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Supplementary Report to Creditors by wuzhengqin



ACN 066 797 760

18 May 2009

S. J. Parbery & N. G. Singleton
Joint and Several Voluntary Administrators


This Supplementary Report has been prepared by the                  In considering the options available to creditors and
Administrators to provide information to creditors in relation to   formulating our recommendation, we have necessarily
two proposals for a Deed of Company Arrangement which have          made forecasts in respect of likely asset realisations and
been submitted to them since the meeting of creditors held on       total creditor claims. These forecasts and estimates may
30 March 2009 and subsequent to our prior report dated 19           change as asset realisations progress and claims are
March 2009. We have not sought to duplicate information             received from creditors. Whilst the forecasts and estimates
contained in our report dated 19 March 2009. Accordingly, this      are the result of our best assessment in the circumstances,
Supplementary Report should be read in conjunction with our 19      creditors should note that the ultimate deficiency, and thus
March Report (together referred to as the “Reports”).               the outcome for each creditor, could vary from the
                                                                    information provided in the Reports
In reviewing the Reports, creditors should note the following:
                                                                    In considering the options available to creditors and
     The statements and opinions given in the Reports are           formulating our recommendation, we have necessarily
     given in good faith and in the belief that such statements     made assumptions with regard to the possible liability due
     and opinions are not false or misleading. Except where         to     certain   contingent     creditors,   namely    those
     otherwise stated, we reserve the right to alter any            entities/persons    that    have     commenced      or   are
     conclusions reached, on the basis of any change in, or         contemplating commencing, proceedings against LB
     addition to, information which may become available to us      Australia for, amongst other things, misleading and
     between the date of this Supplementary Report and the          deceptive conduct in offering for sale certain financial
     date of the adjourned Second Meeting of Creditors.             products. At no time should any aspect of the Reports be
                                                                    considered an admission of any liability to any of these
     Neither PPB nor any member or employee thereof                 entities/persons.     LB Australia has defences to all
     undertakes responsibility in any way whatsoever to any         proceedings and will vigorously defend any and all actions
     person in respect of any errors in the Reports arising from    brought against it. The only true means to determine
     incorrect information provided to us.                          whether such liability exists, and, so the quantum of same,
                                                                    is through the running of legal proceedings.             Any
     Our investigations and analysis have been constrained due      assumptions therefore made with respect to liability in the
     to limited access to Lehman Global information. Whilst we      Reports are for analytical purposes only.
     have been granted an extension of time in which to
     prepare the Reports, there remain a number of issues           The major asset of LB Australia which is available to meet
     where certain assumptions have been required. Where            creditor claims is a proprietary book consisting of corporate
     appropriate, we have highlighted these assumptions             bonds and CDO’s (Collateralised Debt Obligations). The
     throughout the Reports, and to the extent necessary, have      value of these assets is difficult to determine due to a
     considered the possible impact of same when making our         severe lack of liquidity in financial markets at present.
     recommendation to creditors.

         Important Notice to the Reader (cont)

     Consequently, both the recoverable value of assets, and
     the value of potential contingent claims, will be materially
     impacted by future market changes (both improvements
     and deteriorations).

     Proposals for Deeds of Company Arrangement have been
     developed by Lehman Brothers Asia Holdings Limited
     (Provisional Liquidators Appointed)(“LB Asia Holdings”)
     and Gowings Brothers Limited. Details of the Proposals
     are discussed at Section 4 of this Supplementary Report.

     Creditors should obtain their own advice about the effect of
     the proposed Deeds of Company Arrangement on their
     rights as creditors.       However, section 444D of the
     Corporations Act sets out the effect of a Deed of Company
     Arrangement on the creditors of a company. It is the
     Administrators' view that the parties who would be bound
     by the Deed of Company Arrangement include all actual
     and contingent creditors of LB Australia, (including all
     persons or entities that have contingent or unliquidated
     claims), irrespective of whether those parties abstain from
     voting, vote in favour of, or vote against the Deed.

If creditors and claimants are unsure as to how the
proposed Deeds are to operate, require clarification in
respect of their operation, or have any other queries in
relation to the Reports generally, they should obtain legal
and other professional advice they consider appropriate,
and can contact Marcus Ayres of our office by:

Email: Telephone: +61 (0)2 8116 3295


Section                                                 Page

          Abbreviations                                  5

          Annexure Listing                               6

          Listing of Figures                             7

  1       Second Meeting of Creditors                    8

  2       Estimated Financial Position at 12 May 2009    11

  3       Revised Liquidation Alternative                24

  4       Deed Proposals                                 27

  5       Comparison of Liquidation and Deed             39

  6       Alternatives Available to Creditors            44

  7       Administrators Remuneration                    46

          Execution Page                                 47


ASIC means the Australian Securities and Investments                  LBA Finance means Lehman Brothers Australia Finance Pty
Commission                                                            Limited (Administrators Appointed)
ASIA means the Deed proposal offered by LB Asia Holdings              LB Granica means Lehman Brothers Australia Granica Pty
ATO means the Australian Taxation Office                              Limited (Administrators Appointed)
AUD means the Australian Dollar                                       LBA Holdings means Lehman Brothers Australia Holdings Pty
Australian Lehman Group means Lehman Brothers Australia               Limited (Administrators Appointed)
Holdings Pty Limited and its subsidiary and related companies         LBAM means Lehman Brothers Asset Management Limited,
Bond means a debt security issued by a borrower to the                formerly known as Grange Asset Management Limited
bondholder who is a creditor                                          LBHI means Lehman Brothers Holdings Inc, the ultimate US
CDO means Collateralised Debt Obligation which is a financial         Holding Company that has filed a voluntary petition for
instrument                                                            reorganisation pursuant to Chapter 11 of the Bankruptcy Code
Collateral means a security interest held over identified             of the United States
securities and other assets, available to the issuer of securities    LBIE means Lehman Brothers International (Europe)
Committee means the Committee of Creditors elected at the             LBSF means Lehman Brothers Special Financing Inc
first meeting of creditors                                            LBTC means Lehman Brothers Treasury Co BV (In Bankruptcy)
Company means Lehman Brothers Australia Limited                       LCF means the pool of funds set aside under the proposed
Contingent Litigation Creditor means entities or persons that         Deeds and which is to be disbursed to Contingent Litigation
have commenced, or are contemplating commencing,                      Creditors
proceedings against LB Australia for, amongst other things,           NPV means Net Present Value
misleading and deceptive conduct in offering for sale certain         PWC means PriceWaterhouseCoopers, the Provisional
financial products                                                    Liquidators of various European Lehman entities, including LBIE
Corporations Act means the Corporations Act 2001                      Provisional Liquidators means the Provisional Liquidator of the
Deed means Deed of Company Arrangement or “DOCA”.                     Lehman Brothers Asian Entities
Federal Court means Federal Court of Australia                        Repo means Repurchase Agreement
Gowings means Gowings Brothers Limited                                SCB means Standard Chartered Bank Limited
General Deed Fund means the pool of funds set aside for the           SCRAPL means Structured Credit Research and Advisory
benefit of Ordinary Creditors with quantifiable crystallised claims   Proprietary Limited
LB Asia means Lehman Brothers Asia Limited (Provisional               Supreme Court means the Equitable Division of the Supreme
Liquidators Appointed).                                               Court in each applicable State of Australia
LB Australia means Lehman Brothers Australia Limited                  USD means United States Dollar
(Administrators Appointed) formerly known as Grange Securities
LB Inc means Lehman Brothers Incorporated



