The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Lehman Brothers

  • From Vol. 11 No.41 (Oct. 18, 2018)

    Steps Fund Managers Should Take Now to Ensure Their Trading of Swap, Repo and Securities Lending Transactions Continues Uninterrupted After January 1, 2019

    The regulatory fallout from the 2008 global financial crisis continues to affect derivatives and other instruments traded by private funds. Final rules issued in 2017 by three U.S. federal banking regulators (the U.S. Stay Regulations) alter how certain qualified financial contracts (QFCs) will be treated in U.S. bankruptcy proceedings. Although neither private funds nor their managers have direct obligations under the U.S. Stay Regulations, fund managers will nevertheless need to bring certain trading agreements into compliance with those regulations in order to continue trading QFCs with bank counterparties or their affiliates after January 1, 2019. In a recent interview with The Hedge Fund Law Report, Leigh Fraser, partner at Ropes & Gray and co-leader of the firm’s hedge fund group, discussed the U.S. Stay Regulations; the impact that these new regulations have on the trading and documentation of QFCs by private funds; and ways fund managers can ensure compliance with the new regulations, including a discussion of the recently released ISDA 2018 U.S. Resolution Stay Protocol. For additional insights from Fraser, see “Steps Hedge Fund Managers Should Take Now to Ensure Their Swap Trading Continues Uninterrupted When New Regulation Takes Effect March 1, 2017” (Feb. 9, 2017); and our three-part series on best practices in negotiating prime brokerage arrangements: “Preliminary Considerations When Selecting Firms and Brokerage Arrangements” (Dec. 1, 2016); “Structural Considerations of Multi-Prime and Split Custodian-Broker Arrangements” (Dec. 8. 2016); and “Legal Considerations When Negotiating Prime Brokerage Agreements” (Dec. 15, 2016).

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  • From Vol. 11 No.40 (Oct. 11, 2018)

    Reflections on the Tenth Anniversary of the Financial Crisis: The Collapse and Aftermath (Part One of Two)

    On September 15, 2008, Lehman Brothers filed for bankruptcy, essentially marking the beginning of the 2008 global financial crisis. In response, Congress passed the Dodd-Frank Act, which, among other things, directed the establishment of risk-based capital requirements and liquidity requirements for large banks; barred banks from maintaining ownership interests and other relationships with hedge and private equity funds; and amended the Investment Advisers Act of 1940 to change registration, reporting, recordkeeping and disclosure requirements for private funds. Ten years later, however, is the financial system stronger and more resilient? Have hedge funds changed their structures, practices and compliance programs to better protect themselves and their investors? How have new regulations affected the hedge fund space? In connection with the tenth anniversary of the financial crisis, The Hedge Fund Law Report asked Lowenstein Sandler partner Benjamin Kozinn, who was vice president and associate general counsel at Goldman Sachs during the crisis, to answer these and other questions on the 2008 crisis and its impact on hedge funds. In the first article in this two-part series, Kozinn explains the causes of the crisis; the role – if any – hedge funds played in it; the regulatory changes in its aftermath; and the new focus on counterparty risk. In the second article, he will discuss the focus on compliance programs and chief compliance officers; the present strength of the financial system; changes in hedge fund strategies; the current state of hedge fund regulation; and the future of the hedge fund space. For additional insight from Kozinn, see our two-part series “Why Fund Managers Should Ensure Personal Trading Policies Address Cryptocurrencies and ICOs” (Jul. 26, 2018); and “Factors Fund Managers Must Consider When Addressing Cryptocurrencies and ICOs in Personal Trading Policies” (Aug. 2, 2018).

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  • From Vol. 9 No.30 (Jul. 28, 2016)

