Steven Anthony Pearson and Others v Lehman Brothers Finance SA and Others

JurisdictionEngland & Wales
JudgeMR JUSTICE BRIGGS,Mr Justice Briggs
Judgment Date19 November 2010
Neutral Citation[2010] EWHC 2914 (Ch)
CourtChancery Division
Docket NumberCase No: 7942 of 2008
Date19 November 2010
(1) Steven Anthony Pearson
(2) Anthony Victor Lomas
(3) Michael John Andrew Jervis
(4) Dan Yoram Schwarzmann
(5) Derek Anthony Howell (The Joint Administrators of Lehman Brothers International (Europe) (In Administration))
(1) Lehman Brothers Finance SA
(2) Lehman Brothers Commercial Corporation Asia Limited
(3) Lehman Brothers Asia Holdings Limited
(4) Lehman Brothers Inc.
(5) Lehman Brothers Special Financing Inc.

[2010] EWHC 2914 (Ch)

Before: Mr Justice Briggs

Case No: 7942 of 2008






Mr Iain Milligan QC, Mr Guy Morpuss QC, Mr Daniel Bayfield & Mr Socrates Papadopoulos (instructed by Linklaters LLP) for the Joint Administrators

Mr Gabriel Moss QC & Mr William Willson (instructed by Herbert Smith LLP)

for Lehman Brothers Finance SA

Mr Robin Dicker QC & Mr Tom Smith (instructed by Mayer Brown International LLP)

for Lehman Brothers Commercial Corporation Asia Limited and Lehman Brothers Asia Holdings Limited

Mr Michael Brindle QC & Mr Nik Yeo ( instructed by Norton Rose LLP) for Lehman Brothers Inc

Mr Philip Jones QC & Mr Giles Richardson (instructed by Weil, Gotshal & Manges LLP)

for Lehman Brothers Special Financing Inc

Hearing dates: 11 th– 29 th October 2010

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.


Mr Justice Briggs:



This application by the Administrators of Lehman Brothers International (Europe) (“LBIE”) seeks the court's directions as to the principles governing the beneficial ownership, as between LBIE and a number of its affiliates within the Lehman group, of securities which LBIE had, prior to the onset of its administration, acquired from third parties (“the street”) for the account of those affiliates and which, vis-à-vis the rest of the world, still remain vested in LBIE.


The securities comprise a broad range, including both fixed income and equities. The overwhelming majority of them are in dematerialised form, in relation to which LBIE's ownership, as against the rest of the world, consists of a chose in action represented by a credit in LBIE's account (a “depot”) with a clearing house, depository or custodian (collectively “depositories”). A small minority consist of shares with physical documentary title, either registered or bearer, in respect of which legal title was generally vested in a nominee, which may also be regarded as a depository for present purposes.


LBIE acquired the relevant securities pursuant to a global settlements practice which had been instituted generally within the Lehman Brothers group (“the Group”) in the early 1990s. By then, the Group conducted a truly worldwide securities business, operating in numerous different and widely separated time zones including, most importantly for present purposes, Europe, the USA and the Far East. Put shortly, the essence of the global settlements practice was that the Group identified a single group company (a “hub company”) in each main time zone into which all securities acquired in that time zone were settled on acquisition, and from which all such securities were transferred on re-sale to the street. LBIE was the designated hub company for securities bought and sold in Europe, regardless of whether it or one of its affiliates around the world was to enjoy the economic risks and rewards of ownership, including rises and falls in value, and the intermediate income, whether by way of coupon or dividend.


The global settlements practice applied not merely to securities bought and sold as part of a trading strategy designed to yield profits in its own right, but also to securities bought and sold by way of the hedging of the risks arising from the derivatives businesses of particular affiliates.


It was also (or became) Group policy not merely to hold securities between acquisition and re-sale, but to use them for the raising of finance for the Group by lending them to the street in the meantime. Again, the Group designated the same hub companies for the carrying on of this activity as it did to the acquisition and sale of the underlying securities, regardless of the identity of the affiliate for which the securities had been acquired and were held. Thus, all lending of securities to the street in Europe for the raising of finance was carried out by LBIE, and LBIE did not account to specific affiliates for the substantial economic benefits obtained by the use of securities acquired for the affiliate's account in connection with that activity. By contrast, LBIE did account to affiliates for all intermediate income received from securities held for their account between acquisition and re-sale.