A   Notice of Meeting                               8

B   Proxy and Proof of Debt Forms                   8

C   Summary of Receipts and Payments to 12          12
    May 2009

D   Estimate of Return to Each Class of Creditor    25
    – Liquidation

E   LB Asia Deed Proposal                           27

F   Gowings Brothers Limited Deed Proposal          27

G   Distribution of General Deed Fund - Asia        32

H   Distribution of General Deed Fund - Gowings     32

I   Timing of Returns to Creditors – Liquidation    37
    and Deed Proposals

J   Schedule of Administrators Remuneration         46


                                                              16   Comparison of Returns to Contingent Litigation   32
No.   Description                                      Page        Creditors under respective Deeds

1     Statement of Financial Position at 12 May 2009    11    17   Estimated Returns to each class of creditor      33
                                                                   under Deed Proposals
2     Estimated Return from Intercompany Debtors        12
                                                              18   Comparative Return to Creditors – Low Value      39
3     Summary of Proprietary Book Position              13
                                                              19   Comparative Return to Creditors – High Value     39
4     Portfolio Receipts                                16

5     Listing of Other Assets                           17

6     Outstanding Employee Entitlements                 18

7     Related Party Creditors                           18

8     Summary of LBIE Loan Account                      19

9     Range of Returns under Liquidation Scenario       25

10    Estimated Timing of Dividend Payments             26

11    Effect of Related Party Creditor Claims –         26

12    Key Features of Deed Proposals                    27

13    Summary of LCF Operation                          29

14    LB Asia – Distribution of LCF                     31

15    Gowings – Distribution of LCF                     31


1.1     EVENTS AT SECOND MEETING                                    As a consequence, creditors concurred that an adjournment of
                                                                    the Second Meeting of Creditors would be appropriate, and
A second meeting of creditors of LB Australia was held on 30        resolved that the meeting be adjourned to 29 April 2009.
March 2009 to allow creditors an opportunity to consider various
alternatives for the future of LB Australia, namely:                Subsequent to the 30 March 2009 meeting, an additional
                                                                    proposal for a Deed of Company Arrangement was provided to
      To end the Administration;                                    the Administrators by Gowings.

      To wind up LB Australia and appoint Liquidators; or           It became apparent to the Administrators that the two proposals
                                                                    would not be sufficiently developed to allow them to provide an
      To resolve that LB Australia execute a Deeds of Company       appropriate level of reporting to creditors prior to the 29 April
      Arrangement.                                                  meeting. Accordingly, the second meeting of creditors was
                                                                    reconvened on 29 April 2009 and further adjourned to
Subsequent to finalising our Report to Creditors dated 19 March     Wednesday 27 May 2009.
2009, we received advice from the Provisional Liquidators
(KPMG) of LB Asia Holdings that the Deed proposal initially         1.2    MEETING DETAILS
formulated, and which was discussed in the Report at length,
was being revised in order to overcome a number of perceived        The Adjourned Second meeting of Creditors for LB Australia will
legal hurdles in Hong Kong.                                         now be held at 10:00 a.m. on Wednesday, 27 May 2009.

Consequently, we commenced discussions with the Provisional         We have attached at Annexure A Notice of Meeting and at
Liquidator’s representatives in order to gain an understanding of   Annexure B, Proxy and Proof of Debt forms.
the proposed changes. We formed the view that the changes
being contemplated by the Provisional Liquidators were              This meeting will be held at the following location:
sufficiently material to warrant an adjournment of the Second
Meeting of Creditors in order to allow the Administrators           Clayton Utz
sufficient time to consider and report to creditors on the impact   Level 34
of those revisions for creditors.                                   1 O’Connell Street
                                                                    Sydney NSW 2000
As a result of the above, we briefed creditors at the Second
Meeting of Creditors on a number of matters, including
preliminary discussions had with the Provisional Liquidator’s
representatives and our understanding of the Deed revisions.

  1         Second Meeting of Creditors (cont)

1.3     ALTERNATIVES AVAILABLE TO CREDITORS                           We discuss the Administrators’ remuneration in further detail at
                                                                      Section 7 of this Supplementary Report.
At the creditors meeting to be held on Wednesday, 27 May 2009
at 10:00 a.m., the creditors of LB Australia will be able to          1.5    COMMITTEE
consider and vote in respect of the following alternatives:
                                                                      At the forthcoming meeting, creditors may elect a new
      To end the Administration;                                      Committee to represent the general body of creditors (in view of
                                                                      the existing Committee being dissolved upon the happening of
      To wind up LB Australia and appoint Liquidators; or             LB Australia being placed into liquidation or entering into a
      To resolve that LB Australia execute one of the proposed
      Deed of Company Arrangements.                                   We are of the view that there is utility in having a Committee
                                                                      structure in place under both the Deed and liquidation
1.4     ADMINISTRATORS’ REMUNERATION                                  alternatives in view of the likely need to discuss, amongst other
                                                                      matters, the asset realisation programme at regular intervals.
In addition to our remuneration for the period 26 September
2008 to 6 February 2009 which has been approved by the                1.6    SUBMISSION OF PROOFS OF DEBT AND PROXIES
Committee, at the Second Meeting of Creditors, creditors
approved payment of our remuneration for the period 7 February        Any creditor who has already lodged a proof of debt for voting
to 13 March 2009 in the amount of $343,936.90 plus GST (a             purposes will not need to complete a new proof where the level
summary of time spent in respect to those fees was attached at        of their debt remains unchanged.
Annexure J of our 19 March Report).
                                                                      Proxy forms lodged by creditors for the first meeting held on 9
At the reconvened Second Meeting of Creditors, we will be             October 2008 cannot be used for the second meeting.
requesting that creditors consider, and if thought appropriate,
approve our remuneration as follows:                                  Proxy forms lodged by creditors for the second meeting held on
                                                                      30 March 2009 survive the adjournment and do not need to be
       For the period 14 March to 8 May 2009 in the amount of         replaced unless:
       $641,024.75plus GST; and
                                                                             Another person is being appointed to act as proxy; or
       For the period 9 May to the end of the Administration in the
       amount of $450,000.                                                   You had previously issued a special proxy and are now
                                                                             changing your voting instructions or the resolutions in
                                                                             respect of which you gave instructions have changed.

