By Neil Behrmann

THE Lehman Brothers Holdings bankruptcy is a warning to investors who allow their brokers to hold their securities in nominee accounts.

Several major investors who dealt with the investment bank are suing the Receiver of Lehman because the firm hasn't returned their securities. Estimates of the securities that were held by Lehman exceed US$25 billion.

The lesson for investors is that they should demand that their brokers register any bonds and shares purchased in their own individual or corporate names. The securities should then be held in safe custody in case the broker folds.

Brokers should provide clients with written documentation stating that their securities in nominee accounts are segregated and that they are not loaned to financial institutions, hedge funds or others or used as collateral for any other transactions.

Several legal actions against Lehman, previously rated as one of the top brokers, illustrate the potential dangers. Although the assets may eventually be returned, the time delays and legal costs are a serious disadvantage for investors.

Staff of Lehman Brothers International (Europe), or LBIE, and other European creditors have vehemently protested over the transfer of an estimated US$8 billion from Lehman's London European unit to the head office shortly before the New York holding company declared bankruptcy. PricewaterhouseCoopers (PwC), the administrator of Lehman's European operation, has demanded that the US head office repay the money.

British Prime Minister Gordon Brown has also pleaded that Lehman's foreign staff and creditors be repaid.

In an objection to Judge James Peck of the United States Bankruptcy Court, Southern District of New York, GLG, the large listed London hedge fund firm, is seeking repayment of assets from Lehman.

Lehman was one of the prime brokers of GLG and ironically also has an 11 per cent stake in the hedge fund company. Although Barclays Capital has purchased Lehman's New York investment bank, GLG contends that the sale fails to protect the interests of the creditors of LBIE.

'In particular, certain assets that may be included as part of the sale to Barclays may have been misappropriated (by Lehman) in advance of their bankruptcy filing,' alleges GLG in court documents. GLG states that it has filed the objection to ensure that LBIE, its administrators and LBIE's creditors can 'recover the full amount of cash that may have been improperly taken'.

Tony Lomas, who is heading the PwC team and who also handled the administration of Enron in Britain, was quoted in The Sunday Times as alleging that Lehman was 'as close to a mirror image as you could get' to the Enron case.

The similarities are 'the complexity of the trading transactions, the interdependencies of the group companies, and the sweeping of cash into a holding company account, leaving subsidiary companies empty of cash at the point of collapse', he said.

New York hedge funds that have taken action include Bay Harbour Management and Amber Capital Investment Management.

Bank of America (BOA) has also sued three Lehman Brothers Holdings units to recover around US$469 million, including interest which was provided as collateral for derivative transactions.

The lawsuit in New York State Supreme Court states that 'although the transactions were terminated on September 15, 2008 . . . the Lehman Entities have refused repeated demands to return the collateral to BOA'.

A group of unsecured creditors stated in a filing in federal bankruptcy court in New York that about US$17 billion in Lehman cash and securities was being held at JPMorgan as collateral for loans.

In their claim, the creditors' group alleges that JPMorgan 'withheld US$17 billion in excess assets' from Lehman Brothers 'in the days just prior to the bankruptcy filing'.

This article was first published in The Business Times on October 06, 2008.