Lehman Brothers International (Europe) (in administration) - client money and assets update 18/05/09
This update concerns:
- the application issued by the Joint Administrators on 1st May 2009 (the "Application") seeking directions concerning LBIE's obligations in relation to the handling of client money received prior to the time of administration (being 7.56am on 15th September 2008); and
- a letter sent on 13th May 2009 to clients who may have a client money claim.
The Application
For background to the Application, please see the Client Money Update here.
Following an order granted by Mr Justice Blackburne at a hearing held on 15th May 2009, clients and creditors are required to notify the Joint Administrators if they wish to make representations (i.e. present legal argument) to the Court in respect of one or more of the issues which are the subject of the Application by no later than 4pm on 12th June 2009. A copy of the order is available here. A further hearing has been scheduled for 19th June 2009, at which it is intended that any respondents to the Application will be appointed by the Court. If you were appointed a respondent to the application, this would mean that you would be a party to the proceedings and have the right to make representations to the Court on the issues. It would also mean that any order or judgment given by the Court in these proceedings would be binding on you without a further order from the Court.
If you wish to make representations in relation to the Application, you must notify the Joint Administrators of your intention and of the issues you wish to make representations by e-mail to the following address by no later than 4pm on 12th June 2009: clientpositionresponses@lbia-eu.com
Your e-mail must state in respect of which issues you wish to make representations (this must be done by reference to the numbering used in the Application notice. The full text of the High Court application is available here.) and provide us with your full contact details (i.e. name, company, address, phone, e-mail). Following receipt of any such notifications, the Joint Administrators' staff or their legal advisers will contact you.
A witness statement given by Andrew Clark, one of the partners of PricewaterhouseCoopers LLP assisting the Joint Administrators in the LBIE administration, was filed with the Court in support of the Application on 14th May 2009. The purpose of Mr Clark's statement is to provide the Court with some factual context to the questions asked in the Application. Click here to view the witness statement (redacted in accordance with the order of 15th May 2009) and click here to view the Exhibits to the witness statement.
A summary of some of the significant issues raised in the Application and addressed in Mr Clark's statement is set out below. The summary is provided for convenience only and without liability. The issues in the Application are complex and you are therefore encouraged to read the application notice and the two witness statements filed in support of it in full and to seek independent legal advice on your particular rights against LBIE and the client money pool (the "CMP").
The amount of money available in the CMP and the extent of clients' entitlements against it will vary significantly depending on the answers the Court gives to the questions raised in the Application. The decisions reached will have an impact on what is included in and excluded from the CMP, who may and may not participate in the CMP and the amount to be paid to those entitled to receive a distribution from it. Accordingly, the Application will be relevant to individual clients specifically and unsecured creditors generally.
A summary of some of the significant issues raised in the Application and addressed in Mr Clark's statement follows:
1. Which accounts should be included in the CMP?
LBIE segregated client money in a number of core client money bank accounts and client transaction accounts. As at the time of administration, these bank accounts had total credit balances of approximately US$1.9 billion and the client transaction accounts had total credit balances of approximately US$260 million. In aggregate therefore, LBIE segregated approximately US$2.1 billion of client money across these client money bank accounts and client transaction accounts. The Joint Administrators anticipate that the Court will hold that this money will form part of the CMP (although there are some questions to be answered concerning potential adjustments to the CMP which are summarised in paragraph 2 below).
In addition to these accounts, the Joint Administrators have identified a number of further accounts that may also hold client money. Directions are sought as to what balances on which of these accounts, if any, should be included in the CMP. The identified accounts are:
a) more than 275 accounts which appear to have been designated by LBIE as client segregated accounts. Of these accounts, the Joint Administrators have to date identified total credit balances of approximately US$17 million as at close of business on 12th September 2008 and US$185 million as at close of business on 15th September 2008. The Joint Administrators are currently working to identify what portion of these balances was received prior to administration and which may therefore comprise part of the CMP;
b) more than 440 LBIE house accounts some of which possibly contain co-mingled client and house money. These potentially co-mingled accounts had total credit balances of approximately US$162 million as at close of business on 12th September 2008 and US$297 million as at close of business on 15th September 2008; and
c) 26 LBIE nominee accounts in the name of LBPB Nominees Limited (a subsidiary of LBIE). These 26 accounts had total credit balances of approximately US$2.9 million as at close of business on 12th September 2008 and US$52.5 million as at close of business on 15th September 2008.
What balances and on which of these accounts (if any) should be pooled will have a material impact on the size of the CMP and, equally, on what money is available to LBIE's general estate.
2. In what circumstances (if any) should LBIE's general estate add money to or remove money from the CMP for pre-administration events?
