Lehman Prime Brokerage Client Wins U.K. Ruling

Aug 2 2010 | 1:17pm ET

Hedge funds who learned that their assets at Lehman Brothers’ prime brokerage were not properly segregated after the investment bank collapsed should be treated the same way as those funds whose assets were properly protected, a British appeals court has ruled.

In a blow to the causes of both Lehman’s unsecured creditors and the clients of its prime brokerage, led by GLG Partners, whose assets were correctly ring-fenced from Lehman’s other assets, a U.K. Court of Appeal has ordered the administrators of Lehman Brothers International Europe to find those assets that should have been segregated and move them into the $2.16 billion pool already set aside for prime brokerage clients. The ruling overturns a December decision which, while blasting Lehman for failing the properly segregate the assets, still found that those funds were entitled to no protection and should be treated as unsecured creditors.

The ruling is a victory for hedge fund CRC Credit Fund which, along with Lehman Brothers and Lehman Brothers Finance, appealed the December verdict. The Court of Appeal has yet to decide if its decision can itself be appealed.

If the current ruling stands, both the unsecured creditors and those hedge funds whose assets were properly segregated stand to get back much less, and to get it back much later. CRC and the Lehman affiliates have claims totaling more than $3 billion.

“As a result of the court of appeal’s decision, the returns to segregated clients will be diluted and it could take years to resolve what goes into the pot and who is entitled to it,” Jennifer Marshall, a lawyer for GLG, told Bloomberg News. “No clear guidance is given as to how the administrators are to approach these issues and so it seems inevitable that they will have to go back to court.”

“That could have the effect of diminishing the general pool for unsecured creditors,” Arun Srivastava, a lawyer for one of the leaders of the unsecured creditors, Hong Leong Bank, sniffed to Bloomberg. “They’ll inevitably find more money than they would have otherwise, now that they’re looking for it.”

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