   1        Second Meeting of Creditors (cont)

       Having regards to a second Deed Proposal been              1.7      VOTING RIGHTS
       received, all creditors should reconsider any special
       proxies given.                                             Resolutions at the second meeting of creditors will be carried if:

Creditors who are now unable to attend the adjourned meeting            A majority of the creditors voting (whether in person, by
and wish to be represented should ensure that a proxy form, or          attorney or by proxy) vote in favour of that resolution; and
power of attorney (or evidence of appointment of the company
representative) is completed.      In accordance with the               The value of the debts owed by LB Australia to those voting
Corporations Act, all corporate creditors are also required to          in favour of the resolution are more than half of the total
submit a proxy should they wish to be represented at the                debts owed to all creditors voting at the meeting.
                                                                  Prior to the meeting, the Chairman will apply the following
Creditors are requested to return the completed proxy form (and   approach to adjudicating on the admission of creditor claims for
if applicable, proof of debt form) which are attached as          voting purposes:
Annexure B to this Supplementary Report, by no later than 4:00
p.m. on Monday, 25 May 2009 to one of the following:                    Each proof of debt will be considered individually;

By Facsimile: +61(0)2 8116 3111                                         Where claims are contingent or unliquidated in nature, the
                                                                        Chairman will consider the basis of that contingent or
By email:                                        unliquidated claim and the extent to which that claim has
                                                                        been particularised; and
By Mail:      Level 46, MLC Centre
              19 Martin Place                                           With respect to related parties that intend to vote at the
              Sydney NSW 2000                                           second meeting, the Chairman will allow such claimants to
                                                                        vote in accordance with general ledger balances obtained
              Attention: Ms Carol Pang                                  from LB Australia’s accounting records unless that company
                                                                        can otherwise show that such amounts are incorrect by
We note that proxies received after 4:00 p.m. on 25 May                 providing supporting documentation.
2009 may not be accepted to vote at the meeting.
                                                                  Any adjudication of proofs for voting purposes at the
We ask that if you submit your proxy and proof by facsimile or    second meeting of creditors is distinctly different to any
electronic means, that you forward the original copy of same      adjudication made at a later stage by a Deed Administrator
within the following 72 hours.                                    or a Liquidator for dividend purposes.


The estimated financial position of LB Australia at the date of                                                                             Administrators ERV

our appointment was discussed in our 19 March 2009 Report                                                                                    Low             High
(Section 7 page 28).                                                                                                                        ($’000)         ($’000)

Since that date, there have been a number of changes to LB              Assets
Australia’s financial position which are discussed below.                 Cash Balance at Bank                                      2.2.1     84,151          84,151
Consequently, the estimated return to Creditors under both the            Debtors                                                   2.2.2     11,588          33,610
Liquidation and Deed scenarios has also changed and is                    Stock                                                     2.2.3     31,111          97,663
discussed in greater detail at Sections 3 and 4 of this Report.
                                                                          Projected Income                                          2.2.4     15,466          26,071

2.1       STATEMENT OF ESTIMATED FINANCIAL POSITION                       Other Assets                                              2.2.5             Nil       6,103
                                                                        Estimated Total Assets                                               142,316         247,598
Set out at Figure 1 is a summary of the estimated financial             Liabilities
position of LB Australia as at 12 May 2009. This position
                                                                          Employee Entitlements                                     2.2.6       5,582           5,582
statement should be read in conjunction with the RATA summary
detailed at Figure 10 of our 19 March Report, and the respective          Trade Creditors                                           2.2.7       8,700           8,700
Notes at Section 2.2 of this Supplementary Report.                        Related Party Creditors                                   2.2.8    167,980         167,980
                                                                          Estimated Total Liabilities                                        182,262         182,262
It should be noted that the financial position of LB Australia has
been updated to reflect the following key movements:
                                                                        Net Surplus/(Deficiency)                                             (39,946)         65,336
      The realisation of assets subsequent to our appointment,            Contingent Assets                                         2.2.9   Unknown         Unknown
      including, coupon income earned on securities and the               Contingent Liabilities                                   2.2.10    625,575         625,575
      receipt of securities at maturity;
                                                                          Subordinated Creditor                                    2.2.11     87,494          87,494

      The revaluation of certain assets after accounting for further    Total Contingent & Subordinated                                      713,069         713,069
      information obtained subsequent to our 19 March Report;           Liabilities
                                                                        Net Surplus/(Deficiency) before                            2.2.12
                                                                                                                                            (753,015)       (647,733)
      The payment of certain costs and expenses in the                  administration costs
      administration such as the Administrators remuneration and       Figure 1 – Statement of Financial Position at 12 May 2009
      legal fees; and

      Further information surrounding the position of creditors.

  2       Estimated Financial Position at 12 May 2009 (cont)

2.2    NOTES                                                         Set out at Figure 2 is a summary of the revised estimates on the
                                                                     likely return from Intercompany Debtors.
2.2.1 Cash at Bank
                                                                                                                Book         Administrators ERV
We have attached at Annexure C a summary of the receipts
                                                                      Entity                                    Value         Low          High
and payments made in the administration for the period 26
September 2008 to 12 May 2009.                                                                                 ($’000)       ($’000)      ($’000)
                                                                      LB Inc                                          226           Nil           Nil
As you will note, we are holding approximately $84.15 million in      LB Asia                                      6,889            Nil           Nil
various term deposit and cash accounts.
                                                                      LBSF                                            527           Nil           Nil
                                                                      LBA Holdings                                40,489        5,668       11,741
2.2.2 Debtors
                                                                      LB Japan                                        145           Nil           Nil Intercompany Debtors                                          LBA Finance                                 43,104        4,741       20,690
                                                                      LBAM                                         1,179        1,179        1,179
As noted in our 19 March Report, LB Australia was due                                                             92,559       11,588       33,610
approximately $92.5 million from related parties. In particular,
the material debts due to LB Australia were $40.5 million from
LBA Holdings and $43.1 million from LBA Finance.                     Figure 2 – Estimated Return from Intercompany Debtors

                                                            Other Debtors
Following receipt of further information and further investigatory
work carried out in the intervening period to prepare this           Since our 19 March Report, we have recovered a further $1,639
Supplementary Report, we have been able to refine our                from external debtors.
estimates further in respect to the return likely to be received
from those two Companies. Whilst these revisions have been           We continue to confront difficulties collecting the remaining
conducted, we note that the return to creditors from these           external debtors (totalling circa $150,000). Consequently, and
companies remains highly contingent on the return from various       notwithstanding collection efforts continue, we have assumed for
Global Lehman Companies. In particular, we note that the             the purposes of this supplementary report that future external
return to creditors of LBA Finance continues to be uncertain         debtor recoveries will be nil.
largely because the available pool of assets is dependent upon
the recoverable value of Credit Default Swap contracts LBA
Finance entered into with LBSF (book value of $48.5 million).

