Enter to open, tab to navigate, enter to select
Lehman Client Money Issue Resolved by UK Supreme Court
Practical Law Legal Update 8-518-2963 (Approx. 3 pages)
Lehman Client Money Issue Resolved by UK Supreme Court
by US Finance
| Law stated as of 01 Mar 2012 • USA (National/Federal) |
The UK Supreme Court resolved a three-year-old dispute regarding the distribution of client funds improperly segregated by Lehman Brothers' UK affiliate LBIE. The court upheld the decision of the UK Court of Appeal on the scope of the English statutory trust over client money held by or on behalf of LBIE (In the matter of Lehman Brothers International (Europe) (in administration) [2012] UKSC 6 (February 29, 2012)).
On February 29, 2012, the UK Supreme Court ruled that customers of Lehman Brothers International (Europe) (LBIE) that elected to have their posted collateral (client funds) segregated from other client funds and those that did not will share in the distribution of approximately $2 billion in client assets. This means that, in the UK at least, where many global financial institutions often hold client funds, these funds are held in trust by broker-dealers whether or not they have been properly segregated.
It is not clear what impact this may have on US client money segregation matters, which are currently being addressed by the Dodd-Frank Act. But counterparties globally may now prefer to have their posted collateral held by their broker's UK affiliate because of the broad protection of these funds now in place under UK law.
Many of the LBIE "clients" were US prime brokerage customers, such as hedge funds, and swap counterparties that entered into transactions with Lehman’s US affiliates, but which had their posted collateral transferred to LBIE.
The UK Supreme Court upheld the decision of the UK Court of Appeal on each of three appealed questions relating to the scope of the statutory trust over client money under the FSA's Clients' Assets sourcebook (CASS). The UK Supreme Court held that:
- A statutory trust over client monies arose under English law at the time LBIE received those monies, not when those monies were segregated from LBIE's own assets.
- The client money pool includes client money in LBIE's house accounts, as well as in segregated client accounts.
- Any client with a contractual claim to client money has a right to share in the client money pool: there is no requirement that client money should have actually been segregated on the client's behalf.
The court's decision was by a 3:2 majority. The accompanying press summary stresses the majority's focus on giving effect to the natural meaning of the language in CASS, together with the purpose behind it of giving a high level of protection to client money. Accordingly, the decision did not depend on a consideration of general principles of English trust law but took a broader approach to the effect of the CASS rules.
Although clients for whom money was not segregated will welcome the decision, it is also likely to lead to further delay in any distributions by the administrators as they seek to trace client monies in the relevant house accounts.
For more background information, see Practice Note, Lehman Brothers: Client Asset Issues.
For information on collateral segregation and related matters, see Practice Note, Practical Guide to Counterparty Collateral Negotiation: Considerations for End Users.
Court documents: