Following the collapse of Lehman Brothers, the Administrators of Lehman Brothers International (Europe) (“LBIE”) – which was the European regional headquarters of the Lehman group – issued an application to determine how certain of LBIE’s assets should be distributed; namely those assets which it was holding pursuant to the FSA Client money rules (“CASS 7”).

The application was necessary because of gaps and uncertainties in the provisions of CASS 7, which the Judge found to be “patently inconsistent and flawed in certain significant respects” (paragraph 76).  The Administrators joined a number of Representative Respondents to the application in order to argue the various possible interpretations of CASS 7.

The main dispute was between clients for whom LBIE had segregated funds at the time of its administration and those for whom it had not.  These two groups were described as the “segregated clients” and the “un-segregated clients” respectively.  Daniel appeared for the Seventh Respondent, Paragon Capital Management Fund Ltd, which was a segregated client.  The application raised some 70 discrete issues, underlying many of which was the question whether the basis for sharing in the pool of money constituted pursuant to CASS 7 upon the administration of LBIE should be shared only between those clients for whom the money had been segregated, or also amongst those clients for whom money should have been segregated, with the segregated and the un-segregated clients arguing respectively for those different outcomes.  Following a 12 day hearing before Mr Justice Briggs the Court found in favour of the segregated clients.

There were also arguments as between the segregated clients concerning the date at which their entitlements should be calculated and whether such entitlements were subject to a right of set-off.

The judgment constitutes a definitive explanation of how the FSA client money rules work and is likely to affect the many firms operating in the financial sector to whom such rules apply.

Daniel Hubbard appeared on behalf of the 7th Respondent.

Read the full text of the Judgment