Supreme Court rules in Lehman client money case

The Supreme Court has ruled that hedge funds whose client money was not properly ring fenced when Lehman Brothers International (Europe) (LBIE) went into administration will have access to monies deposited in the UK division of the failed bank.

The case has been among the most contentious spinning out of the 2008 collapse of Lehman Brothers and focuses on FSA regulations on client money.

Hedge fund CRC and the Lehman affiliates defended an appeal launched by GLG Investments.

The initial court application by LBIE’s administrators was prompted  after it failed to identify client money and segregate vast sums received from or on behalf of clients.

In addition, there was the failure of LBIE affiliate, Lehman Brothers Bankhaus, with which LBIE had deposited $1bn of segregated client money before it also went into administration.

The key question was whether the client money held by Lehman Brothers Bankhaus should only be available to clients for whom LBIE had segregated the money (the segregated clients) or whether it should also be available to clients for whom LBIE ought to have segregated money as client money but where LBIE had failed to do so (the unsegregated clients).

The Supreme Court dismissed the appeal by the segregated clients, led by Allen & Overy partner Jennifer Marshall instructing South Square’s Antony Zacaroli QC for GLG Investments.

Giving the substantive ruling, Supreme Court deputy president Lord Hope said: “It is unlikely that client money which had yet to be segregated under the alternative approach was intended to be treated differently from client money which had been segregated, whether under the normal approach or the alternative approach.”

The unsegregated clients were led by CRC Credit Fund, represented by Simmons & Simmons partner Robert Turner, who instructed Robert Miles QC of 4 Stone Buildings.

Simmons said the ruling would unblock a major impediment to distributions to both client money claimants and creditors.

Turner commented: “It’s a boost for investor protection and an important stepping stone in terms of getting the administrators closer to being in a position, at long last, to get client money back to those entitled to it and a first distribution.”

The legal line up:

For the appellant GLG Investments: South Square’s Antony Zacaroli QC leading David Allison and Adma Al Attar also of South Square Allen & Overy partner Jennifer Marshall.

For the respondent CRC Credit Fund: 4 Stone Buildings’ Robert Miles QC and Richard Hill of the same set instructed by Simmons & Simmons partner Robert Turner.

For the respondent Lehman Brothers Finance: 4 Stone Buildings’ Jonathan Crow QC and Maitland Chambers’ Jonathan Russen QC instructed by Field Fisher Waterhouse partner Duncan Black.

For the respondent Lehman Brothers: 4 Stone Buildings’ Jonathan Crow QC and Maitland Chambers’ Jonathan Russen QC instructed by Norton Rose partner Hamish Anderson.

For the respondent administrators: 20 Essex Street’s Iain Milligan QC leading Maitland Chambers’ Rebecca Stubbs (QC in waiting) and Richard Fisher of South Square instructed by Linklaters partner Stephen Fletcher.

For the intervener the FSA: Erskine Chambers’ David Mabb QC and Stephen Horan of the same set.