• Judge rules against administrators' scheme of arrangement; scheme supported by hedge fund GLG Partners
  • $9 billion in assets available to be distributed to creditors
  • Administrators "disappointed" by ruling; seek expedited appeal

Hedge funds that have billions of dollars of assets tied up in the failed bank, Lehman Brothers International Europe (LBIE), received a setback last month when a judge ruled a planned scheme to distribute the assets could not be sanctioned by the court. LBIE was the London-based European arm of Lehman Brothers, which collapsed in September last year.

In a judgment on 21 August, Mr Justice Blackburne ruled that a scheme of arrangement presented by the administrators, PricewaterhouseCoopers (PwC) and supported in court by hedge fund GLG Partners, did not satisfy the requirements of Part 26 of the Companies Act. Noting the "very great effort" made by the administrators to "bring about a speedy return of the assets," Mr Justice Blackburne said this was not a conclusion he was "happy to reach." However, agreeing with the London Investment Banking Association, which opposed the scheme, the judge ruled that because the assets were held on trust they could not be distributed on a pooled basis without compromising other creditors' claims.

Many hedge funds have assets locked in LBIE because of its role as a major prime broker to hedge funds. Prime brokers provide a range of services to hedge funds providing execution, clearing and settlement of trades, custody, financing, and stocklending.

According to PwC, of the almost $30 billion in assets held by LBIE, $13.1 billion has been returned. Approximately $9 billion more is available and could potentially be returned under a scheme of arrangement.

Since it was placed in administration, the Alternative Investment Management Association (AIMA) and the U.S.- based Managed Funds Association (MFA) have been lobbying PwC and the Financial Services Authority to find ways to speed up the administration. In a letter to the Governor of the Bank of England last year, the MFA even suggested that the delay in the administration of LBIE could lead to a wider failure in the prime brokerage industry that would be "disastrous for UK plc."

PwC believes a scheme of arrangement offers hedge funds the best way to expedite the return of their assets. In a presentation to the AIMA and MFA in August, PwC sought backing of its scheme from hedge fund industry and warned that "in the absence of the scheme it will take some years to return all client assets."

Responding to the court ruling, PwC said that the judgment was a "disappointment" but that it would be launching an appeal and would seek an expedited hearing in November this year. If the appeal is successful and the scheme is approved by creditors (which requires a 75% majority), the earliest the scheme could take effect would be the first quarter of 2010.

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