A U.K. Court of Appeal, in a devastating ruling against Lehman Brothers, has decided that the prime brokerage did not properly segregate hedge fund assets after the collapse of the investment bank, and that the hedge funds deserve the same treatment as received by those whose assets were properly segregated.
In a crushing blow to the plotting of both Lehman’s unsecured creditors and the clients of its prime brokerage, led by GLG Partners, whose assets were correctly segregated from Lehman’s other assets, the U.K. court has enjoined 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 shreds a December decision which, while excoriating 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 magnificent 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.”