    2            Estimated Financial Position at 12 May 2009 (cont)

2.2.3 Stock                                                                      AUD Bonds

As noted in our 19 March Report, LB Australia holds a variety of                       LB Australia currently holds 17 AUD denominated bonds in its
assets in its proprietary trading portfolio (Bonds, CDO’s and                          portfolio with a total face value of AUD27.15 million, the majority
Equities)                                                                              of which are subordinated debt issues by Australian Financial
                                                                                       Institutions (AFI’s). Most of these AFI bonds have “call” dates
Set out below is a summary of the composition of the proprietary                       ranging from 2009 to 2012, and as a result, subject to the state
portfolio along with our revised estimated returns on realisation:                     of capital markets, these bonds may be redeemed at face value
                                                                                       on the call date.
                                             Face          Administrators ERV
 Product                                     Value          Low           High         The remaining four bonds totalling AUD16.1 million were issued
                                            ($’000)        ($’000)       ($’000)
 AUD Bonds                                                                                A major Australian listed company, AUD10 million maturing
   Financial Institutions                         11,050      7,068        11,050         2012;
   Lehman Treasury                                 5,500             0             0
   Other                                          10,600      8,837        10,600         A foreign financial institution, AUD600,000 maturing 2010;
                                                  27,150     15,906        21,650
 CDO’s                                                                                    LBTC, 2 bonds totalling AUD5.5 million maturing 2011.
   Non Lehman Originated                     129,585         14,050        64,792
   Lehman Originated                              17,822             0      8,911      It is expected that all AUD denominated bonds held, except for
                                             147,407         14,050        28,983
                                                                                       those issued by LBTC, will realise face value upon maturity.
 Foreign Currency Bonds                           61,490             0             0
                                                                                       For the purposes of establishing High and Low ERV’s for this
 Other                                             3,500      1,155         2,310      Report, the following values have been adopted:
                                                  64,990      1,155         2,310
                                             239,547         31,111        97,663      Low ERV       External market valuation (provided by Nomura)
                                                                                                     less 10%.

Figure 3 – Summary of Proprietary Book Position
                                                                                       High ERV      Face value of the bond portfolio less AUD5.5
                                                                                                     million reflecting the face value of the two LBTC
We discuss below the results of our further enquiries and the                                        bonds.
impact on the estimated realisable value.

  2       Estimated Financial Position at 12 May 2009 (cont)

No value will be attributed to the LBTC bonds under either            High ERV      50% of the face value of the CDOs held. This
scenario until such time as information is received indicating a                    discount has been applied as the full extent of any
value expectation.                                                                  defaults and credit events underlying each CDO is
                                                                                    not yet known. The performance and ultimate   CDO’s                                                                     determinant of the amount of principal returned
                                                                                    from a CDO generally depends upon the ability of
“Non-Lehman” Originated CDOs                                                        the credit swap provider to meet its obligations,
                                                                                    together with the performance of a portfolio of
LB Australia currently holds 14 CDO’s in this category with a                       “reference” corporate credits. The ultimate return
total face value of AUD129.5 million. Maturities range from 2009                    to Creditors will rely on the future performance of
to 2016. Whilst a number of CDO’s have intermediate call                            these parties.
dates, it is unlikely any CDO will be called due to a lack of
refinancing opportunities.                                            The current market value has been provided as at 30 April 2009.

Whilst it has proved difficult to obtain full details of these        Lehman Originated CDO’s
transactions, including credit events, we are not aware of any
defaults relating to these assets. We also note that coupons are      The March 2009 Report to Creditors outlined in depth the steps
continuing to be received. However, external market values            required to unwind the Lehman transactions given the default of
reflecting deep discounts to face value highlight that the            the credit swap counterparty, LBSF. Lehman originated CDO’s
likelihood of being able to sell the CDO’s in the current market is   have subsequently ceased paying coupons.
extremely low. As coupons continue to be received, it would be
disadvantageous to creditors to attempt to sell the CDO’s in the      Pursuit of the unwinding of these transactions is continuing,
current market.                                                       albeit the US Trustee for each CDO is taking a conservative
                                                                      stance with respect to notification and approvals to act.
Unlike the Lehman originated CDO’s, there have been no                Ultimately, once the swaps are terminated in each transaction
defaults under the respective ISDA Agreements and as such,            (which removes the credit event risk), the relevant Trustee will
there is no opportunity to cancel the credit default swap and         hold the underlying collateral which may subsequently be
access the underlying collateral by unwinding the transaction.        distributed to CDO holders in specie. However, it is currently
                                                                      unclear whether the Trustees will take this action or alternatively
For the purpose of this Supplementary Report, the ERV’s have          hold the collateral plus accompanying coupon receipts to
been based upon the following:                                        maturity in order to allow for timing of any claims against the
                                                                      Trustees to be brought by for instance, LBSF.
Low ERV       Current Market Value less 30%

   2       Estimated Financial Position at 12 May 2009 (cont)

For the purpose of this Supplementary Report, the ERV’s have        As LBIE is in administration, and the likelihood of the repo being
been based upon the following:                                      unwound considered low, the nature of the assets on LB
                                                                    Australia’s books may need to be restated as an intercompany
                                                                    loan from LB Australia to LBIE. For this reason, the High and
Low ERV       Nil value given that there is no market for these     Low ERV’s applied to these assets has been set at nil.
              CDO’s together with the potential complexities and
              unknown timing in unwinding these transactions.       No income is being received by LB Australia on these bonds.

High ERV      50% of the face value of the underlying collateral    Other
              for Lehman originated CDO’s, taking into account
              the potential time to unwind the transactions and     LB Australia holds 3.5 million units in the Centro MCS 36
              impact upon market values of the underlying           Investment Trust. Trust assets are comprised of a portfolio of
              collateral.                                           mid-sized shopping centres across the USA.

Foreign Currency Bonds                                              The latest valuation of net asset backing per unit as at
                                                                    December 2008 was AUD0.66, resulting in a value of the holding
LB Australia’s holding of foreign currency bonds reflects           of AUD2.3 million. As the Trust is unlisted, liquidity is deemed
subordinated and hybrid equity instruments issued by Australian     low.
Trading Banks having an aggregate face value of $61.5m.
Maturities range from 2014 to 2053 with the current market          For the purposes of this Supplementary Report, the following
values evidencing deep discounts to face value.                     valuation basis has been utilised:

As highlighted in the March 2009 Report to Creditors, these         Low ERV       The value of the unit net asset      backing as at
foreign currency bonds appear to have been held by LBIE (in                       December 2008 less 50%,             reflecting the
administration) under a repo with other financial intermediaries.                 complexity of Centro’s position,      the economic
Following discussions with previous LB Australia staff, it has                    downturn in the United States and   illiquidity of the
been established that this was common Global Lehman Group                         security.
practice, with the funds raised from this arrangement not being
returned to the Company, but utilised within the Global Lehman      High ERV      The value of the unit net asset backing as at
Group. These transactions are the subject of further                              December 2008.
investigation which may necessitate a claim being made against
LBIE (which would offset any claim LBIE is making against LB

    2            Estimated Financial Position at 12 May 2009 (cont)

2.2.4 Future Estimated Income                                                      income has been generated for LB Australia as the bonds
                                                                                   are not currently held in LB Australia’s name.
Since commencement of the Administration, LB Australia has                         We have assumed on a worst case scenario that events of
continued to receive income on securities held in the portfolio. A                 default will cause certain holdings in the CDO portfolio to
summary of income received to 12 May 2009 is as follows:                           cease paying coupons and have applied a national 50%
                                                                                   discount to arrive at our low value estimate.
                                Income Earned      ERV Low       ERV High
                                   to Date                                      For the purposes of this analysis, we have included the non
                                                                                discounted projected income within the estimated balance of
 Product                           ($’000)         ($’000)        ($’000)
                                                                                assets available to be distributed to creditors. However, we note
 AUD Bonds                                   988       4,860          4,860     that this income is significantly dependent upon market
 CDO’s                                   6,376        10,606        21,211      conditions, particularly future credit events occurring to entities
 Foreign Currency Bonds                        0             0              0   referenced to our tranche holdings in the CDO’s.
 Other                                         0             0              0
                                         7,364        15,466        26,071

Figure 4 – Portfolio Receipts

We make the following comments in respect to this analysis:

      We have excluded AUD Bonds issued by LBTC to arrive at
      projected income balances.

      An assumed coupon has been utilised to calculate the future
      income on CDO holdings. In that regard, it has been
      necessary to make this assumption due to difficulty obtaining
      full details of the non-Lehman originated CDO’s.

      Actual and future income excludes those CDO’s originated
      by Lehman Brothers as those CDO’s are being unwound.

      We understand that Foreign Currency Bonds are subject to
      repurchase agreements undertaken by LBIE. As a result, no

     2            Estimated Financial Position at 12 May 2009 (cont)

2.2.5 Other Assets                                                                               As noted in our 19 March Report, we have flagged our
                                                                                                 interest in those monies with the Provisional Liquidator of LB
Other assets identified by the RATA and Company records are                                      Asia Holdings.
detailed below, along with an update on realisation efforts where
applicable (readers should also refer to our 19 March Report for                                 We have engaged KPMG to conduct a review of LB
background information where appropriate):                                                       Australia’s taxation position in an effort to ensure all liabilities
                                                                                                 to the Commissioner are captured (particularly withholding
                                                      Director     Administrators ERV            tax), and any potential recoveries (such as GST and carried
                                     Book Value        ERV          Low          High            forward tax losses) are recovered/effectively utilised.
                                       ($’000)        ($’000)      ($’000)      ($’000)
                                                                                                KPMG is in the process of finalising its advice to us in respect
 ASX Membership                              250             Nil          Nil        250        to this matter.
 Loan to Employees                         5,342             Nil          Nil           Nil
 PAYG Income Tax                             187             Nil          Nil           Nil   2.2.6 Employee Entitlements
 Investment in Subs                        6,471          5,824           Nil      5,824
                                                                                              As noted in our 19 March Report, we received a total of 18
 Prepaid Other                               394             209          Nil           Nil
                                                                                              claims from employees that were terminated on or about our
 Deposit Other                                   29           29          Nil           29    appointment. Total claims from these employees amounted to
 Deferred Tax Assets                      20,970             Nil          Nil           Nil   $6.7 million.
 Withholding Tax                             537             483          Nil           Nil
                                          34,180          6,545           Nil      6,103
                                                                                              Since receiving these claims, we have sought legal advice
                                                                                              regarding the respective entitlements due to these employees.
Figure 5 – Listing of Other Assets                                                            We have also held discussions with a number of employees and
                                                                                              have sought to correctly attribute liability to the appropriate legal
      The ASX Membership Fee relates to licensing arrangements                                entity. Consequently, the estimated entitlement position for
      and is held by ASIC. To date we have not made any                                       employees has changed as follows:
      progress recovering this fee, although we note our
      expectation that matters are likely to progress at the time
      custodian services are closed out.

      We are given to understand monies representing Investment
      in Subsidiaries ($5.8 million) are still being held by SCB in a
      suspense account with that bank.

    2           Estimated Financial Position at 12 May 2009 (cont)

                                                                    2.2.8 Related Party Creditors
 Claim Type                                Estimated Liability
                                                 ($’000)            In the previous two months we have been working in
 Wages                                                       14     consultation with the various external administrators of the
                                                                    Global Lehman Group to better estimate the amount due to the
 Payment in Lieu of Notice                                  233
                                                                    respective Lehman entities.
 Annual Leave                                               108
 Long Service Leave                                         109     We have set out in the table below the amount of claims filed to
 Retrenchment                                               644     date and our estimate on the actual amount likely to be due to
 Retention                                                 2,446
                                                                    those entities based on our investigations to date.
 Bonus                                                     1,936     Geographical Segment                No.   Claim      No.   Estimated
 Other                                                       92                                                                 Liability
                                                           5,582                                               ($’000)           ($’000)
Figure 6 – Outstanding Employee Entitlements                         Asia                                 6    141,848     6          141,848
                                                                     Australia                            1       5,813    1               5,813
Following from the above, we expect to admit $5.2 million as         Europe/United States                 4    114,230     8           20,319
priority creditor amounts (which are to be paid before unsecured
                                                                                                               261,891                167,980
creditors), and $400,000 as unsecured amounts.
                                                                    Figure 7 – Related Party Creditors
2.2.7 Trade Creditors
                                                                    At this stage it should be noted that whilst the above depicts our
We note that to date we have received claims from 56 creditors      best estimates, the circumstances of the intercompany
totalling $6.4 million at the time of writing. Whilst we expect     relationships are complex in nature.             Further, due to
(based on the quantum of claims made) that the unsecured            complications surrounding the accounting system maintained in
creditor pool will reduce slightly, given that 40% of the trade     Japan, data in Australia and Asia is out of “sync” with the United
creditor base are yet to file a claim we have conservatively left   States. As such, it has been difficult to verify certain aspects of
the estimated debts due to trade creditors at $8.7 million.         the various claims with accurate supporting ledger material. We
                                                                    have now approached the United States for certain of this data
                                                                    and are awaiting a response.

