SIPA Trustee for Lehman Brothers Inc. Files Preliminary Investigation Report: Lessons Learned and Recommendations to Protect Broker-Dealer Customers

NEW YORK, Aug. 25 /PRNewswire/ -- James W. Giddens, the Trustee for the $110 billion liquidation of Lehman Brothers Inc. (LBI) under the Securities Investor Protection Act (SIPA), today issued his Preliminary Investigation Report on the failure of LBI and recommendations for protecting customers in broker-dealer liquidations.

Mr. Giddens commented:  "The Securities Investor Protection Act was designed to protect public customers in the event of a brokerage firm collapse.  A disaster on the scale of Lehman Brothers was never contemplated, but for the most part SIPA worked well. Under the most challenging circumstances, SIPA enabled the nearly seamless transfer of 110,000 accounts with $92 billion in assets to solvent broker-dealers – giving the vast majority of Lehman's U.S. brokerage customers access to their property and ability to trade at a critical time for the financial markets."

The report also says that because Lehman Brothers had not prepared a pre-liquidation disaster plan, concrete provisions for the mechanics of asset transfers were lacking and contributed to the chaos of the Lehman bankruptcy.  To avoid a "second Lehman" and protect customers in future SIPA liquidations, the Trustee's report makes eight recommendations that could be implemented by regulation, industry agreement or legislation.

The SIPA Trustee's Preliminary Investigation Report and Recommendations were prepared by his counsel, Hughes Hubbard & Reed LLP, and filed with the U.S. Bankruptcy Court for the Southern District of New York.  Among the key findings:

• Prior to the liquidation process, regulators and Lehman's internal compliance function largely did their jobs in supervising LBI's basic operations as a broker-dealer.
• During normal operations, LBI was generally in compliance with regulatory requirements and financial responsibility and customer segregation rules.
• For the most part, SIPA worked well.  At a time of great tumult in the financial markets, the provisions of the SIPA statute enabled the nearly seamless transfer of assets representing the vast majority of customer accounts, from Lehman to other broker-dealers.  Regrettably, not all LBI customers avoided loss or disruption, and remaining claims are being administered under the largest and most complex SIPA claims process in history.
• Most LBI customer property was intact and accessible as envisaged by the regulations, particularly in the United States.  Obtaining property that was or should have been held in foreign depositaries proved more challenging.
• As detailed in the report, the Trustee has been disappointed in the performance and attitudes of many entities that hold LBI property or information. The deeds show a pattern of delay, incomplete information and creation of obstacles. Parties have seemed all too willing to take extreme positions in order to claim a right under what was intended to be customer property or to withhold property clearly belonging to the LBI estate.  This has greatly hindered the Trustee's work, resulting in significant added costs and frustrating SIPA's underlying goals. 

"After any disaster there are practical lessons to learn," Giddens added.  "The brokerage industry seems to have forgotten that its success or failure still depends on the confidence of customers. The sense that customers will be protected and dealt with fairly ought not to be eroded through narrow self-interest." 

The Trustee's preliminary report makes eight recommendations for avoiding a "second Lehman":

• Pre-liquidation disaster planning, including a "living will", which would require each broker-dealer to have in place an up-to-date liquidation plan that could be monitored by regulatory authorities.
• Robust pre-liquidation negotiations and provisions on the mechanics of asset transfers, including access to assets, information systems and people.
• Balancing clearing banks' rights and broker-dealers' obligations in order to prevent denial of access to information screens and seizure of what should be segregated customer property.
• Study of clearing agencies' emergency rules, operations and consequences.
• Reconsideration of unitary fund of customer property in favor of funds for different types of accounts.
• Increasing the Securities Industry Protection Corp.'s financial resources, borrowing authority and flexibility.
• Provisions for liquidation of collateral and return of excess or marking to market to cure deficiencies.
• Rational rules for unwinding outstanding non-customer financial transactions.

SIPA requires the Trustee to investigate and report the financial condition and business affairs of the debtor, in this case LBI. A final report will be released at the conclusion of the liquidation proceedings.  Today's filing is a preliminary report and can be found at www.lehmantrustee.com.

The information in this statement does not apply to any other Lehman entity, including separate insolvency proceedings involving Lehman Brothers Holding, Inc. (LBHI) and Lehman Brothers International (Europe) (LBIE).

SOURCE Office of the Trustee of Lehman Brothers Inc.