SEPTEMBER 17, 2008


LEHMAN BROTHERS HOLDINGS, INC.’S BANKRUPTCY FILING

RAISES PRESSING ISSUES FOR HEDGE FUNDS

On September 15, 2008, Lehman Brothers Holdings, Inc. (Lehman Holdings and, with its subsidiaries, Lehman) initiated Chapter 11 bankruptcy proceedings with the United States District Court for the Southern District of New York. In its filing, Lehman Holdings listed total bank and bond debt of approximately $768 billion and assets worth approximately $639 billion. The case, which involves the largest bankruptcy to date in US history, will be heard by Judge James M. Peck.

As of the time of this publication, the US subsidiaries of Lehman Holdings, which include Lehman Brothers, Inc. (its principal US broker-dealer) (LBI) and Neuberger Berman Holdings, LLC, have not joined the bankruptcy filing.

The bankruptcy filing has already severely affected foreign subsidiaries of Lehman Holdings. UK regulators have placed several of the UK subsidiaries of Lehman Holdings in administration with PricewaterhouseCoopers as administrator. A key UK subsidiary likely to be liquidated is Lehman Brothers International (Europe), Lehman Holdings’ principal European broker-dealer. Additionally, the Australian Securities Exchange suspended the “market participant” status of Lehman Brothers Australia Limited, Lehman Holdings’ Australian subsidiary, after all third-party clearers terminated their clearing services for the company.

Yesterday, Lehman Holdings’ two Japanese subsidiaries filed for bankruptcy in Tokyo District Court with 4 trillion yen ($38 billion) in combined liabilities, the country’s second-largest collapse since World War II. Japan’s Financial Services Agency and the Tokyo Stock Exchange have ordered Lehman to suspend its Japanese operations. For at least the next nine days, the firm will only be permitted to trade to execute existing contracts and to recover client assets. Further, Lehman has ceased to trade on the Hong Kong Securities Exchange and the Hong Kong Futures Exchange until further notice.

Given the scope and complexity of Lehman’s operations, clients may be affected in multiple ways, including, among others:

Prime Brokerage Arrangements with LBI or Other Subsidiaries. Clients of LBI’s prime broker services should consider whether they should transfer their securities holdings from LBI, whether such securities would be frozen if LBI also filed for bankruptcy and whether any securities hypothecated by Lehman Holdings or its subsidiaries as loan collateral might be claimed by creditors of Lehman Holdings. Clients should note that the Securities Investor Protection Corporation (SIPC) maintains a special reserve fund authorized by Congress to protect prime broker investor assets in the event of insolvency. On September 15, 2008, SIPC issued a statement that use of the reserve account is currently unnecessary as all customer cash and securities are accounted for.

Lehman Securitizations, Participations and Repurchase Agreements. Clients that invest in Lehman-sponsored securitizations (or are party to any participation and repurchase agreements) should consider whether the pending insolvency proceedings will disrupt the administration of their arrangements and whether such arrangements should therefore be amended. For example, Lehman was one of the largest US dealers in repurchase agreements. As such agreements can fall within the safe harbor provisions of the US Bankruptcy Code, a non-debtor party could be eligible to terminate a repurchase transaction without regard to the protection Lehman would otherwise be granted.

Lehman as a Swap Counterparty. Clients with outstanding swap and derivatives positions with Lehman entities should consider whether to novate or terminate existing transactions, even if the applicable counterparties are otherwise solvent. Counterparties should consider that existing guarantees from Lehman Holdings will have little (if any) value, a fact which may ultimately trigger a credit support default pursuant to a negotiated or “deemed” Master Agreement. All swaps and derivatives are subject to the safe harbor provisions of the US Bankruptcy Code, which entitles counterparties to close out and net transactions without regard to certain protections that would otherwise be enjoyed by Lehman. Posted cash and securities for swaps and derivatives transactions may also present additional issues for consideration.

Lehman as a Lender or Administrative Agent Under Credit Facilities. Clients with a lending relationship with Lehman should consider whether Lehman Holding’s bankruptcy proceedings will disrupt the administration of their credit facilities (eg, the issuance of letters of credit) and the enforceability of the relevant Lehman Holdings subsidiary’s obligation to lend, should it join Lehman Holdings in bankruptcy.

Lehman’s global situation is rapidly evolving. We will continue to provide you with legal updates as events progress.