    Implications of Lehman Brothers Decision on Hedge Fund Managers Trading CDOs

    On June 28, 2016, Judge Shelley Chapman of the U.S. Bankruptcy Court for the Southern District of New York authored an opinion in the case of Lehman Brothers Special Financing Inc. v. Bank of America National Association. This decision, which holds that certain market-standard provisions in structured finance transactions are enforceable when the swap counterparty’s default is due to the bankruptcy of that counterparty, provides hedge fund managers and others trading collateralized debt obligations (CDOs) and other structured products with greater certainty than prior rulings relating to the collapse of Lehman Brothers. The Hedge Fund Law Report recently interviewed Schulte Roth & Zabel partner Paul Watterson about Judge Chapman’s decision and its ramifications for hedge fund managers. Specifically, Watterson addressed the significance of the decision in light of prior case law, the implications of the decisions for hedge fund managers trading CDOs and the specific provisions managers should include in CDO documentation to take advantage of this holding. For more on the Lehman Brothers collapse, see “Lesson From Lehman Brothers for Hedge Fund Managers: The Effect of a Bankruptcy Filing on the Value of the Debtor’s Derivative Book” (Jul. 12, 2012); and “How Can Hedge Funds Get Their Money Out of Lehman Brothers International Europe?” (Aug. 5, 2009).

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  • From Vol. 8 No.30 (Jul. 30, 2015)

    Second Circuit Rules on Whether Repo Clients of Broker-Dealers Are “Customers” Under SIPA

    In 2008, Lehman Brothers, Inc. (Lehman) entered into a liquidation proceeding in the U.S. Bankruptcy Court for the Southern District of New York, in accordance with the Securities Investor Protection Act (SIPA).  A number of banks that had sold securities to Lehman under various repurchase agreements (repos) filed claims in the proceeding seeking to be treated as “customers” of Lehman, which would have given them priority claims in respect of the securities covered by the repos.  Lehman’s bankruptcy trustee determined that the banks were not “customers” within the meaning of SIPA.  Both the Bankruptcy Court and the U.S. District Court for the Southern District of New York affirmed the trustee’s determination.  See “U.S. District Court Rules on Whether a Party to a Repurchase Agreement with a Broker-Dealer That Enters Liquidation Is a ‘Customer’ of the Broker-Dealer under SIPA,” The Hedge Fund Law Report, Vol. 7, No. 18 (May 8, 2014).  In what is likely to be the last judicial word on the subject, the U.S. Court of Appeals for the Second Circuit recently ruled on the District Court’s decision.  This article summarizes the facts and circumstances surrounding the Lehman repos; examines the Second Circuit’s legal reasoning; and discusses possible implications of the decision on the hedge fund industry as a whole.  For coverage of a dispute over “customer” status in a liquidation of a futures commission merchant, see “Bankruptcy Court Rules on Whether Funds Held by Bankrupt Futures Commission Merchant for Retail Forex and OTC Metals Trading Are ‘Customer Property’ Entitled to Priority Distribution,” The Hedge Fund Law Report, Vol. 7, No. 20 (May 23, 2014).

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  • From Vol. 7 No.18 (May 8, 2014)

    U.S. District Court Rules on Whether a Party to a Repurchase Agreement with a Broker-Dealer That Enters Liquidation Is a “Customer” of the Broker-Dealer under SIPA

    Following its collapse in 2008, broker-dealer Lehman Brothers Inc. (Lehman) entered a liquidation proceeding administered by the U.S. Bankruptcy Court for the Southern District of New York (Bankruptcy Court) in accordance with the Securities Investor Protection Act of 1970 (SIPA).  Under SIPA, “customers” of a failed broker-dealer are entitled to special protection in the broker-dealer’s liquidation.  In that regard, several banks that had entered into repurchase agreements with Lehman prior to its collapse sought to have their claims categorized by Lehman’s liquidation trustee as “customer” claims under SIPA.  The trustee refused to do so; and the Bankruptcy Court concurred.  The banks then appealed the Bankruptcy Court’s decision to the U.S. District Court for the Southern District of New York.  This article offers a detailed discussion of the District Court’s decision.  Although broker-dealer liquidations are rare, the Court’s decision should inform the drafting of hedge funds’ prime brokerage and repurchase agreements.  See “Prime Brokerage Arrangements from the Hedge Fund Manager Perspective: Financing Structures; Trends in Services; Counterparty Risk; and Negotiating Agreements,” The Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013).

