Second Announcement in Respect of the Proposed Settlement of the Omnibus Claim

Introduction

Following the agreement in principle that was struck between LBI and LBIE on 4 October 2012, both estates have been working towards a binding settlement agreement under which LBI will admit an agreed omnibus claim brought by LBIE in respect of LBIE’s underlying customers. This agreement is expected to be signed before the end of 2012 and will then be put before the US and English Courts.

The LBI distribution to LBIE in respect of the omnibus claim (the “LBI Omnibus Distribution”) will be a mixture of cash and securities. These securities will substantially not match the securities claimed by LBIE’s underlying customers. The Joint Administrators believe that the LBI Omnibus Distribution will provide an opportunity for a significant distribution to be made by LBIE to its customers with claims represented in the omnibus claim. To facilitate this distribution, LBIE intends to propose a consensual arrangement to those underlying customers. This consensual arrangement is aimed at:

• recognising and seeking to accommodate the differing positions and views of LBIE’s customers in respect of their rights to participate in the LBI Omnibus Distribution, in particular with regards to the relevant date for the calculation of their entitlements;
• promoting an arrangement which is equitable and expeditious with a view to settlement of accepting customers’ entitlements as against the LBI Omnibus Distribution as quickly as possible; and
• avoiding as far as reasonably possible, lengthy and unprecedented litigation which LBIE considers would be inevitable if a consensual arrangement cannot be agreed with a sufficient number of customers given the complexities of the circumstances surrounding customers’ entitlements in respect of the LBI Omnibus Distribution.

It is anticipated that the consensual arrangement could be offered to customers in January 2013 and, if accepted, it is hoped that it could result in a first distribution to accepting customers within 45 days of the first recovery from LBI in respect of the LBI Omnibus Distribution.

The proposed consensual arrangement will be outlined in an omnibus claim settlement agreement that will promote a set of pragmatic compromises to address the rights of customers to the LBI Omnibus Distribution. It will take effect as a modification to the Claims Resolution Agreement (the “CRA”) for customers who are bound by that agreement and a new contract for non-CRA customers.

Core Elements of the Consensual Arrangement

In considering the proposed terms of the consensual arrangement, the Joint Administrators of LBIE are mindful of the fact that the LBI Omnibus Distribution will involve a distribution of a mix of securities which will substantially not match the securities claimed by LBIE’s underlying customers.

In order to address the issues arising from the mismatch of securities represented in the LBI Omnibus Distribution as compared to securities claimed by LBIE’s underlying customers, substantially all of the LBI Omnibus Distribution would be liquidated to create a larger cash fund to be added to the other cash balances secured in the settlement. Reserves would be set aside from this fund to allow for disputes with customers as to their positions and/or valuations of their claims and also to provide a prudent reserve to meet the claims of non-accepting customers. From the remaining fund, LBIE would create an accepting customer fund from which it would make cash distributions to accepting customers pro rata to their Best Claims as set out below.

LBIE is proposing that customers who accept the consensual arrangement will be entitled to a share of a pool of funds out of the LBI Omnibus Distribution. A customer’s entitlement will be calculated by reference to the value of its Best Claim (as defined below) as a percentage of the Best Claims of all customers who accept the proposal. A customer’s “Best Claim” will be the higher of either:

• the value of the accepting customer’s claim on 19 September 2008 (and, for the avoidance of doubt, excluding income accruing after 19 September 2008); and
• the market value of an accepting customer’s claim, including income, on a more current date (expected to be 30 November 2012).

In order for the consensual arrangement to be successful, it will require the support of a significant majority of customers and a high level of acceptance. As the CRA signatories represent approximately 70% of the economic interest in the LBI Omnibus Distribution, the consensual arrangement would necessarily need to be accepted by 75%¹  of CRA signatories (thereby effecting the necessary amendments to the CRA to reflect the consensual arrangement). If such an amendment were passed, all CRA signatories would be bound by the consensual arrangement and would therefore be accepting customers. A high level of acceptance will also maximise the prospects of the proposed settlement agreement with LBI being approved by the US Bankruptcy Court.

Distributions to Accepting Customers

Using indicative data from June 2012, LBIE estimates that the ultimate recoveries of customers, if all customers accepted the consensual arrangement, could be in excess of 90% of their Best Claim. These estimated recoveries are before any deductions for indebtedness, limited costs and deductions and withholdings for or on account of taxes.

For most customers their Best Claim is expected to be the current mark-to-market value of their notional portfolio together with any associated income or attributed distributions arising on that portfolio in the last four years. This recovery estimate will be affected by several factors including:

• the extent of any market price movements prior to liquidation of those securities received from LBI;
• the extent of the reserves;
• the costs of liquidating securities received from LBI;
• the level of acceptances of the consensual arrangement; and
• the date used for fixing current values.

