LBIE - RASCALS - High Court Opinion

Neutral Citation Number: [2010] EWHC 2914 (Ch)Case No: 7942 of 2008

IN THE HIGH COURT OF JUSTICECHANCERY DIVISIONCOMPANIES COURTIN THE MATTER OF LEHMAN BROTHERS INTERNATIONAL (EUROPE) (IN ADMINISTRATION)AND IN THE MATTER OF THE INSOLVENCY ACT 1986

Royal Courts of JusticeStrand, London, WC2A 2LLDate: 19/11/2010

Before

:

MR JUSTICE BRIGGS

- - - - - - - - - - - - - - - - - - - - -

Between:(1)

STEVEN ANTHONY PEARSON(2)

ANTHONY VICTOR LOMAS(3)

MICHAEL JOHN ANDREW JERVIS(4)

DAN YORAM SCHWARZMANN(5)

DEREK ANTHONY HOWELL(The Joint Administrators of Lehman Brothers International (Europe)(In Administration))Applicants- and -(1)

LEHMAN BROTHERS FINANCE SA(2)

LEHMAN BROTHERS COMMERCIAL CORPORATION ASIALIMITED(3)

LEHMAN BROTHERS ASIA HOLDINGS LIMITED(4)

LEHMAN BROTHERS INC.(5)

LEHMAN BROTHERS SPECIAL FINANCING INC.Respondents

- - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - -Hearing dates: 11

th

– 29

th

October 2010

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of thisJudgment and that copies of this version as handed down may be treated as authentic.............................MR JUSTICE BRIGGS

Mr Iain Milligan QC, Mr Guy Morpuss QC, Mr Daniel Bayfield & Mr SocratesPapadopoulos

(instructed by

Linklaters LLP

) for the Joint Administrators

Mr Gabriel Moss QC & Mr William Willson

(instructed by

Herbert Smith LLP

)for Lehman Brothers Finance SA

Mr Robin Dicker QC & Mr Tom Smith

(instructed by

Mayer Brown International LLP)

for Lehman Brothers Commercial Corporation Asia Limited and Lehman Brothers AsiaHoldings Limited

Mr Michael Brindle QC & Mr Nik Yeo

(

instructed by

Norton Rose LLP

) for LehmanBrothers Inc

Mr Philip Jones QC & Mr Giles Richardson

(instructed by

Weil, Gotshal & Manges LLP

)for Lehman Brothers Special Financing Inc

Mr Justice Briggs:

INTRODUCTION

1.

This application by the Administrators of Lehman Brothers International (Europe)(“LBIE”) seeks the court’s directions as to the principles governing the beneficialownership, as between LBIE and a number of its affiliates within the Lehman group,of securities which LBIE had, prior to the onset of its administration, acquired fromthird parties (“the street”) for the account of those affiliates and which, vis-à-vis therest of the world, still remain vested in LBIE.2.

The securities comprise a broad range, including both fixed income and equities. Theoverwhelming majority of them are in dematerialised form, in relation to whichLBIE’s ownership, as against the rest of the world, consists of a chose in actionrepresented by a credit in LBIE’s account (a “depot”) with a clearing house,depository or custodian (collectively “depositories”). A small minority consist of shares with physical documentary title, either registered or bearer, in respect of whichlegal title was generally vested in a nominee, which may also be regarded as adepository for present purposes.3.

LBIE acquired the relevant securities pursuant to a global settlements practice whichhad been instituted generally within the Lehman Brothers group (“the Group”) in theearly 1990s. By then, the Group conducted a truly worldwide securities business,operating in numerous different and widely separated time zones including, mostimportantly for present purposes, Europe, the USA and the Far East. Put shortly, theessence of the global settlements practice was that the Group identified a single groupcompany (a “hub company”) in each main time zone into which all securities acquiredin that time zone were settled on acquisition, and from which all such securities weretransferred on re-sale to the street. LBIE was the designated hub company forsecurities bought and sold in Europe, regardless of whether it or one of its affiliatesaround the world was to enjoy the economic risks and rewards of ownership,including rises and falls in value, and the intermediate income, whether by way of coupon or dividend.4.

The global settlements practice applied not merely to securities bought and sold aspart of a trading strategy designed to yield profits in its own right, but also tosecurities bought and sold by way of the hedging of the risks arising from thederivatives businesses of particular affiliates.5.

It was also (or became) Group policy not merely to hold securities betweenacquisition and re-sale, but to use them for the raising of finance for the Group bylending them to the street in the meantime. Again, the Group designated the samehub companies for the carrying on of this activity as it did to the acquisition and saleof the underlying securities, regardless of the identity of the affiliate for which thesecurities had been acquired and were held. Thus, all lending of securities to thestreet in Europe for the raising of finance was carried out by LBIE, and LBIE did notaccount to specific affiliates for the substantial economic benefits obtained by the useof securities acquired for the affiliate’s account in connection with that activity. Bycontrast, LBIE did account to affiliates for all intermediate income received fromsecurities held for their account between acquisition and re-sale.