Lehman International administrators outline client money appeal ruling

By Caroline Salls

Pittsburgh, Aug. 2 - Lehman Brothers International Europe's joint administrators said the Court of Appeals has ruled on four parties' appeal in a client money handling case, overturning a previous ruling on two issues and upholding two others, according to a company news release.

As previously reported, the joint administrators sought direction from the court on May 1, 2009 concerning the company's obligations in relation to handling client money received before its administration.

In January 2010, CRC Credit Fund Ltd., Lehman Brothers Inc., Lehman Brothers Finance AG and Lehman Brothers Holdings Inc. appealed judgments related to the client money issue.

The administrators said the Court of Appeals overturned the previous judgments on two issues.

Specifically, appeals court said the FSA's client money rules require identifiable client money held by Lehman Brothers International Europe at the time of administration outside of its segregated accounts to be pooled with the client money held in its segregated accounts.

The pool will be distributed to all of the clients entitled to claim against the pool.

In comparison, the earlier judgment found that the pool comprises only the client money in the company's segregated accounts, and that identifiable client money held outside those accounts should be returned to the clients.

The appeals court also ruled that all clients who ought to have had money segregated for them by Lehman Brothers International Europe as client money before administration are now entitled to share in the client money pool, regardless of whether or not the company segregated the money for them.

The previous judgments had held that only segregated client money claimants were entitled to claim against the pool.

In addition, the administrators said the appeals court upheld the previous ruling on two issues.

Specifically, the courts agreed that the statutory trust attached to client money attaches at the point of receipt of client money by Lehman Brothers International Europe, not at the point of segregation.

In addition, both courts ruled that money that was payable by Lehman Brothers International Europe to a client but had not been appropriated to that client before the administration is not client money and does not form part of the client money pool.

Next steps

The joint administrators said they did not yet know if any parties planned to take their appeal to the Supreme Court.

In the meantime, the parties are working on the terms of an order reflecting the appeals court's judgment. Since the court is on vacation, the administrators said they do not expect the order to be made before late September or early October.

New York-based Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 08-13555.

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