FAQs For Trust Property 19/3/09

Client Assets

1. What process have the Joint Administrators adopted to return client assets? 

The priority of the Joint Administrators is to follow a logical, efficient and fair process in dealing with client asset claims and to identify, reconcile and return these assets to clients who have a valid claim.

To this end, the Trust Property Team is reviewing all accounts with a view to the return of assets in an orderly and efficient manner.  The team is reconciling LBIE's books to external custodians and to information received from clients.

The Joint Administrators have written to 1,707 clients (constituting Prime Services, Futures, Safe Custody and Private Investment Management clients) thought potentially to have claims, rights or other interests in Trust Property.  To date, approximately 60% of these clients have so far replied.Those that have not responded have been pursued for their responses.  These client positions are being reconciled with data available to verify the validity of the clients claim and determine net positions. Simple cases where there is sufficient quality data available and there are minimal associated legal issues will be processed first, in line with the principles for prioritising claims.  (See Trust Property question 7 above.) 

Where further information is required to reconcile the claim, clients are being contacted to provide further data or clarification of positions submitted.

This review process is extremely complex and we are presently unable to provide an estimate of the timeframe for the return of client assets. We are mindful of the uncertainty experienced by counterparties and their need to resolve matters as quickly as possible.

Where a client is experiencing hardship and believes they have a legitimate demand to have their position considered urgently, a hardship and prioritisation process has been developed. For further information, refer to the Trust Property question 8 on hardship above.

2. What general conditions apply to the return of my assets? 

The Joint Administrators are not yet able to verify the position of all clients with certainty. Where assets are returned prior to the net position being understood with certainty there is a need to mitigate the risk of competing future claims being made against the asset in question. Therefore the clients must agree to certain conditions in order to release their assets early. These include:

1. A small percentage of the asset figure is retained as a contribution towards the costs of the overall administration. As we do not yet know the complete pool of money and assets available to return to clients, and the positions of all clients to whom money or assets may be owed, this provides some protection against any future adjustment that may be required.
2. Clients must also provide an acceptable form of indemnity from the counterparty and a guarantee from a sufficiently well rated institution, such as an AA rated bank to protect against any situation which arises whereby an asset has wrongly been given back to a particular client. 

3. What are the major issues that have arisen in returning client assets? 

The Joint Administrators have spent a considerable amount of time investigating and liaising with their legal team in relation to a variety of issues concerning client assets.  The situation is complex and there are numerous issues and processes which require resolution in order to determine finally the claims of all clients to Trust Property.

LBIE had many agreements with clients which were subject to individual negotiation, thus each agreement must be reviewed and it has not been possible to conduct a review of these agreements on a sample basis or to review only 'standard terms' used by LBIE. 

The Joint Administrators must ascertain which assets held by LBIE are client assets and which are house assets by reconciling these to third party data and relevant contracts. Each counterparty has a suite of contracts and master agreements which can include, amongst others, Prime Brokerage Agreements, Futures Agreements, Stock Lending Agreements, ISDA Master Agreements and Cross Margining and Netting Agreements. These can be in several forms. They may be, and often are, individually modified by agreement or side letter. Some of them are subject to New York law and some of them are subject to English law.  In addition, LBIE had a de-centralised manner of storing legal documents and thus both the sources of documentation and the location of documents is proving challenging.

The effect and interrelationship of these contracts has never been tested in a situation like the LBIE Administration and complex legal issues have arisen.  Significant practical issues therefore arise in identifying and reviewing contracts and understanding all relevant terms.

Some of the additional legal and practical issues that have arisen are:

• Whether assets have been delivered outright to LBIE by way of transfer title.
• Whether (where LBIE is holding Trust Assets) LBIE had a right of use over the asset and whether such right of use was subject to any restriction.
• Whether LBIE had any right of security in respect of Trust Assets that might entitle it not to return the asset until all liabilities owing to LBIE and/or its affiliates have been satisfied.
• To what extent should losses be borne by clients where they share in a pool of securities? For example, similar assets can be listed on different markets in different forms. How are shortfalls to be allocated between clients? What if there has been a series of movements on the account? What if the house also has claims on the pool?
• What is the impact of close out on settling net liabilities between house and client?
• How do foreign laws impact on trust and contractual claims?
• Where contracts or legal agreements have been terminated, what is the effect on trust property claims?

As the LBIE systems ceased operating upon LBIE entering administration, the availability of accurate data on assets being held in key depots is also proving a challenge.  The Joint Administrators are currently in negotiations with relevant bodies to access the necessary information to reconcile the client position responses received. In addition, there is an ongoing exercise being undertaken to update LBIE books and records with all transactions processed from the time LIBE entered administration, including post administrative events such as dividends payments, coupons and actions, to ensure the completeness and accuracy of the data.