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  • From Vol. 5 No.29 (Jul. 26, 2012)

    U.S. Bankruptcy Court Rules on Whether Money Managers’ “Soft Dollar” Credits Are Entitled to “Customer” Priority in Lehman SIPA Liquidation

    When Lehman Brothers collapsed in 2008, hundreds of money managers that used its brokerage arm, Lehman Brothers Inc. (Lehman), to execute trades were left with unspent “soft dollar” commission credits.  In the Lehman liquidation proceeding, a number of those managers claimed that they were “customers” of Lehman with respect to those soft dollar balances within the meaning of the Securities Investor Protection Act of 1970 (SIPA).  Brokerage “customers” are entitled to priority in a SIPA liquidation over the claims of unsecured creditors of the brokerage firm.  The U.S. Bankruptcy Court for the Southern District of New York (Bankruptcy Court) recently ruled on whether the money managers’ claims for “soft dollar” credit balances represent “customer” claims under SIPA or whether such claims must be treated as general unsecured claims.  This article summarizes the background in this case and the Bankruptcy Court’s decision and reasoning.

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  • From Vol. 5 No.27 (Jul. 12, 2012)

    Lesson from Lehman Brothers for Hedge Fund Managers: The Effect of a Bankruptcy Filing on the Value of the Debtor’s Derivative Book

    Prior to its bankruptcy filing, Lehman Brothers (Lehman) was a global broker-dealer/investment bank that conducted trades and made investments on behalf of itself as well as its clients, including many hedge fund managers.  As part of this business, Lehman entered into a large number of “derivatives” transactions – such as credit default swaps, interest rate swaps and currency swaps – both for speculative and hedging purposes.  As of August 2008, Lehman held over 900,000 derivatives positions worldwide, in each case through one of its operating subsidiaries.  In many instances, Lehman’s ultimate parent entity, Lehman Brothers Holdings Inc. (LBHI), guaranteed the obligations arising out of these derivatives positions.  As of August 31, 2008, Lehman internally estimated that, on an aggregate basis, its derivatives positions had a positive net value of approximately $22.2 billion, representing a significant asset of the company.  This substantial “in the money” position abruptly turned “out of the money” as the result of LBHI’s bankruptcy filing in the early morning of September 15, 2008.  The commencement of LBHI’s bankruptcy case – the largest by far in U.S. history, with claims well exceeding $300 billion – provided a contractual basis for a large majority of Lehman’s derivatives counterparties to terminate their transactions with Lehman.  As a result, more than 80 percent of Lehman’s derivatives positions terminated as of, or soon after, the date of the bankruptcy filing.  Alvarez & Marsal, Lehman’s restructuring advisors, concluded in a three-month internal study that the losses from terminated derivatives trades cost the bankruptcy estate “at least” $50 billion.  In a guest article, Solomon J. Noh, a partner in the Global Restructuring Group at Shearman & Sterling LLP, examines what may be one of the principal reasons why Lehman’s bankruptcy filing resulted in such an extraordinary loss in value for the Lehman estate and how Congress has proposed to address this problem in any future failure of a major financial institution.  See also “Treatment of a Hedge Fund’s Claims Against and Other Exposures To a Covered Financial Company Under the Orderly Liquidation Authority Created by the Dodd-Frank Act,” The Hedge Fund Law Report, Vol. 4, No 15 (May 6, 2011).

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  • From Vol. 5 No.20 (May 17, 2012)

    British High Court Interprets ISDA Master Agreement to Suspend Non-Defaulting Party’s Payment Obligations Until Defaulting Party Has Cured the Default

    Counterparty risk has garnered significant attention among hedge fund industry participants in the aftermath of the collapse of Lehman Brothers in 2008.  Evaluating counterparty risk requires hedge fund managers to evaluate their counterparty agreements to understand, among other things, the scope of their obligations in the event that one of their trade counterparties defaults or becomes insolvent.  A decision recently handed down by the Court of Appeals of England and Wales interpreted a contractual provision contained in the International Swaps and Derivatives Association, Inc. Master Agreement (Master Agreement) that governs such obligations in relation to swaps and other derivatives effected between trade counterparties.  A central component of the case involved the interpretation of Section 2(a)(iii) of the Master Agreement, which provides that a party to a derivative contract is not obligated to make payments to the counterparty while an “event of default” is occurring with respect to the counterparty.

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  • From Vol. 4 No.37 (Oct. 21, 2011)

    Lehman Brothers Court Holds Triangular Setoff Provisions Unenforceable in Bankruptcy

    On October 4, 2011, the United States Bankruptcy Court for the Southern District of New York held that Section 553(a) of the Bankruptcy Code renders unenforceable cross-affiliate netting or “triangular” (non-mutual) setoff provisions to the extent they cover non-mutual debts between the debtor and entities affiliated with the creditor.