                                                                    Notwithstanding the above, we note that claims made to date
                                                                    generally reflect the accounting records of LB Australia, save

  2       Estimated Financial Position at 12 May 2009 (cont)

for a claim that has recently been made by LBIE and which we       We discuss in detail below the composition of the LBIE claim
discuss below.                                                     which is summarised as follows:

      LBIE Claim                                                    Component of Claim                       ($’000)
                                                                    Intercompany Account                      11,896
Subsequent to issuing our 19 March Report, we received a claim      Failed Trades                                213
from LBIE in the amount of $109,904,780. This claim is
                                                                    Contracted Trades Pending                 94,568
approximately $90 million higher than the amount disclosed in
LB Australia’s records and which was reflected in the Director’s    House Assets                                3,228
RATA.                                                                                                        109,905

                                                                   Figure 8 – Summary of LBIE Loan Account
The claim has not yet been finalised by the Administrators of
LBIE.      In that regard, the Administrators of LBIE have
highlighted the following reasons for being unable to lodge a           Intercompany Account
definitive claim:
                                                                   LB Australia conducted an intercompany account with LBIE
   The circumstances of the intercompany relationship are          which we understand was reviewed and reconciled between the
   complex in nature;                                              respective Financial Controllers on a monthly basis.      The
                                                                   records of LBIE reveal a net intercompany balance in favour of
   Insufficient time to update records having regards to the       LBIE which includes cash funding and cash settlements. For
   sheer volume of the inter-company transactions;                 example, LBIE provided clearance and settlement services for
                                                                   LB Australia principal and client activity in international
   Difficulty obtaining valuations of underlying securities with   securities. Other elements of the claim included recharges
   limited assistance from counterparties;                         within the Group for overheads.

   The volatility of current market conditions; and                The current estimate of the amount of the debt attributable to
                                                                   intercompany transactions (cash clearance and settlements) was
   The scale and complexity of the administration of LBIE.         AUD11,896,395.

                                                                   This account is determined on a net basis and advisedly
                                                                   includes all claims between the companies (both receivables and
                                                                   payables) arising out of the intercompany relationship.

  2       Estimated Financial Position at 12 May 2009 (cont)

   Failed Trades                                                      Australia owes assets and securities to LBIE with a value equal
                                                                      to AUD3,227,908.
A failed trade relates to a stock loan, or outright purchase or
sale of securities entered into between LBIE and LB Australia         The value of the House Assets Claim is priced on the basis of
prior to the collapse of the Lehman Group, but which had not          the limited information available to LBIE (including limited
settled. As a result of failed trades, it is alleged funds or stock   systems access and a scarcity of resources). The majority of
which should have been transferred from LB Australia to LBIE          the pricing was derived at 12 September 2008, however pricing
have not occurred.                                                    from this date was not available in respect of all assets and
                                                                      consequently different dates may have been used.
The Administrators of LBIE currently estimate that the amount of
the debt attributable to failed trades is AUD212,552.                 The Administrators of LBIE have reason to believe that the
                                                                      House Assets Claim may relate to or include securities or other
   Pending Trades                                                     assets which are held on trust by LB Australia for LBIE or LBIE’s
                                                                      clients. The Administrators of LBIE are still investigating these
LBIE has also claimed for certain pending trades. Such trades         matters.
comprise the outright purchase and sale of securities which had
been agreed between LBIE and LB Australia where the                      Administrators View on LBIE Claim
contractual settlement date had not occurred prior to the
Administration date. Consequently, the parties had agreed to          We are currently reviewing the claim filed by the Administrators
buy or sell securities, but neither cash nor securities were          of LBIE in conjunction with former staff of LB Australia, our
exchanged prior to the administration date.                           solicitors and representatives from PwC, with a view to
                                                                      determining, amongst other matters, whether there are any
The Administrators of LBIE currently estimate that the amount of      offsetting claims that should be taken into account.
the debt attributable to pending trades is AUD94,567,925. The
Pending trades claim represents the cash sum equivalent to the        Whilst our investigations are yet to conclude, we have formed
value of securities which were deliverable to LBIE by LB              the preliminary view that the claim being made in respect to
Australia and the cash sums payable by LB Australia to LBIE in        ‘Pending Trades’ should be excluded as we are not aware of:
connection with the relevant pending trades.
                                                                         Any cash being paid to LB Australia in respect to the
   House Assets                                                          purported transactions; or

Included within the claim are a number of securities that are            The transfer of any securities into LB Australia’s proprietary
owed to LBIE by LB Australia. LBIE understands that LB                   book.

  2       Estimated Financial Position at 12 May 2009 (cont)

In the absence of being able to arrive at a definitive claim from   discussed the general nature of these claims at Section 9 of that
LBIE, at this time we have assumed for the purposes of this         report (page 41).
Supplementary Report that LBIE has a claim of $15.3 million.
                                                                    As you would recall, we estimate that there are 308 possible
2.2.9 Contingent Assets – Claims under Insurance                    Contingent Litigation Claimants with a ‘universe’ of potential
      Continents                                                    losses in the order of $625.6 million using a mark to market at
                                                                    26 September 2008 as determined by SCRAPL. To date, the
LB Australia had Professional Indemnity insurance coverage in       claims that have been filed with our office represent 15% of the
respect to periods prior to and following the acquisition of        total possible claimants which equates to 23% of the total
Grange Securities Ltd by Lehman.                                    possible notional losses calculated under the model.

Prior to the Administrators appointment, LBA had settled a          It is important to keep in mind that the valuation of CDO’s at the
number of claims with clients. Proceedings against LBA had          date of our appointment was imported into our Contingent
also been commenced by 3 parties seeking recompense for             Creditor Claims Model only to arrive at a notional loss for the
losses sustained on CDO investments recommended by                  purposes of generating expected outcomes to creditors under
Lehman. Since the Administrators appointment, further claims        the liquidation and deed scenarios. Particularly, we note that
have been made by other investors.                                  this estimate is likely to bear no relevance to the actual loss that
                                                                    would be calculated by the Court if it were the case that LB
We are advised that details of insurance policies should not be     Australia was placed into liquidation and certain of the
disclosed as this may void coverage. We advise however that         Contingent Litigation Claimants successfully prosecuted a claim
Wingecarribee Council have made application to the Court for        against LB Australia.
details of the insurance policies (refer Section 2.2.10 of this
report).                                                            It is worthwhile noting at page 2 of my 19 March 2009 Report
                                                                    that I specifically raised this issue, and for the sake of
The Administrators have notified each of the insurance              completeness, I have extracted the relevant comment below:
companies in terms of the policies and an initial claim has been
submitted. Due to the uncertain outcome of these claims, we             “In considering the options available to creditors and
are not able to ascribe any value to potential recoveries.              formulating our recommendation, we have necessarily
                                                                        made assumptions with regard to the possible liability
                                                                        due to certain contingent creditors, namely those
2.2.10 Contingent Liabilities                                           entities/persons that have commenced or are
                                                                        contemplating commencing proceedings against the
As noted in our 19 March 2009 Report, we have received 48               Company for amongst other things, misleading and
claims from councils, other authorities and individuals. We             deceptive conduct in offering for sale certain financial

