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UK Lehman Court Ruling Benefits Some Hedge Funds, Not Others

by Robin Pilgrim,, London

22 December 2009

Mr Justice Michael Briggs, who has given judgment in the UK on the question of the distribution of hedge funds' money, described the failure to ring-fence client monies as a “shocking underperformance” by Lehman Brothers International Europe (LBIE).

As part of the most significant 2008 banking failure in the US involving USD600bn in assets, the UK court heard that LBIE, London, had ring-fenced up to USD2.1bn of money for some clients, but failed to ring-fence billions more for other clients, who nevertheless argued that they should be treated as if the funds had been segregated.

In a decision that should force reviews of bank procedures in segregating client funds, the High Court in London ruled that LBIE had not properly ring-fenced about USD3bn of client funds, such that refunds could not be released from a USD1bn pool held by the bank’s administrators. Those affected adversely include Lehman affiliates and hedge funds, CRC Credit Fund and Claren Road, whose claims now rank with unsecured creditors.

Justice Briggs said LBIE had "fallen massively short" of Financial Services Authority rules when it failed to identify and segregate client monies so that they could be returned in the event of an administration. The ruling means that the existence of these regulatory requirements provided no extra protection to clients in the event that the requirements were not heeded.

Leave to appeal was given. Also the administrators, PricewaterhouseCoopers, were given a March 2010 deadline for completion of claims on assets held in trust, so that a potential USD32bn distribution to hedge funds could commence.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at and a description of the report can be seen at

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