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  • From Vol. 4 No.27 (Aug. 12, 2011)

    U.K. Supreme Court Rules That Change in Priority over Dante CDO Collateral Triggered by Lehman Bankruptcy Does Not Violate Britain’s Anti-Deprivation Bankruptcy Rule

    Belmont Park Investments PTY Limited was one of several Australian institutional investors (Noteholders) that purchased notes under the “Dante” collateralized debt obligation (CDO) program sponsored by Lehman Brothers Special Financing Inc. (Lehman).  The proceeds of the Dante notes were used by a Lehman special purpose vehicle to purchase AAA rated debt instruments that were held by BNY Corporate Trustee Services Limited as collateral to secure the parties’ obligations under the CDO and a related credit default swap.  Central to this dispute were CDO and swap provisions that shifted priority to the collateral from Lehman to the Noteholders in the event of Lehman’s bankruptcy.  In related cases involving Lehman, U.S. Bankruptcy Courts had previously ruled that the priority-shifting provision was a prohibited ipso facto clause, and ruled that Lehman retained first priority to the collateral.  In contrast, the U.K. Supreme Court has now ruled that the provision does not violate the United Kingdom’s anti-deprivation rule.  We summarize the Supreme Court’s decision.  For a discussion of two related U.S. Bankruptcy Court decisions, see “Bankruptcy Court Holds That a Provision in a Derivative Contract Subordinating Payments to a Bankrupt Counterparty May Be an Unenforceable Ipso Facto Clause,” The Hedge Fund Law Report, Vol. 4, No. 18 (June 1, 2011); “Bankruptcy Court Finds Unenforceable CDO Provisions Subordinating Swap Termination Payments to Swap Counterparty Lehman Brothers as a Result of Its Bankruptcy,” The Hedge Fund Law Report, Vol. 3, No. 5 (Feb. 4, 2010).  See also “Treatment of a Hedge Fund’s Claims Against and Other Exposures To a Covered Financial Company Under the Orderly Liquidation Authority Created by the Dodd-Frank Act,” The Hedge Fund Law Report, Vol. 4, No. 15 (May 6, 2011).

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  • From Vol. 4 No.18 (Jun. 1, 2011)

    Bankruptcy Court Holds That a Provision in a Derivative Contract Subordinating Payments to a Bankrupt Counterparty May Be an Unenforceable Ipso Facto Clause

    On May 12, 2011, the United States Bankruptcy Court for the Southern District of New York, in its oversight of the jointly administered chapter 11 bankruptcy cases of Lehman Brothers Holding, Inc. (LBHI) and Lehman Brothers Special Financing, Inc. (LBSF), found that a provision in a derivative contract that would subordinate payments to a counterparty in the event of its bankruptcy or insolvency may constitute an unenforceable ipso facto clause, and that the termination payments provision of the relevant contract was not eligible for the Bankruptcy Code safe harbor for qualified financial contracts.  This decision reaffirmed the holding in a prior decision in the LBHI bankruptcy.  See “Bankruptcy Court Finds Unenforceable CDO Provisions Subordinating Swap Termination Payments to Swap Counterparty Lehman Brothers as a Result of Its Bankruptcy,” The Hedge Fund Law Report, Vol. 3, No. 5 (Feb. 4, 2010).  Although this decision largely follows the legal analysis in the prior decision rather than breaking new legal ground, this decision is likely to increase the negotiating leverage of the LBHI estate vis-à-vis swap and other counterparties.  More generally, the decision sheds additional light on the treatment of bankruptcy/insolvency-based termination provisions in derivatives contracts.  This article details the background of the adversary proceeding and the Court’s legal analysis.  For more on the operation of bankruptcy/insolvency-based termination provisions in qualified financial contracts under the Bankruptcy Code and Title II of the Dodd-Frank Act, see “Treatment of a Hedge Fund’s Claims Against and Other Exposures To a Covered Financial Company Under the Orderly Liquidation Authority Created by the Dodd-Frank Act,” The Hedge Fund Law Report, Vol. 4, No. 15 (May 6, 2011).

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  • From Vol. 3 No.23 (Jun. 11, 2010)

    Bankruptcy Court Finds Swedbank AB Violated Automatic Stay in Lehman Brothers’ Bankruptcy; Rules Safe Harbor Provisions Do Not Override Setoff Mutuality Requirement

    In bankruptcy parlance, a “setoff” refers to the ability of a creditor and a debtor that owe each other money to apply their claims against one another, if called for under non-bankruptcy law.  As a prerequisite to exercising setoff rights, Section 553(a) of the Bankruptcy Code (the Code) requires “mutuality” between debtor and creditor and debt and credit.  Mutuality exists when “the debts and credits are in the same right and are between the same parties, standing in the same capacity.”  In the absence of mutuality, a creditor’s refusal to pay amounts due to a bankrupt estate may violate various sections of the Code, including Section 362, the automatic stay, even if the estate also owes the creditor money.  Exceptions exist, however.  For instance, in 2005, Congress amended Section 560 and enacted Section 561 of the Code, to provide safe harbors for, inter alia, any pre-existing contractual right of a swap participant to offset or net termination values from the swap agreements in another participant’s bankruptcy.  On May 5, 2010, Judge James Peck of the United States Bankruptcy Court for the Southern District of New York, presiding over the Chapter 11 Bankruptcy of Lehman Brothers Holdings Inc. (LBHI) and its affiliates (collectively, Lehman), squarely addressed whether these Code amendments erased the requirement of “mutuality” for a party to a swap agreement to engage in a “setoff” under Section 553(a).  The Court held that “A contractual right to setoff under derivative contracts does not change well established law that conditions such a right on the existence of mutual obligations.”

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  • From Vol. 2 No.41 (Oct. 15, 2009)

    Will the Proposed Out-of-Court Plan Help or Hinder Efforts of Hedge Fund Creditors to Recover Assets from Lehman Brothers International Europe?

    The administrators of Lehman Brothers International Europe (LBIE), PricewaterhouseCoopers (PwC), continue to try to formulate a speedy and viable process for returning hedge fund client assets.  After a proposed scheme of arrangement (Scheme) was rejected by the High Court in London, PwC unveiled a contractual solution (Solution) as an alternative to the proposed Scheme.  PwC said in a statement that the Solution would allow them to distribute “a very significant portion” of the $8.9 billion in assets currently under their control directly to creditors.  According to PwC, the Solution offers substantially the same terms to investors as the Scheme.  The key difference is that the contracts by which the Solution would be effectuated do not need court approval.  LBIE is the U.K. broker-dealer affiliate of Lehman Brothers Holdings Inc., and served as a prime broker to various hedge funds.  On September 15, 2008, LBIE was placed into administration in the U.K.  The U.K. court appointed several PwC partners as joint administrators of the LBIE estate.  When LBIE collapsed, the assets of its hedge fund clients were frozen.  In the intervening year and change, those hedge funds clients have endured a long and tortuous process in an effort to retrieve their assets.  For more on the LBIE Scheme, see “How Can Hedge Funds Get Their Money Out of Lehman Brothers International Europe?,” The Hedge Fund Law Report, Vol. 2, No. 31 (Aug. 5, 2009).  This article aims to help hedge fund managers with assets tied up in the LBIE administration determine whether or not to participate in the Solution.  To do so, the article examines: the mechanics of the Solution; the mechanics of the Scheme; how net equity claims would be computed and valued under both the Solution and the Scheme; recourse available to LBIE clients that participate in the Solution but disagree with valuations of claims; timing and mechanics of distribution of assets under the Solution; effect of the Solution on non-participating creditors; and the primary benefits and drawbacks to hedge funds of participating in the Solution.