The last client money calculation and segregation by LBIE (a "daily adjustment exercise") was made on 12th September 2008 based on data as at the close of business on 11th September 2008. The Court has been asked how the Joint Administrators should deal with: I) market movements and events occurring after 11th September 2008; and II) potential errors by LBIE in its client money calculation on 12th September 2008. In relation to each of these issues, the question is whether the LBIE estate is required to add money to or entitled to remove money from the CMP.
I. The Joint Administrators have identified the following issues which arise as a result of market movements and events occurring after 11th September 2008:
a) Money was paid to LBIE's clients after 11th September 2008. But for the administration, the Joint Administrators believe that at least some of these payments would have resulted in part of the client money segregated by LBIE being withdrawn to reflect these payments. However, no such withdrawals were made since no further daily adjustment exercises were carried out because of the administration. It is estimated that at least US$45 million was paid out to LBIE's clients on 12th September 2008.
b) In relation to certain margined transactions, LBIE typically segregated an amount in respect of such transactions equal to the initial margin paid by the client less any unrealised losses not yet covered by the delivery of variation margin, or, as the case may be, plus any unrealised gains on the client's position. In order to determine the extent to which the notional values of margined transactions fluctuated after 11th September 2008, the Joint Administrators would need to look at over 35,000 movements across more than 2,500 different products for 67 clients. Accordingly, they are not presently able to quantify the aggregate value of these movements. However, by way of very broad indication, the Joint Administrators estimate that the total value of clients' account balances for margined transactions decreased in value (i.e. due to changes in free cash balances and margin amounts as well as market movements) by nearly US$300 million during the course of Friday 12th September 2008.
c) Where a trade between LBIE and a client did not settle (in part) on the due date (i.e. a 'partial fail' occurred such that the client delivered the required cash but LBIE only delivered a portion of the required shares to the client), LBIE would typically segregate as client money for that client an amount equivalent to part of the purchase price (depending on the extent of the fail). Once the fail was resolved, LBIE would remove the segregated client money as part of the next reconciliation. LBIE had segregated US$7.8 million in respect of partial fails as at close of business on 11th September 2008. It currently appears that more than US$2.6 million worth of these fails were resolved on 12th September 2008.
d) LBIE held some client securities in segregated client depots. Where a depot did not, or appeared from LBIE's records not to, hold enough securities to meet client entitlements (for example, because of a failed delivery into the depot) (a "depot break"), LBIE would segregate client money equivalent to the value of this shortfall. As at close of business on 11th September 2008, LBIE had segregated in excess of US$216 million in respect of depot breaks. During the course of 12th September 2008, nearly US$138 million worth of these depot breaks were resolved (e.g. securities were delivered to the depot making up the shortfall). In addition, during the same period the net value of those securities in lieu of which LBIE had segregated money (and which had not been resolved) decreased by approximately US$390,000.
e) LBIE segregated the majority of client money in US dollars, even where it received client money in another currency. Where it converted currencies, it bore the currency risk for fluctuations and so was required to adjust such sums in order to account for exchange rate fluctuations. These amounts were last adjusted by reference to exchange rates as at close of business on 11th September 2008.
II. The Joint Administrators have identified a number of areas where LBIE did not segregate client money in its calculation on 12th September 2008 where perhaps it should have done. These include the following:
a) LBIE did not generally segregate any client money for its affiliates (other than some money for certain underlying clients of affiliates). It is not clear whether LBIE should have done. The Application therefore asks the Court for directions on this issue.
b) LBIE had complex arrangements for the trading of various positions with its affiliates which gave rise to indebtedness as between LBIE and those affiliates. It is arguable that LBIE should have segregated as client money some or all of the amounts it owed to its affiliates in connection with these arrangements. It did not.
c) It appears that LBIE did not generally segregate the value of any unrealised gains on certain options transactions with clients. The Joint Administrators are investigating whether LBIE should have segregated client money in respect of such gains. They currently estimate the total value of these unrealised gains arising from options transactions which were not segregated to be US$146m.
d) It appears that LBIE did not segregate any money for over-the-counter derivative transactions with clients and counterparties because LBIE considered that any money was held by it as 'total title transfer' collateral. The Joint Administrators are still investigating this matter.
e) The Joint Administrators have identified certain instances where operational errors led to LBIE not segregating certain client money.
If LBIE is required to adjust the CMP to take account of any of the above issues, then that may have a material impact both on the size of the CMP and, equally, what money is available to LBIE's general estate.
3. How should client entitlements be determined?
The Joint Administrators have identified a number of issues that may have an impact on a client's entitlement to receive a distribution from the CMP, or the amount of any such distribution. These include:
a) For certain clients, LBIE segregated client money but did so in an amount that was less than perhaps should have been segregated for that client. Are those clients entitled to a distribution from the CMP calculated by reference to the greater or lesser amount? Should LBIE approach client money entitlement on a position by position basis?
b) For certain clients, LBIE segregated client money where it was not (or was not at that time) required to do so. Are those clients entitled to a distribution from the CMP or not?
c) For certain clients, LBIE at one stage held client money on a segregated basis but ceased to do so at some point prior to administration in circumstances where it should have continued to segregate client money. Are those clients entitled to a distribution from the CMP by virtue of the fact that client money was at one time held on a segregated basis for them?
d) For certain clients LBIE did not segregate any client money but should have done so. Are those clients entitled to a distribution from the CMP?
e) Should a client's client money entitlement be calculated as at the time of the appointment of the Joint Administrators?
The answers to these questions may have a material impact on the number of clients who are entitled to receive a distribution from the CMP as well as the extent of those entitlements, and (it necessarily follows) the amount in fact received by those clients in due course.
In particular, the answers to these questions will determine the extent to which affiliates are entitled to make a claim against the CMP. If the Court determines that (1) LBIE should have segregated client money for its affiliates, and (2) notwithstanding the failure to segregate, such affiliates are still entitled to claim against the CMP, then, assuming LBIE's general estate is not required to top-up the CMP to correct this under-segregation, the amount available for distribution to LBIE's other clients will be significantly reduced. Equally, if LBIE's general estate is required to top-up the CMP, then there will be a material reduction in the funds available to general creditors.
The decision in Re Global Trader Europe Limited (2009) EWHC 602(CH) suggests that clients for whom money was not segregated do not have a claim against the CMP. However, the Joint Administrators are seeking directions on this issue in order to eliminate any doubt, and in particular having regard to the potential significance of the effect on all clients.
4. To what extent should post administration events be taken into account when considering the CMP and entitlements to the CMP?
Had LBIE not gone into administration at 7.56am on 15th September 2008, it would have continued performing daily adjustment exercises and the CMP would have been adjusted accordingly.
a) Should the LBIE estate make payments into the CMP for post administration events?
The decision in Re Global Trader Europe Limited (2009) EWHC 602(CH) suggests that there is no obligation on LBIE to continue to adjust the CMP for post administration events. However, the Joint Administrators are seeking directions on this issue in order to eliminate any doubt, and in particular having regard to the potential quantum of any such obligation.
b) Should client money entitlements be adjusted down for post administration events?
Assuming client money entitlements are to be determined as at the time of administration, post administration events may nevertheless need to be taken into account in order to avoid an "over-payment" to certain clients. For example, say LBIE segregated client money for a client in relation to a failed purchase and that fail was resolved following administration. If the client received all of the securities upon the fail being resolved, that client would in effect recover twice over if it were also to receive a distribution from the CMP (putting to one side for the moment the effect of any shortfall in the CMP).
If a client's client money entitlement is to be reduced for post administration events, then an issue arises as to whether the reduction should be made prior to or at distribution. If made prior to distribution, then it would seem to follow that the CMP will receive the benefit of the reduction in the client entitlement. If the reduction is made at the time of distribution, then it would seem to follow that the LBIE estate would receive the benefit of the reduction.
If clients' client money entitlements are to be adjusted for post administration events, then this could lead to a significant reduction in certain clients' client money entitlements.
5. How should client money be distributed?
The Joint Administrators have identified a number of issues that may have an impact on what clients will actually receive when client money is distributed. These issues include:
a) Can the client money be distributed in a single currency? The Joint Administrators consider a distribution in US dollars to be the simplest and cheapest method of distribution.
b) While most of the CMP is held in US dollars, some is held in other currencies. If distributions are to be made in one currency, what date should be used for the purposes of using spot exchange rates in order to establish the relative values of clients' client money entitlements? The Joint Administrators consider the logical date to be the date on which distributions are made.
13th May letter to clients
On 13th May 2009, the Joint Administrators wrote to those clients who (according to LBIE's records) may have a client money claim. The purpose of this letter was to provide clients with further information about the LBIE pre-administration client money position, the issues the Joint Administrators are seeking to address to allow the partial return of such client money, the actions which have been taken to seek to address these issues and the steps underway to make a distribution of such client money. The letter also addressed the Application.
A generic copy of the letter to clients is available here.
If you believe that you may be entitled to claim against the CMP and have not received a copy of the letter, you should e-mail: clientpositionresponses@lbia-eu.com
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