   2      Estimated Financial Position at 12 May 2009 (cont)

    products. At no time should any aspect of this report be       The administrators are opposing the production of the
    considered an admission of any liability to any of these       documents sought by Wingecarribee on a number of grounds,
    entities/persons. The Company has defences to all              but primarily on the basis that the information is commercially
    proceedings and will vigorously defend any and all actions     sensitive and confidential to LB Australia, the administrators are
    made against it, the only true means to determine              managing the insurance claims as part of the administration, the
    whether such liability exists and the quantum of same is       insurers have not denied liability for the claims and
    through the running of legal proceedings. Any                  Wingecarribee ought not obtain access to the insurance
    assumptions therefore made with respect to liability in this   information as that may be an advantage it has over other
    report are for analytical reference only”.                     Contingent Litigation Creditors. The notice of motion has been
                                                                   listed for hearing by Justice Rares on 19 May 2009. The results
Wingecarribee Proceedings                                          of this hearing will be discussed at the forthcoming creditors
As mentioned at Section 9.1.4 of our 19 March 2009 Report,
Wingecarribee Council commenced proceedings against LB             On Friday 8 May 2009, Rares J granted Wingecarribee leave to
Australia in December 2007. The primary cause of action relied     proceed for the limited purpose of making an application to
upon by the plaintiff is a misleading and deceptive conduct        obtain copies of LB Australia’s insurance policies.
claim. These proceedings, along with two others were stayed
pursuant to Section 440D of the Corporations Act 2001 at the       The matter is to be heard on 19 May 2009. The results of this
commencement of the administration.                                hearing will be discussed at the forthcoming creditors meeting.

On 8 May 2009, Wingecarribee Shire Council sought and              2.2.11 Subordinated Creditor
obtained leave to proceed against LB Australia pursuant to
section 440D(1)(b) of the Corporations Act, for the limited        LBA owes LB Granica $87.5 million being advances totally $80
purpose of seeking the production of certain documents. The        million together with accrued interest. The funds were provided
Wingecarribee Council seeks the production of copies of all        for the purpose of satisfying ASX License capital requirements.
insurance contracts referred to in the Report dated 19 March
2009, copies of any other professional indemnity or insurance      LBA and LB Granica entered into agreements on 7 March 2007
contracts that might indemnify it for the claims made by           which provide for the debt to be subordinated to all other debts
Wingecarribee Council against LB Australia, copies of Directors'   of the company.
and Officers' insurance policies, and copies of correspondence
between LB Australia and its brokers or insurers relating to       Accordingly, LB Granica is not entitled to receive any amount
notification of insurers of claims or circumstances of claims.     until such time as all other creditors are satisfied.

  2       Estimated Financial Position at 12 May 2009 (cont)

2.2.12 Net Surplus/Deficiency

We have estimated the net position before further administration
costs, contingent creditor claims and the subordinated debt due
to LBA Granica in the order of a $40 million deficiency to a
surplus of $65 million. The outcome ultimately is dependant
upon the recoverable value of related party loans and the value
of LB Australia’s proprietary investment book.

After inclusion of $625.6 million in contingent creditor claims,
and $87.5 million of subordinated debt, this deficiency is
expected to increase to $648m to $753m.


The estimated outcomes for creditors should LB Australia be            Creditors should note that the Administrators have been
placed into Liquidation were set out in the 19 March 2009 Report       provided with these estimates by their legal advisors which
at Section 11.                                                         are necessarily based upon assumptions which may change.
                                                                       It is possible that a negotiated settlement with the Contingent
Having regard to the changes in the financial position discussed       Litigation Claimants would be achieved avoiding the level of
at Section 2 of this Supplementary Report we have revised the          expenditure included herein.
estimated liquidation outcome herein.
                                                                       Quantum of Creditor Claims – the final value of admitted
3.1      AVAILABLE ASSETS                                              creditor claims may materially affect the return to creditors.
                                                                       Any significant increase in estimated liabilities may arise in
Following from the results of our investigations, it is envisaged      the following respects:
that liquidation will derive a substantially similar return from
asset realisations as would be achieved under the Deed                     Loan Account – LBIE (Refer Section 2.3) - should this
alternative.                                                               claim be admitted at full value, the creditor pool will
                                                                           increase by approximately $90m compared to estimates
We have set out in Figure 1 (from page 13) the estimated assets            contained in our 19 March 2009 Report.
available to meet creditor claims, ($142.3 million “low” and
$247.6 million “high”).                                                    Contingent Litigation Creditors - we would expect
                                                                           potential further material changes in the liability position if
3.2      PROSPECTIVE LIABILITIES                                           Contingent Litigation Claimants were successful in
                                                                           prosecuting their case.
As noted in our 19 March Report, there are two aspects to the
liquidation scenario that will have a material impact on the return        In particular, we note that the model we have developed
to creditors.                                                              to ascribe an amount to the notional ‘universe’ of losses
                                                                           on the face value of products held by Contingent
      Legal Costs – we expect a significant amount of legal and            Litigation Creditors is being used only to assist with:
      other professional costs would be unavoidable in a liquidation
      scenario in view of the prospective and significant number of            This comparative analysis between the Deed and
      prospective legal claims and those already commenced, by                 liquidation alternatives; and
      Contingent Litigation Claimants. For the purposes of this
      Supplementary Report we have retained the estimates                      As a mechanical means to distribute the LCF.
      incorporated in our 19 March 2009 Report.

    3       Revised Liquidation Alternative (cont)

We also note that the valuations used in the Contingent              3.5         SUMMARY OF ESTIMATED RETURNS UNDER
Litigation Creditors model are mid market valuations using                       LIQUIDATION
correlation models typically used by Investment Banks. These
models contain certain assumptions which may not be relevant         Having regard to the above scenarios, in liquidation, creditors
to the quantification of a damages claim, and in some cases, we      may receive the following range of returns:
understand do not take into account future coupon payments to
be received. For the purposes of this Supplementary Report, we       Catergory of Creditors                                   Low        High
                                                                                                                              (c in $)   (c in $)
have retained the value of these liabilities in line with our 19
                                                                     A. Contingent Creditors Unsuccessful
March 2009 Report.
                                                                                        Employees                             100c       100c
                                                                                        Creditors Generally                   74c        100c

In liquidation, the proceeds of contracts of insurance are applied                      Contingent Litigation Creditors             -          -
in accordance with section 562 of the Corporations Act (refer to
Section 8.3 of our 19 March Report).                                                    Subordinated Creditors                      -    67c

                                                                     B. Contingent Creditors Successful
As the return to LB Australia from these policies is uncertain at
this juncture, we have excluded any settlement amount from our                          Employees                             100c       100c
estimated return to creditors.
                                                                                        Creditors Generally                   13c        26c

3.4      MODELLING OF RETURN TO CREDITORS                                               Contingent Litigation Creditors       13c        26c

Set out at Annexure D to this Supplementary Report is our                               Subordinated Creditors                      -          -
estimate of the return to each class of creditor under the
following scenarios:                                                 Figure 9 – Range of Returns under Liquidation Scenario

