Appeal court extends protection for investment clients
Client money held by Lehman Brothers International (Europe) (LBIE) prior to it going into administration should be distributed pro rata whether or not it had been segregated, the Court of Appeal ruled last week (Re Lehman Brothers International (Europe) (in administration) [2010] EWCA Civ 917.
The case concerned the correct operation of the Client Asset Sourcebook (CASS) when recovering client money following LBIE’s insolvency in 2008.
Client money belongs to the client but is held by an investment firm under a statutory trust for trading or portfolio management purposes.
LBIE had a legal duty to segregate client money from its own, but failed to do so. Consequently, the administrators found a shortfall in the amount of client money available for distribution. A bank in which LBIE stored $1bn of client money had also become insolvent, which further depleted the amount of funds available.
The court upheld a ruling that the statutory trust arose on the receipt of client funds and held that the money pool should include all traceable client money, whether or not it had been “segregated”. Delivering her judgment in the case, Lady Justice Arden said: “Client money is not money only to be found in segregated accounts. Accordingly, if the intention of CASS7 is to include all client money in the expression ‘client money account’, the term must be wider than accounts containing segregated monies.”
Mez Raja, solicitor at CMS Cameron McKenna, says the decision potentially widens the scope both for the number of recipients of client money from the administrators’ eventual distribution and the amount of client money available to be distributed.
“I think in general the net of protection is cast wider but there are other potential consequences in terms of investor protection. As an individual client, your claim is bundled in with those of other clients, which means that if you took additional steps to secure your own client money entitlement at the outset, then those steps may eventually prove to be of limited effect,” he adds.
Permission to appeal to the Supreme Court is likely to be sought.
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