The concentration of the acquisition, sale and lending of securities within one Lehman hub company within each main geographical area of the Group's activities was perceived to be very beneficial to the Group in terms of efficiency and economy, but it was also perceived to create, at least potentially, three problems for the hub company. The first (“the capital charge problem”) was that to the extent that the hub company paid the acquisition price for securities on settlement with the street, against an unsecured debt for the same acquisition price owed to it by the affiliate for which it had been purchased, the hub company faced a regulatory capital charge which, at least in the case of LBIE and Lehman Brothers Inc (“LBI”), the New York hub company, amounted to 100% of the amount of the unsecured debt.


The second problem (“the segregation problem”) was that the hub company might, unless a regulatory exception applied, be required to segregate securities acquired for the account of third parties (including affiliates) rather than, as was the Group's practice, for the hub company to hold all securities acquired both for itself and its affiliates in un-segregated house accounts.


The third problem (“the financing problem”) was that the use of securities for the raising of finance by lending to the street required the hub company to be able to transfer absolute and unencumbered title to its street counterparty, whether under re-purchase transactions (“repos”) or stock loans, and it was perceived that if the effect of the acquisition of securities by a hub company for an affiliate was to confer beneficial title to the securities upon the affiliate, then the hub company might be in difficulty giving good title to the street as necessitated by financing transactions.


I have described these as potential problems because it is far from clear, in the early 1990s at least, that they, or any of them, rendered LBIE's centralised activities in the acquisition and sale of securities for its affiliates, or by lending to the street, impracticable, still less unlawful in regulatory terms. Nonetheless they were perceived to be of sufficient gravity, either immediately or in the near future, to give rise to the setting up of a small project group of persons within LBIE known as the Regulation and Administration of Safe Custody and Global Settlement working party, or “Rascals” for short, tasked with devising a solution to them. That catchy acronym became the label used for the identification of the processes adopted to address those three perceived problems and, in due course, as the name for this litigation.


The Rascals project was initiated in 1993. Following negotiations between LBIE and the affiliates for which it dealt in securities, the Rascals processes recommended by the working party began to be applied from about 1996. Rascals processes continued to be applied between LBIE and various of its affiliates until, and indeed after, LBIE went into administration on the morning of 15 th September 2008. Although those processes shared certain common features, they were by no means uniform, as between LBIE and different affiliates, or in relation to different types of securities.


Nonetheless, and at the risk of oversimplification, the Rascals processes shared the following common features:

i) They were applied to large classes of securities acquired by LBIE, acting as hub company, for the account of affiliates.

ii) In each case the affiliate purported to confer upon LBIE its proprietary interest (if any) in the underlying security in exchange for monetary consideration in the form of a purchase price or the deposit of monetary collateral, leaving the affiliate with a contractual right against LBIE to recover its proprietary interest in equivalent securities, again for monetary consideration, at a future date.

iii) The commercial intent (albeit not contractual obligation) of the processes was usually that they should apply for the whole or substantially the whole of the period between the acquisition of the security from the street by LBIE and its eventual re-sale to the street.

iv) The intended effect of the processes (whether or not successful) was to replace an unsecured obligation by the affiliate to refund LBIE the purchase price for the acquisition of the security from the street with a secured obligation of the affiliate to pay for its re-acquisition from LBIE of an equivalent security under the Rascals processes, whether by paying the repurchase price under the off-leg of a repo or paying back the collateral lodged during the currency of a stock loan (repos and stock loans being the two types transaction alternatively used by all the Rascals processes).


It will be unnecessary for me to describe every form of Rascals processing used within the Group...

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1 firm's commentaries
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    • JD Supra United Kingdom
    • 8 November 2019
    ...underlying security and could not enforce its rights directly against the issuer (following Lehman Brothers International (Europe) [2010] EWHC 2914 (Ch)). 4 Paragraph 117. 5 Paragraph 117. 6 Paragraph Emma Shields (White & Case, Professional Support Lawyer, London) contributed to the develo......
1 books & journal articles
  • Securities and Financial Services Regulation
    • Singapore
    • Singapore Academy of Law Annual Review No. 2016, December 2016
    • 1 December 2016
    ...the Singapore Real Estate Investment Trust” (2010) 24(3) Trust Law International 155. 19 Cf Pearson v Lehman Brothers Finance SA [2010] EWHC 2914 (Ch), whose decision was upheld in Pearson v Lehman Brothers Finance SA [2011] EWCA Civ 1544. 20 Monetary Authority of Singapore, Enhancements to......

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