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  • From Vol. 2 No.33 (Aug. 19, 2009)

    Lehman Brothers Claims that Withholding of Payments under Swap Agreement Violates the Automatic Stay of Bankruptcy Code

    On June 24, 2009, Lehman Brothers Holdings Inc. (LBH) filed a motion in the United States Bankruptcy Court in the Southern District of New York requesting that the court compel Metavante Corporation to perform its obligations under a swap agreement it had entered with Lehman Brothers Special Financing Inc. (LBSF).  LBH claims that Metavante’s attempt to suspend its regularly scheduled contractual payments violates the automatic stay provisions of the Bankruptcy Code.  Metavante responds that the Bankruptcy Code does not dictate a specific timeframe in which a non-debtor party must terminate a swap contract to preserve the protections afforded by the Code’s safe harbor provisions.  Also, it asserts that their swap agreement specifically permits a swap counterparty to suspend its payment obligations under swap transactions if an “event of default,” such as a bankruptcy, has occurred and is continuing with respect to its counterparty.  We discuss the factual background of the case and the court’s legal analysis.  The case is particularly important in offering guidance to hedge funds about the law that will govern the increasingly important intersection of bankruptcy and derivatives laws.

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  • From Vol. 2 No.31 (Aug. 5, 2009)

    How Can Hedge Funds Get Their Money Out of Lehman Brothers International Europe?

    The return of assets to clients of Lehman Brothers International Europe (LBIE) has been a slow, complex process.  Administrators for LBIE have applied to the U.K. High Court for approval of a proposed scheme of arrangement (Scheme) intended to facilitate the process of valuing, recovering and returning client assets.  (A scheme of arrangement is the analogue in a U.K. administration proceeding to a reorganization plan in a U.S. Chapter 11 proceeding.)  See “Should Hedge Funds Purchase Unsecured Debt of Lehman Brothers Holdings Inc.? Key Legal Issues Impacting Returns,” The Hedge Fund Law Report, Vol. 2, No. 26 (Jul. 2, 2009).  LBIE is the U.K. broker-dealer affiliate of Lehman Brothers Holdings Inc (LBHI), and served as a prime broker to various hedge funds.  On September 15, 2008, LBHI filed a petition in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of the United States Bankruptcy Code.  Subsequently, 18 additional affiliates of LBHI filed petitions in the United States Bankruptcy Court also seeking relief under Chapter 11.  For more on the LBHI bankruptcy see, “Lehman Brothers Holdings and Certain of its Subsidiaries File for Bankruptcy Protection,” The Hedge Fund Law Report, Vol. 1, No. 21 (Sep. 22, 2008).  Also on September 15, 2008, LBIE was placed into administration in the U.K.  The U.K. court has since appointed several partners of PricewaterhouseCoopers (PwC) as joint administrators of the LBIE estate.  When LBIE collapsed, the assets of its hedge fund clients were frozen, and for such hedge funds, retrieving those assets has been a long and tortuous process.  Reportedly, some hedge funds have collapsed based on their inability to recover assets frozen at LBIE.  Others have had difficulty paying redemptions.  And at a minimum, hedge funds with assets frozen at the insolvent broker-dealer have been unable to deploy those assets for investment purposes.  To date, PwC has returned about $13 billion of the $32 billion in clients assets held at LBIE.  The Scheme is intended to improve and expedite the process of returning assets to affected clients.  On July 14, 2009, PwC issued a briefing note outlining the key points of the Scheme.  Our article attempts to cut through the thicket of cross-jurisdictional complexity in an effort to help hedge funds with assets tied up at LBIE answer a simple question: how can they get their money back?  To help answer this question, we discuss the background of the Scheme; Scheme approval process; who is eligible to file claims under the Scheme; how claims will be valued under the Scheme; netting; currency and tax considerations; an opt-out provision in the Scheme; when to expect disbursements; and the relationship of the Scheme to the related U.S. Securities Investor Protection Act proceeding.

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    Should Hedge Funds Purchase Unsecured Debt of Lehman Brothers Holdings Inc.? Key Legal Issues Impacting Returns

