Hedge Funds Lose Lehman Soft-Dollar Fight

Jul 11 2012 | 12:30pm ET

Some two dozen hedge funds and money managers will have to get in line with other unsecured creditors of Lehman Brothers' brokerage business, a federal judge has ruled.

U.S. Bankruptcy Judge James Peck rejected the hedge funds' request to have their soft-dollar claims treated as those of customers. Had Peck agreed with them, the hedge funds would have been repaid their soft-dollar balances before creditors got anything.

Instead, Peck sided with Lehman trustee James Giddens, who had argued that the soft-dollars were not customer cash, but more like frequent-flyer miles.

"This determination is correct both because the soft-dollar accounts do not hold any customer property and because the soft-dollar claims are based on a breach of contractual obligation of LBI to provide research services to its customers," Peck wrote. As such, the hedge funds' only recourse to them is as unsecured creditors.

The hedge funds had sought Securities Investor Protection Act for the soft dollars, which were used to buy research and other brokerage services from Lehman. Had the judge agreed, they would have been entitled to up to $500,000 each.

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