Hedge Funds Battle To Save Billions From Lehman (LEH) Bankruptcy

Several hedge funds have initiated legal action against PricewaterhouseCoopers, Lehman Brothers’ European administrator, in a bid to recover up to $40 billion in assets which have been frozen as a result of the firm’s declaration of bankruptcy. FT:

RAB Capital sued in the UK High Court this week demanding the return of $50m held by the failed bank on behalf of one of its smaller funds.

RAB failed to accelerate the hearing of the case, which is being followed by other funds owed money by Lehman, but was continuing with the action.

However, some hedge funds may find they become general creditors of Lehman as PwC, the administrators, disclosed that they believed the bank’s prime brokerage had used about $22bn of the collateral held in trades for its own cash-raising operations in a practice known as rehypothecation. This allows the prime broker to re-lend client securities held as collateral.

The problem for Lehman, or PwC as the case may be, is that RAB had an agreement with Lehman which stipulated that RAB assets could not be used for rehypothecation. Several other funds are in a similar position, and will watch the outcome closely.

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