The High Court has given another lengthy ruling on issues arising in the administration of Lehman Brothers International (Europe) (LBIE). This ruling addressed general principles on the issue of title to securities (equities and fixed income securities) held by LBIE for affiliates in unsegregated house depot accounts at the point of collapse. As part of the group policy LBIE acted as the hub company in its geographical area of operation (in this case Europe) acquiring (and lending and selling) all securities regardless of whether LBIE itself or one of the affiliates around the world was to enjoy the economic risks and rewards of ownership, including rises and falls in value, and the intermediate income.
The concentration of the acquisition, sale and lending of securities within one Lehman hub company in each geographical area was considered to be very beneficial to the group in terms of efficiency and economy, but there were, or were perceived to be, problems relating to regulatory capital charges, the regulatory requirement to segregate and the use of such securities to raise finance by lending to the street. A working party was set up in the early 1990s to review these processes. It devised a system known by the acronym Rascals.
The judge held that the affiliates did not acquire any proprietary interest in securities purchased on their behalf before the Rascals system was introduced but, once it was introduced, they initially had a proprietary interest in securities acquired by LBIE. Under this system, title was immediately transferred to LBIE by the affiliates under one of two bases: either there was a repo which lasted only for one day and was completed and immediately repeated on each successive business day, or, for securities acquired for stock lending, there was an open-ended stock loan.
Although the daily repos, title would in the normal course of events have been passed back to the affiliates on the occasion of the last repo, the transfer of title was dependent upon payment being made simultaneously by the affiliate concerned, and as none of the affiliates was able to pay, title in all securities held at the point of collapse by LBIE under the Rascals system remained with LBIE and so they were beneficially owned by LBIE.
Subject to any particular factual issues which may arise in relation to particular securities or affiliates, this ruling will apply to all securities held by LBIE in unsegregated accounts which at the point of collapse had not been resold to the street and were not the subject of stock lending to the street.