Returns to customers from the LBI Omnibus Distribution are expected to be phased recognising that the transfer from LBI (and any subsequent liquidation by LBIE of securities received) will also be executed in stages.

It will likely be at least April 2013 before the LBIE/LBI settlement agreement has been put before both the US and English Courts. The LBI Omnibus Distribution from LBI to LBIE will not commence until these approvals have been obtained and the settlement becomes unconditional. Taking into account this timing and related matters, the first distribution could be June 2013 but may be later. The level of the first interim distribution is expected to be in the range of 60% to 70% of an accepting customer’s Best Claim, before the appropriations and deductions noted above.

There is no current estimate of the timescale for when the final distribution will be made.

As part of the offer, customers will receive a statement setting out LBIE’s estimate of their share of the LBI Omnibus Distribution based on various assumptions (“Statements”). Much of the data and many of the assumptions to be incorporated in those Statements have already been reflected in the June 2012 statements that were recently issued to customers. It is therefore essential that customers provide us with prompt and detailed responses to these recent statements. As a practical matter, clients must provide this feedback(together with supporting documentation) by Friday 14 December 2012 if there is to be any prospect of LBIE potentially incorporating this information within the estimate of their share.

It is anticipated that agreement to a consensual arrangement would, in respect of accepting customers, also achieve final agreement on the status of LBI pending trades with those accepting customers. Certain customers may have executed unsecured Claims Determination Deeds with LBIE where the settlement status of LBI pending trades was assumed. If the agreed settlement status is different, a supplemental deed can be prepared to admit any amounts owing to the customer as a result of the change as an additional unsecured claim. Customers with such additional unsecured claims would be eligible to participate in any catch-up and additional dividends to be paid to unsecured creditors.

Conditions of the Consensual Arrangement

As a part of the consensual arrangement, accepting customers will agree that they do not have any proprietary interest in any specific security in the LBI Omnibus Distribution. Accepting customers will also be required to waive any direct claims against LBI in respect of any assets held through LBIE as custodian where such claims have already been denied by LBI.

Non-Accepting Customers

Any customer who does not accept the offer will remain entitled to whatever rights and recoveries they are entitled to in law (whether under contract or otherwise) in respect of the LBI Omnibus Distribution once those claims have been agreed with LBIE or, more likely, finally determined by an English Court.

LBIE expects that the process would, given the complexities, be protracted and subject to a high risk of multiple appeals.

Distributions to be made to non-accepting customers would be made from the reserves set aside in respect of their claims and would only be made once their entitlements had been finally determined or agreed.

Reserves

Reserves will be established from the LBI Omnibus Distribution. Reserves may be established in cash or securities and may be created for:

• Non-accepting customers - to cover a prudent estimate of the various alternative legal assessments of the claims of non-accepting customers.
• Valuation/position challenges - to cover disputes with accepting customers. A customer may dispute the values or other factual components incorporated in their individual statements which will be issued as part of the consensual arrangement. If LBIE considers it is likely to be reasonable and practicable to resolve such disputes in a timely manner, that customer will become an accepting customer and enter into a streamlined dispute resolution process which would be binding on it and LBIE. If not, the customer would become a non-accepting customer.

To the extent that any such reserves are determined not to be required, the surplus will be swept back to the accepting customer fund.

Inevitably, the higher the rate of acceptance of customers, the lower the amount of reserves required and the greater the initial distribution for accepting customers.

Shortfall Claims

If, on the date of the last distribution to all accepting customers, the aggregate amount received on or prior to that date by an accepting customer (adding back for these purposes any amounts appropriated against its liabilities or deducted or withheld for or on account of tax) is less than the value of that accepting customer’s claim on 19 September 2008, then that accepting customer will have an unsecured claim against LBIE for the difference provided that if the aggregate of all such unsecured claims exceeds a capped amount then all such claims will be abated rateably. The quantum of the capped amount will be set and communicated by the Joint Administrators prior to the offer being launched.

The unsecured claim in respect of shortfalls referred to above will rank for post petition interest from the date of Administration and this interest amount will not be subject to the capped amount.

The shortfall claim may also be used by an accepting customer effectively to collateralise indebtedness owed to LBIE.

Liquidation and Return of Securities

LBIE’s overriding objective will be an orderly liquidation of the securities in the LBI Omnibus Distribution that will optimise and expedite recoveries.

