In a judgment issued on 15 December in the English High Court (Lehman Brothers International (Europe)(in administration) v CRC Credit Fund Limited & Ors [2009] EWHC 3228), and based on assumed facts presented to him, Mr Justice Briggs described the failure by LBIE to protect client monies from the impact of insolvency as "truly spectacular" and involving "shocking underperformance".

In a long and complex decision in which he examined the application of the rules about client money in chapter 7 of the FSA's Client Assets Sourcebook (CASS 7), the judge concluded that the rules gave no greater rights to clients as regards assets deposited with LBIE than arose under the general law. In particular, the practice, permitted under CASS 7, of mixing client monies with the assets of LBIE and other Lehman Brothers companies under the so-called "alternative approach" to the management of monies held on trust, did not create any greater right to trace into those monies.

Where LBIE held client monies in segregated accounts, clients had secured claims to those monies to the extent that they contributed to the monies held, rather than by reference to their contractual claims against LBIE. Client monies will be pooled, and if the funds held are insufficient to pay all the claims, claims against the pool will be pro rated.

The judgment is critical of the drafting of CASS 7 and will limit the recovery of claims in the LBIE insolvency by clients who may have assumed that their assets were protected. Auditors, regulators and professional advisors will inevitably come in for criticism. Beyond Lehman Brothers, the judgment has significant implications for the way in which regulated entities currently hold client monies and the true level of protection afforded to clients by the CASS rules.

Given the serious implications of this judgment, it is likely to be appealed to the Court of Appeal.