Tuesday, November 25, 2008

Groups in Lehman asset trap

(FT) Several companies reliant on four US hedge funds face collapse because the funds cannot access shares and loans held at the London arm of Lehman Brothers, the collapsed bank.

The four funds – whose names were kept secret in a High Court ruling this week – claimed that they were likely to close in mid-December if they failed to get access to information about their assets frozen at Lehman. The funds made an unsuccessful effort to force the administrators of Lehman, four PwC partners, to give them details of their assets and how much they owe to ­Lehman.

The funds are likely to be followed by “numerous” others of the 1,000 former clients of the Lehman prime brokerage, Lehman Brothers International (Europe), according to PwC.

The warnings from the funds follow several cases of funds closing or blocking withdrawals because they cannot access holdings at Lehman, even though they expect to recover them.

In his ruling, Mr Justice Blackburne said the funds argued that, if they could not get information on their assets by mid-December, “it is likely that the funds will be wound down forthwith”. As well as job losses, “the funds’ inability to engage in restructuring will probably lead to the collapse of at least four companies in which securities are held”.

Jonathan Kelly, a lawyer at Simmons & Simmons, said the decision was further proof that the UK courts were taking a hard line on claims against Lehman’s main European arm.

“The High Court is really desperate to illustrate that it is not going to take the place of the administrators in resolving these issues,’’ Mr Kelly said. “To do otherwise could open the floodgates.”

The judge said in his ruling that he was “sympathetic” to the plight of the funds but it would be wrong to overrule the approach being taken by the administrators, which PwC has said could take months.

PwC won court approval last month for a procedure involving identifying 140,000 failed trades to reconcile assets before making payouts.

The administrators complained to the court that, two months after the collapse, they were still being hampered by “the refusal of a number of custodians and others to comply with demands for information”.

Mr Justice Blackburne has now been put forward to hear all claims stemming from the investment bank’s insolvency, in part to prevent conflicting decisions.

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