The settlement of trades and the associated issues around failed and unsettled trades is also a significant issue facing the Joint Administrators. This introduces additional complexity with regards to different approaches, legal requirements and rules when dealing with failed trades, and may impact the valuation of some client assets. For more information, refer to the section of the website on failed trades. 

In addition, in all cases the Joint Administrators also need to examine LBIE's wider relationship with relevant counterparties and ensure there are no offsetting claims against the estate before any assets can be returned.

4. Where were client assets typically held? 

Client assets were generally located at sub custodians, settlement agents, exchanges and clearing houses. LBIE had some 97 relationships with global sub custodians and settlements agents and was active on most of the global exchanges and clearing houses either directly as LBIE or indirectly through brokers and other Lehman Brothers affiliates. The Joint Administrators have an ongoing dialogue with these institutions and have written to them all to obtain relevant information that can be used to help locate the assets.

Typically the custodians have three LBIE accounts, being house (for the benefit of LBIE), prime brokerage nominees (where LBIE may have a charge over the assets) and safe custody (split into two accounts where one has right of set off against the assets and the other one does not). The Joint Administrators have asked for details of all accounts that exist.

5. What steps are being taken to recover the assets held by Lehman Brothers Inc ("LBI")? 

LBIE has undertaken an extensive review of its books and records to identify customers with potential claims against LBI. An omnibus claim was lodged on 30^th January 2009 to recover cash, securities or other assets held by LBI on behalf of LBIE's clients. Due to the issues being faced with missing or inaccessible records and IT data, while considerable effort has been made to represent LBIE's client including gathering of client position responses and authorisation signatures from clients, LBIE cannot guarantee that the omnibus claim has identified every customer with securities, cash or other assets held by LBI through LBIE.

As was advised prior to the 30^th January 2009 deadline, LBIE's customers may wish to pursue their rights in the SIPA proceeding by filing a claim on their own behalf with the Trustee as well. If you have cash, securities or other assets that were booked directly with LBI, you will need to pursue these assets separately, as they are not included in the omnibus claim.

If you believe you have assets held by LBI through LBIE and did not file your own claim to the SIPA proceeding by the 30^th January 2009, you will need to sign and return the Customer Authorisation form, duly completing questions 1- 8, as soon as possible.
http://www.pwc.co.uk/assets/pdf/lbie-customer-authorisation.pdf

These forms may be emailed in PDF to clientpositionresponses@lbia-eu.com or sent to the following address as soon as possible to:

Cathy Stewart
Trust Property Team
Lehman Brothers International (Europe)
25 Bank Street
London
E14 5LE

Further information on SIPA can be found at the following link:

Client money and assets update - SIPA customer claims - 20/01/09

Any questions regarding this information should be directed to clientpositionresponses@lbia-eu.com

Copies of the Trustee's Notice of the SIPA claims process, claim forms, and other background information on the SIPA liquidation may be found at www.sipc.org and under Proceedings/Liquidation and on the Trustee's website, www.lehmantrustee.com.

6. Can you liquidate my positions with LBIE? 

The general position of the Joint Administrators is that they will not take steps to dispose of securities which are held for LBIE in client asset depots. This was stated in the creditors' meeting on 14 November 2008.

7. Will I receive dividend payments paid on my securities after LBIE entered Administration? 

LBIE in Administration continues to receive client money, such as income, dividends and redemptions of maturing client assets ("Post-Administration Cash"). Such money is treated differently to pre-administration cash and there is ongoing activity to reconcile and process these events on LBIE's systems.

The Post-Administration Cash shall be returned to the relevant client once all appropriate steps have been undertaken to establish client entitlement and appropriate systems and controls are in place to manage a transfer.

For Post-Administration Cash received in relation to a Client Asset (e.g. dividend from an equity holding) establishing client entitlement will mean establishing whether the Client has entitlement to the Client Asset (See Client Asset questions 1 and 3 above; see also Client Money and Assets update - 07/10/08 for further detail regarding Trust Property for the process the Joint Administrators are undertaking to establish client asset entitlement and return of those assets).

8. What are rehypothecated assets? 

Rehypothecated assets are assets over which LBIE has exercised its contractual right of use pursuant to the International Prime Broker Agreement or other relevant contract.  An exercised right of use results in the transfer of all title to the relevant assets to LBIE.  The client whose assets have been used has a contractual right to the return of equivalent assets.  Rehypothecated assets therefore become part of LBIE's estate.

Client positions will be reviewed on a case-by-case basis to determine the extent, if any, of rehypothecation of their assets. If assets have been rehypothecated, these will not be available for return to you.  The extent to which your assets could be rehypothecated is set out in your agreements with LBIE.

9. Will the Joint Administrators make margin calls? 

To the extent that it is necessary for LBIE to protect its positions, the Joint Administrators reserve the right to make margin calls.