In a very limited number of cases, securities may be distributed in lieu of cash to a customer in a manner achieving the same economic outcome as for a cash distribution to other accepting customers.

Composition of the Pool and Exposure to Market Movements

The terms of the consensual arrangement will determine the value of the accepting customers’ interests in the pool as at a fixed date and this is currently expected to be 30 November 2012. Any changes in the value of the accepting customer fund arising from market price movements (up or down) affecting the securities returned as part of the LBI Omnibus Distribution, will accrue to LBIE’s underlying customers subject to the effect of the shortfall component outlined above.

LBIE will provide high level information to customers as to the composition of the portfolio of securities that it expects to recover from LBI. This will allow customers to assess, in advance, the nature of the market risks to which they would be exposed following the settlement with LBI. LBIE is unable to provide any guidance as to how those risks might be best managed.

Lien Recoveries

Certain customers have outstanding indebtedness to LBIE or third parties which will need to be addressed as part of any settlement of their rights to the LBI Omnibus Distribution. Specifically, interim distributions will first be applied to reduce a customer’s indebtedness to LBIE before remittance of any amounts to customers, unless alternative arrangements (on terms acceptable to LBIE and including the collateralisation elections available to CRA signatories) are put in place. Interest on indebtedness due to LBIE will continue to accrue, subject to collateralisation elections, where applicable.

Small Claims Offer

LBIE is considering the possibility of replicating some or all of the terms of the Small Claims Settlement Offer used for unsecured creditors of LBIE, but in this case applied to the claims of CRA and non-CRA customers who accept the consensual arrangements in respect of the LBI Omnibus Distribution. A threshold of $225,000 is being considered and eligible customers would receive the entirety (less appropriations and deductions) of their Best Claim in the first distribution.

Tax

LBIE has assessed the possible UK tax implications for LBIE of the consensual arrangement and the settlement with LBI and the US withholding tax implications for payments to be made under the settlement with LBI and under the consensual arrangements. Given the unique nature of this situation and the large sums involved, LBIE currently proposes to approach the relevant tax authorities in the US and UK to obtain pre-clearances as to the expected tax treatment. It is possible that such clearances may not be obtained in advance of distributions to customers and this may impact the amounts to be deducted or withheld as well as delay or reduce the recoveries for underlying clients. LBIE continues to monitor the above tax implications arising from the consensual arrangement and the settlement with LBI.

All customers will, in any event, need to furnish LBIE with relevant tax forms and declarations.

Customers should seek independent tax advice in relation to the impact of the proposed arrangements and the settlement on their own tax position.

Costs and Expenses

Costs and expenses incurred by LBIE will be allocated to each accepting customer (by legal entity) up to a maximum of 1% of its aggregate recoveries (plus any applicable VAT) and $2.5m (plus any applicable VAT) (taking into account costs and expenses already incurred, which in respect of CRA customers, will be as calculated under the CRA). Amounts recovered through this mechanism will be transferred to the LBIE general unsecured estate to offset costs already borne in the pursuit and resolution of the omnibus claim against LBI.

¹ Note that voting values under the CRA will be by reference to the relevant assets and liabilities of a CRA signatory under the CRA and not solely by reference to their LBI related claims.

Important Disclaimer

The information and contents of this update communication are being provided to you by LBIE for discussion purposes only. This update does not constitute a commitment or offer on the part of LBIE or its Joint Administrators, and should not be construed as such, nor does it constitute any form of advice to the recipients. The contents of this communication are based on provisional analysis by LBIE and/or information provided by LBI, and LBIE reserves the right without specifying any reasons to amend all or part of this communication.

Any party (including any recipients) who obtains access to and chooses to rely on this update communication (or any part thereof) will do so entirely at its own risk. No person has, nor is held out as having, any authority to give any statement, warranty, proposal or undertaking on behalf of LBIE or its Joint Administrators in connection with this communication.

LBIE and its Joint Administrators will be under no obligation to provide the recipients with access to any additional information, to update this document or to correct any inaccuracies in it which may become apparent.

LBIE and its Joint Administrators, and their respective officers, employees and agents disclaim any liability which may arise from this communication, or any other written or oral information provided in connection herewith, and any errors and/or omissions herein or therein.

Nothing contained in this update communication is an acknowledgement of any claim that a recipient or any other claimant may have against LBIE or any other entity. Neither LBIE nor its Joint Administrators shall have any liability to any recipient or to any other person in respect of the information contained herein or for any defect or incompleteness in it. No representation is made by LBIE or its Joint Administrators about any claim that may be asserted against LBIE in respect of the LBI positions or any shortfall in recovery of the LBI positions.