Hedge funds to win back Lehman cash

Hedge funds with money tied up in the Lehman Brothers administration were given a boost yesterday as the High Court ruled that cash and securities held by the collapsed bank as custodian should be returned to clients.

Justice Briggs handed down judgment in an application by PricewaterhouseCoopers, Lehman Brothers International (Europe)'s (LBIE) administrators, for direction on the status of money received by the bank after it went into administration.

Briggs ruled that securities and cash derived from securities held by LBIE as custodian and received post-administration should be treated as trust money, segregated from the wider assets of the collapsed bank, and returned to beneficial owners.

RAB Market Cycles (Master) Fund was joined to the application as a representative of LBIE's counterparties. Hong Leong Bank Berhard was also joined as a representative of unsecured creditors, "in order that the court should hear full adversarial argument on these issues".

RAB's barrister Jules Sher QC successfully argued that the standard prime brokerage charge agreement was no longer relevant once LBIE went into administration and stopped providing prime brokerage services to clients.

Agreeing with Sher, Briggs said: "The insolvency of LBIE, although it did not pass entirely without mention in the Agreement, was no doubt regarded by the draftsman as a remote contingency. The dire consequences for counterparties of its going out of business and refusing to perform its prime brokerage services were, it seems to me, entirely overlooked."

Briggs said the administrators had acted correctly in resisting delivery of securities and cash to counterparties so far, "because to have done so would have been contrary to the efficient conduct of the administration".

But he said there would have been an "injustice" if unsecured creditors obtained a "windfall" at counterparties' expense.

"Payments of sums equivalent to the relevant cash are therefore necessary disbursements, because they are necessary in order to remedy the injustice which the retention of that windfall would otherwise bring about," he concluded.

Simmons & Simmons partner Christopher Braithwaite, who acted for RAB, said the decision was important for hedge fund clients of LBIE.

"Hedge funds would not have thought they had a huge credit risk in asking prime brokers to have custody of assets," he said.

Braithwaite said the ruling would have an effect on future prime brokerage agreements. He said there would be more negotiation between prime brokers and clients to clarify what would happen in the event of future insolvencies.

PricewaterhouseCoopers issued a statement warning that money would not be returned immediately.

"The joint administrators will not necessarily be able to make payments of post-administration money straight away: appropriate steps need to be undertaken on a client by client basis to establish the entitlement to both the post-administration money and any security in respect of which such money has been paid and received by LBIE," the statement said.