Hedge Fund/Investment Management Alert
January 2009
Authors:
Gordon F. Peery
617.261.3269
gordon.peery@klgates.com
Charles A. Dale, III
617.261.3112
chad.dale@klgates.com
Mackenzie L. Shea
617.261.3250
mackenzie.shea@klgates.com
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January 30, 2009 Deadline for
Lehman Brothers Inc. “Customer” Claims
Friday, January 30, 2009 is the deadline for submitting “Customer” claims relating to
Lehman Brothers Inc. (“LBI”), the New York-based broker -dealer arm of Lehman
Brothers. Failure to file a Customer claim by the January 30, 2009 deadline will
preclude a claim as a Customer under the Securities Investor Protection Act (“SIPA”)
in the LBI SIPA proceedings.
The LBI “Customer”
The January 30, 2009 deadline applies only to those who are “Customers” of LBI under
the Securities Investor Protection Act (“SIPA”). Creditors of LBI that are “Customers”
(as that term is definedi and discussed in this Alert) are generally those who are owed
cash or securities by LBI (as opposed to other Lehman Brothers affiliates such as the
United Kingdom broker Lehman Brothers International (Europe)). Under SIPA, a
“Customer” is generally one who had securities that were received, acquired, or held
by LBI in the ordinary course of its business. The SIPA definition of “Customer”
includes anyone with whom LBI dealt with, whether as principal or agent.
As an example, a Customer under SIPA would include a fund that deposited cash with
LBI for purposes of purchasing securities on margin or otherwise. Additionally, a party
with an “open contractual commitment” with LBI as of September 19, 2008, the date
on which the LBI SIPA proceedings commenced, arguably could also file a claim on
or by January 30, 2009. “Open contractual commitments” are contracts that have yet
to be performed such as trades to buy or sell securities through LBI.
Customer claims are entitled to priority treatment under the SIPA. These claims are
generally satisfied from customer property (e.g., cash and securities) that LBI held in
its broker -dealer capacity. Customers under SIPA also have access to a reserve fund
maintained by the Securities Investor Protection Corporation (“SIPC”). SIPC provides
relief to Customers under SIPA which includes a form of insurance against losses to a
maximum of $500,000. The SIPC reserve will not be available to Customers of LBI
that miss the January 30, 2009 deadline as well as those parties that do not qualify as
“Customers” under SIPA.
The SIPC Trustee in the LBI proceeding may approve Customer claims in full, in part,
or alternatively, it may reject the claim in full. Claimants will be notified and will be
given an opportunity to advance arguments in support of its Customer claim within
30 days following rejection of that claim; a hearing with the Bankruptcy Court may
be requested.
Creditors that are Not “Customers”
The January 30, 2009 deadline does not apply to these two other categories of
creditors: (i) general creditors of LBI that are not “Customers” or (ii) creditors of
other Lehman entities (e.g., Lehman Brothers Holdings, Inc.). A Customer would not
Hedge Fund/Investment Management Alert
include a party that posted collateral in support of
a derivatives trade with Lehman Brothers Special
Financing Inc., for example.
With respect to the first excluded category of
Lehman creditors (i.e., general creditors of LBI
who are not “Customers”), those creditors still need
to file a claim with the Bankruptcy Court, but have
a longer period of time in which to do so. General
creditors and other claimants have until June 1,
2009 to file a claim against LBI. With respect to
the second category of claimants (i.e., creditors of
other Lehman entities), those claimants will have
their own deadlines for filing claims established by
the court hearing the Lehman Brothers proceedings,
the United States Bankruptcy Court for the Southern
District of New York (the “Bankruptcy Court”).
Those who fall outside of the SIPA definition of
“Customer” are considered non-customer creditors
and the U.S. Bankruptcy Code governs those parties’
claims. The LBI Trustee will satisfy non-Customer
claims by means of a pro-rata distribution of the
remaining assets of the LBI estate.
Uncertainty Relating to “Customer” Status
Many market participants that dealt with LBI do
not have adequate documentation that confirms
their status as an LBI Customer and many are in the
process of retrieving such documentation in the days
leading up to the January 30, 2009 deadline. Those
market participants who believe that they qualify
for “Customer” status and treatment under SIPA are
encouraged to file their claims on or before this January
30, 2009. In the event that you need assistance in
making the determination that an entity is a “Customer”
under SIPA, or if there are questions relating to the
SIPC claims process, please let us know.
Endnotes
The relevant excerpt of the SIPA definition of Customer
is as follows:
(i ) 15 U.S.C. §78lll. DEFINITIONS
(2) CUSTOMER
he term “customer” of a debtor means any person
T
(including any person with whom the debtor deals
as principal or agent) who has a claim on account of
securities received, acquired, or held by the debtor in
the ordinary course of its business as a broker or dealer
from or for the securities accounts of such person for
safekeeping, with a view to sale, to cover consummated
sales, pursuant to purchases, as collateral security, or
for purposes of effecting transfer. The term “customer”
includes any person who has a claim against the debtor
arising out of sales or conversions of such securities, and
any person who has deposited cash with the debtor for the
purpose of purchasing securities, but does not include—
(A) a ny person to the extent that the claim of such person
arises out of transactions with a foreign subsidiary of
a member of SIPC; or
(B) a ny person to the extent that such person has a claim
for cash or securities which by contract, agreement,
or understanding, or by operation of law, is part of the
capital of the debtor, or is subordinated to the claims
of any or all creditors of the debtor, notwithstanding
that some ground exists for declaring such contract,
agreement, or understanding void or voidable in a suit
between the claimant and the debtor.
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This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or
relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
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