have been segregated by LBIE, the Administrators would encourage you, with your legal advisers, to review your documentation with LBIE, as well as the FSA client money rules, to assess whether that money should in fact have been treated as client money.

4. I am an intermediary, and have received letters in respect of some funds/accounts I control but not others.  This doesn't seem right as the documentation with LBIE is the same across all those funds/accounts. 

In respect of those funds/accounts that did not receive either letter (and for which you have confirmed that no such letters were sent by LBIE - you can confirm this by e-mailing clientpositionresponses@lbia-eu.com), this is likely because, according to LBIE's records, LBIE had not in fact segregated client money for those funds/accounts.

If you believe that this is incorrect, the Administrators would encourage you, with your legal advisers, to review the relevant documentation with LBIE, as well as the FSA client money rules, to assess the funds'/accounts' position.  In particular, you should check whether the client money components which made up the range of client money segregated for any fund which received a 29 May letter exist in relation to other funds - for example, cash segregated in relation to depot breaks will only be relevant to those funds where such a break existed as at close of business on 11^th September. 

5. I have a cash balance on my account at LBIE.  I understand that LBIE segregated client money in relation to cash balances.  So why has my cash balance not been included in the letter of 29^th May 2009 to me?

The Administrators believe that LBIE segregated client money in relation to the (positive) cash balances of some (but not all) clients.  In particular, the Administrators understand that many clients had agreed that their money (including any positive cash balance) was held by LBIE as collateral and should not therefore be treated as client money.  Examples of the contracts under which clients agreed money would be held by LBIE as collateral and should not therefore be treated as client money are set out under FAQ 3 above.

If you believe that client money should have been segregated by LBIE in respect of your cash balances, the Administrators would encourage you, with your legal advisers, to review your documentation with LBIE, as well as the FSA client money rules, to assess whether such money should in fact have been treated as client money.

6. The letter of 29^th May indicates that client money was segregated for me on the 12^th September in respect of open futures positions.  However, I am aware that the market value of these futures positions then declined in value.  Am I still entitled to the higher segregated amount as indicated in the letter?

Among the questions asked of the Court in the Application, is whether clients' client money entitlements should be adjusted to reflect various events (including changes in value of futures positions) that occurred both before and after the time of administration. 

7. I had open OTC options and OTC contracts for differences with LBIE.  Was money segregated in relation to margin and unrealised gains on these positions?

Many of LBIE's clients had agreed that money provided by them to LBIE (including margin) be transferred outright to LBIE as collateral and should not therefore be treated as client money. Examples of the contracts under which clients agreed money would be held by LBIE as collateral and should not therefore be treated as client money are set out under FAQ 3 above.

With respect to unrealised gains, the Administrators understand that LBIE did not generally segregate client money in respect of unrealised gains on options, contracts for differences or other OTC derivative transactions.

8. I have not received a GAC code.  Does that mean I am not entitled to make a claim for client money?

No. Not having a GAC code does not limit your legal rights. 

9. If I am not making representations to the court, does that mean I may lose my right to client money? 

No.

The Administrators are seeking clients and creditors who may be interested in making representations (i.e. presenting legal argument) to the Court to ensure that the relevant legal issues are fully argued before the Court. The Court will then make determinations in respect of those issues. How the Court determines the issues will affect which clients have a client money entitlement and the extent of those entitlements. However, clients and creditors who have not made representations will not be treated any differently by the Administrator than those in the same position who have made representations. 

10. I believe that LBIE received my client money post administration.  Does the Application apply to my client money? 

No.  The Application is in respect of client money received prior to the time of administration only.