Lehman Brothers International (Europe) v CRC Credit Fund Ltd & Ors

Client money segregated for a class of potentially affected clients may generate client money entitlements for clients later identified as members of that class, even where their precise identities were unknown when segregation occurred. The same principle applies to a buffer segregated for unapplied credits, where subsequent investigation identifies the clients to whom the credits related. Any insufficiency in a buffer is allocated rateably among the affected clients. This does not displace the general pooling provisions of CASS 7.9. A shortfall caused by the insolvency of a bank receiving segregated money is treated under the general pooling provisions.

This was a supplementary judgment following the court’s main judgment of 15 December 2009 on the Client Money Application. The Administrators sought answers to additional questions concerning client money segregated for Depot Breaks and unapplied credits at the point of entitlement. Written submissions were received from the Administrators, GLG, Paragon and HLBB. The central issues were whether clients could obtain entitlements from money segregated for a class or unidentified beneficiaries, and how any resulting shortfall should be treated.

1. Depot Breaks. Money segregated on a stock-line basis for Depot Breaks is segregated for a class of clients entitled to stock of the relevant type. If LBIE’s books, records and information from clients later establish which clients were adversely affected, those clients have client money entitlements calculated by reference to the appropriate portion of the amount segregated, despite their precise identities not having been known at segregation.
2. The position differs from that of clients for whom LBIE had no intention to segregate money. Subsequent identification of the beneficiaries gives effect to the original intention to protect the relevant proprietary rights. The entitlement is reduced or extinguished when the relevant securities, or part of them, are delivered to the client.
3. Unapplied credits. The same reasoning applies where a buffer was segregated for unapplied credits. Clients whose money was received within the relevant three-business-day period, but not specifically segregated, may receive an appropriate share of the buffer if they are later identified as beneficiaries of the relevant credits. Clients whose credits were segregated more than three business days before the PLS may likewise receive an entitlement when the relevant clients are identified.
4. If the buffer is insufficient, each additional entitlement based on later identification is abated rateably among the affected clients. This identifies the amount originally segregated for those clients and does not depart from the general pooling required by CASS 7.9.
5. A different consequence applies where the buffer is attenuated because money was paid to a bank which later became insolvent, such as Bankhaus. Any resulting shortfall is dealt with under the general pooling provisions.
6. Both parts of Question 27 and both parts of Question 28 were answered in the affirmative.