The bankruptcy of

US investment bank Lehman Brothers has sent shockwaves through the wealth management industry as investors who used the Wall Street firm as a platform to trade their assets could be left empty-handed.

A large shareholder in UBS, the UK investment firm Olivant, still has not been able to recover its stake in the Zurich-listed bank as a result of the bankruptcy of Lehman Brothers, the US investment firm that acted as a temporary holder of thousands of firms’ shares.

A person familiar with the Olivant case told WealthBriefing that the firm was among “thousands” of investors who face the daunting task of trying to unravel what has happened to securities they may have transferred to Lehman Brothers in its role as a prime broker.

The saga adds to problems already experienced by investors who may have lost all or some capital via Lehman-backed structured products.

Lawyers at Withers, the private client law firm, told WealthBriefing that the chances of investors getting their shares back depends on whether Lehman employed its “right of use” powers over shares that were transferred to its prime brokerage. If the

US firm did use this power, then it became the legal owner of the shares and original investors are in the position of unsecured creditors.

Olivant held a 2.8 per cent stake in UBS and its stake was placed into an account with Lehman Brothers, which has lent out these shares. Since the collapse of Lehman in September, however, getting hold of the Olivant stake has been difficult.

It is normal practice for institutional investors such as pension funds or life insurance firms to lend out their stocks via prime brokers to earn a fee. When stocks are lent out, the original owner of the share will lose their voting rights on such shares for the interval they are lent out.

At a closed-doors meeting at the O2 Dome centre in

London’s Dockland district last Friday, creditors of Lehman Brothers met with the investment bank’s administrators, PriceWaterhouseCoopers, to discuss the situation.

“Until administrators [PwC] are able to unwind all the affairs of Lehman, it remains unclear where that shareholding of Olivant actually is,” a person familiar with the matter told WealthBriefing.

Thousands of investors face the laborious task of tracking down their assets that had been handled by Lehman Brothers. Olivant was hardly unique in its plight, the person said.

UBS declined to comment on the matter. Olivant also declined to comment.

As a tragic footnote to this unfortunate episode, Olivant partner and chief operating officer, Kirk Stephenson, died on 25 September after he was involved in a railway accident outside

London.

The National Association of Pension Funds, whose members oversee a total of about £800 billion of assets, said its members had not raised the Lehman Brothers case as a specific issue. However, it was looking to help pension funds calculate what sort of counter-party risk they might face, a NAPF spokesman told WealthBriefing.

A key issue to establish is whether Lehman exercised its “right of use” over shares or not, said Roberto Moruzzi, litigation partner at Withers.

With this right, the investor “authorises the prime broker to borrow, lend, charge, hypothecate, dispose of or use for its own purposes the securities invested by transferring the securities to itself (or to another person) without giving notice of the transfer to the investor”, he said.

"The significance of this is that if the “right of use” is exercised by the prime broker, title in the securities invested will pass to it and, in the event of its insolvency, the investor is simply left as an unsecured creditor with a right to receive equivalent securities or cash to the same amount,” Mr Moruzzi said.

“The amount it will receive from the formal insolvency procedure will then entirely depend on realisations made by the administrator or liquidator as against what the total value of other accepted unsecured claims is,” he said.

"If, however, the 'right of use' provision has not been exercised by the prime broker, the investor has a proprietary claim over its securities invested - he still owns them, and can ask for their immediate return,” Mr Moruzzi said.

“In the case of Lehmans, the administrators have at this early stage been prepared to return such securities on provision by the investor of a bank-backed indemnity," he added. 

Withers colleague Rosalyn Breedy, added, that all authorised and regulated institutions [such as Lehman] should have in place proper systems and controls to what trades it has outstanding and need to be settled.

"Prospective clients should perform due diligence on any organisation where they propose to expose themselves to counterparty risk," she said.

Bear Stearns, the bank that was taken over by JP Morgan earlier this year after suffering heavy losses, faced a similar situation to Lehman but JP Morgan quickly acted to protect clients’ market positions, Ms Breedy said.