The U.K. Supreme Court has ruled that hedge fund GLG Partners can appeal a lower court ruling that said that all customers of the prime brokerage unit of Lehman Brothers International Europe can recoup their assets from a $2.1 trillion pool regardless of whether or not the assets were properly segregated.

GLG Partners, a unit of London-based Man Group plc, had said that only assets that are properly segregated by Lehman Brothers International – aka separated from the parent firm --could share in a pool of $2.1 trillion in assets. The U.K. Supreme Court made its decision on December 20.

“The joint administrators and the client money team continue to make progress in identifying client money in unsegregated bank and transaction accounts,” said PricewaterhouseCoopers, the administrator for Lehman Brothers International Europe in announcing the U.K Supreme Court’s decision.

In August, GLG Partners had lost its case in the U.K. Court of Appeal when the appeals court ruled in favor of another hedge fund CRC Credit Fund which wanted all of the prime brokerage clients of Lehman Brothers International, the European arm of the U.S. banking giant Lehman Brothers, to share in the pool even if their assets are not properly ringfenced. The U.K. Court of Appeal had overturned yet another lower court decision which said that clients of the prime brokerage unit of Lehman Brothers International which did not have their assets properly segregated from the firm were considered “unsecured creditors” and could therefore recoup only a fraction of their claims.

The U.K.’s Financial Services Authority does have rules governing the segregation of client assets from the assets of a financial firm. But those rules explained in the Client Assets Sourcebook or CASS call for “an alternative approach” to holding client assts that permits funds to sit in a bank’s own accounts before being segregated. Such a scenario has created uncertainty over how a firm should handle client assets if it goes bust before it properly segregates the funds as was evidenced with Lehman Brothers International.

At the center of the controversy is a decision made in September 11, 2008 when a London-based trader at CRC Credit Fund decided to exit the fund’s foreign-exchange forward contracts with LBIE. The decision to terminate the contracts should have triggered a payment of $52 million into CRC’s client account but the money remained in LIBE’s account and Lehman declared bankrupcy four days later.


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