    Before the ink was dry on the Chapter 11 bankruptcy filing of Lehman Brothers Holding Inc. (LBHI) last September 15, hedge funds – at least those with relatively strong stomachs – were  evaluating LBHI debt as an investment opportunity.  Many had in mind the Enron precedent, in which hedge funds and others bought the energy company’s debt for cents on the dollar, and in some cases enjoyed a par recovery based on lawsuits against the energy company’s banks.  (However, the Enron precedent is distinguishable in important ways, as discussed in this article.)  Others saw value in Lehman’s substantial derivatives book, in particular, in the opportunity to step into the shoes of Lehman’s derivatives counterparties.  Over the months since the filing, an active market has developed in LBHI’s unsecured debt.  Those on the long side of that market anticipate that value may reside in two primary sources: (1) recovery from JPMorgan Chase & Co. (JPMorgan) on the theory that the bank, acting as LBHI’s clearing bank with respect to repurchase agreements (repos) and as a significant derivatives counterparty, demanded and received more collateral than it was entitled to in the two weeks prior to the filing, thereby hastening or even causing the bankruptcy; and (2) that the Barclays PLC miscalculated the amount it should have paid for LBHI’s U.S. broker-dealer business, thus resulting in too little consideration being paid to the LBHI estate.  With unsecured LBHI debt currently trading at around 15 cents on the dollar, hedge funds are taking a close look at the merits of these claims.  To facilitate the evaluation by hedge funds of those claims, this article explores JPMorgan’s relationships with Lehman, the seizure by JPMorgan of LBHI collateral, potential remedies that may lead to recovery of some or all of that collateral, the relevance of the Enron precedent, the sale of the U.S. broker-dealer business to Barclays, the potential effects of various outcomes on the perception of finality of asset sales in bankruptcy and potential other sources of recovery for holders of unsecured debt of LBHI.

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  • From Vol. 1 No.26 (Dec. 3, 2008)

    Lehman Debtors Propose Procedures to Unlock Value in “In The Money” Derivative Contracts

    Bankruptcy Court Judge James Peck will preside over a hearing in Manhattan today, December 3, in the consolidated bankruptcy cases of Lehman Brothers Holdings Inc. and certain of its subsidiaries (collectively, Debtors), concerning procedures proposed by the Debtors for the settlement or assumption and assignment of derivatives contracts that are, from the Debtors’ perspective, in-the-money (that is, contracts on which the Debtors are owed money) and that have not been terminated by the relevant counterparties.  We explain the operation of and law relevant to derivatives contracts in this context, and the mechanics of the proposed procedures.

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  • From Vol. 1 No.21 (Sep. 22, 2008)

    Lehman Brothers Bankruptcy: ISDA Issues

    The recent bankruptcy filing by Lehman Brothers Holdings Inc. has generated pressing and complicated questions for hedge funds. Among the most salient topics on the minds of many hedge fund lawyers and managers is how the Lehman filing will affect hedge funds who entered into trades with Lehman or an affiliate under the ISDA Master Agreement. More generally, even for hedge funds that do not have direct Lehman exposure, the filing raises questions about what happens when your counterparty to a trade documented on the ISDA Master goes into liquidation. Leading derivatives attorneys from law firm Sutherland have contributed an article to The Hedge Fund Law Report that addresses these timely issues.

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  • From Vol. 1 No.21 (Sep. 22, 2008)

    Lehman Brothers Holdings and Certain of its Subsidiaries File for Bankruptcy Protection

    In one of the first responses by a law firm to the bankruptcy filing by Lehman Brothers Holdings Inc. (Lehman Holdings), Willkie Farr & Gallagher LLP produced a memorandum highlighting some of the salient questions raised by the filing, including questions relating to the following topics: prime brokerage arrangements with Lehman Holdings subsidiaries; Lehman Holdings subsidiaries serving as lenders or administrative agents under credit facilities; Lehman Holdings subsidiaries as swap counterparties; and Lehman securitizations, participations and repurchase agreements. The memorandum, included in this issue of The Hedge Fund Law Report, should help hedge fund lawyers and managers ask the right questions as they evaluate their counterparty risk exposure in light of the Lehman situation.

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  • From Vol. 1 No.17 (Aug. 1, 2008)

    SEC Subpoenas Hedge Fund in Connection With Suspected Rumormongering

    In recent weeks, the SEC has subpoenaed more than 50 hedge fund advisers, seeking communications relating to their involvement in circulating false rumors intended to drive down the share prices of certain financial companies. According to some experts interviewed by The Hedge Fund Law Report, the SEC’s rumormongering investigation is unlikely to disrupt business as usual in the $2.5trillion hedge fund industry. Others, however, see the investigation as an effort by the agency to exert new powers over hedge funds. In any case, the SEC’s investigation has rekindled the long-running debate in the hedge fund legal community about how to determine when rumors fall on this or that side of anti-market manipulation laws and rules.

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