                                                                     On a net present value basis, assuming proceedings were to
A       The Contingent Litigation Creditors are unsuccessful in      take six years to resolve and applying a 5% opportunity cost to
        litigation; and                                              capital, the return to ordinary unsecured creditors is estimated to
                                                                     be in the range of:
B       The Contingent Litigation Creditors are successful in
        litigation.                                                        55 cents to 75 cents if Contingent Litigation Creditors were
                                                                           unsuccessful in prosecuting their claims; or

    3            Revised Liquidation Alternative (cont)

      10 cents to 20 cents if Contingent Litigation Creditors were
      successful in prosecuting their claims.                                             For the purpose of our reporting obligations, we have defined a
                                                                                          related party as any member of the Lehman Brothers group
3.6        ESTIMATED TIMING OF RETURNS UNDER                                              globally. However, having regard to the independent
           LIQUIDATION                                                                    appointments of Insolvency Practitioners to the International
                                                                                          Lehman entities, we consider any related party significance to be
Set out in the table below is our estimate as to when creditors                           substantially diminished.
may expect to receive the estimated distributions at Section 3.5.
                                                                                          The estimated Creditor claims of the relevant parties are
Category of Creditors                Estimated Payment of Dividend                        summarised below:
Priority Creditors
          Employees                  June/July 09
                                                                                          Australian Related Parties (including LBAG)                 93.3
Unsecured Creditors                                                                       Asian Related Parties                                      141.8
          General and Related        If Litigation is successfully defended 2010 - 2011   Other Lehman Entities (Overseas)                            20.3
                                                                                          Total Related Party Claims                                 255.4
          Party Creditors            If Litigation is lost - up to 2015

                                                                                          Less Creditor Subordinated - LBAG                         ( 87.5)
Figure 10 – Estimated Timing of Dividend Payments

                                                                                          Related Party Creditors having parity with other
The above estimates in respect of unsecured creditors assume a                            Unsecured Creditiors                                       167.9
lengthy delay in payment of dividends until litigation is finalised.
                                                                                          Total Ordinary Unsecured Creditors (excluding LBAG,
However, any number of scenarios may be adopted                                           Subordinated Creditor but including Contingent Creditor
including the potential for a negotiated settlement of claims                             Claimants)                                                 802.7
which may be achieved at any point in the litigation cycle.                               Figure 11 – Effect of Related Party Creditor Claims

                                                                                          From the above analysis, Related Party Claims having parity
                                                                                          with other unsecured creditors comprise 20.9% of the total
                                                                                          creditor pool.



4.1    GENERAL
                                                                    4.2        KEY FEATURES OF PROPOSED GENERAL DEED
The Administrators’ Report to Creditors dated 19 March 2009 set                FUND
out the basis of a proposal for a Deed furnished to us by LB Asia
Holdings (“the Asia Proposal”).                                     A summary of the key features of the Deed Proposals are as
A number of proposed amendments were submitted to the
Administrators subsequent to the issue of that report and which     Key Feature                                         ASIA   Gowings   Note
were discussed generally with Creditors at the meeting on 30
March 2009.                                                         Deed Administrators to be Stephen James                √       √
                                                                    Parbery and Neil Geoffrey Singleton.
On Thursday, 14 May 2009, the final terms of LB Asia’s Deed
                                                                    Property of the Deed Fund to comprise all assets       √       √
Proposal were provided to the Administrators. A copy of this        of LB Australia
proposal is attached at Annexure E.
                                                                    A separate Contingent Litigation Creditors Fund        √       √     4.2.1
                                                                    (“LCF”) to be established under the Deed
The Administrators also received on Tuesday, 12 May 2009, an
alternative draft proposal from Gowings (a Contingent Claimant      Deed Administrators to be assisted by a                √       √     4.2.2
Creditor). A finaly version was provided on Sunday, 17 May          Committee of Creditors
2009. A copy of this proposal (“the Gowings Proposal”) is
                                                                    Distribution of Deed Fund in order of priority         √       √     4.2.3
attached at Annexure F.
                                                                    Creditor Claims will be extinguished upon              √       √     4.2.4
Creditors should note that the proposals reflect a                  payment of their entitlements under the Deed
framework for a Deed of Company Arrangement and do not
                                                                    Releases to be provided to LB Australia and its        √      X      4.2.4
incorporate all the detail expected to be included in the           Directors and Officers and related party entities
actual Deed. Whilst the Administrators have sought to
reflect the intentions of the alternative proposals, they do        Regular reporting to Creditors                         √       √     4.2.5

not accept responsibility for any errors or omissions in            Remuneration of Administrators                         √       √     4.2.6
relation to the proposals. In our view, there are a number of
significant issues effecting creditors which have not been          Powers of Administrators                               √       √     4.2.7
fully articulated in the proposals received.
                                                                    Figure 12 – Key features of Deed Proposals

Our views and commentary in relation to the two Deed proposals      Our subsquent commentary on these matters should be read in
follow by way of comparison. Where appropriate, we have made        conjuction with the Deed Proposal’s attached at Annexure E
reference to our 19 March 2009 Report.                              and F.

  4       Deed Proposals (cont)

                                                                     Asia Proposal do these creditors have no further claim against
4.2.1 Establishment of Contingent Litigation Creditors               LB Australia. That proposal states that the LCF is to be
      Fund (“LCF”)                                                   established to pay Contingent Litigation Creditors "without the
                                                                     need for Litigation Creditors and the Company engaging in General                                                      litigation that would reduce or delay the return to all Creditors".
                                                                     This may not be the case if Contingent Litigation Creditors elect
An LCF is to be established under both LB Asia and Gowings’          to pursue, prosecute or resolve any Insurance Claim. If such an
proposals as a sub-fund of the General Deed Fund to deal             Insurance Claim is pursued (as provided for in the Gowings
specifically with the claims of Contingent Litigation Creditors      Proposal) LB Australia will incur the costs of defending litigation,
which were described in detail at Section 9 of the 19 March          which may not be paid for by any relevant insurer. The
Report.                                                              Administrators understand that it is common for insurers to
                                                                     reserve their position on liability (regardless of whether they are
The structure of the fund is generally represented below:            a party to any proceedings) and await the outcome of
                                                                     proceedings.      In these circumstances, under the Gowings
                   General Deed Fund (All Assets of LBA)             Proposal the Contingent Litigation Creditors will continue to have
                                                                     the right to bring proceedings against LB Australia (and related
                                                                     entities and directors).

                                                                     The Administrator of the LCF will be responsible for the
                                                                     distributions from the LCF to the Contingent Litigation Creditors.
         Distribution to Creditors      LCF
         (excluding Litigation          (Receives funds from         The establishment of the LCF in accordance with the Asia
         Creditors)                     General Deed Fund)           Proposal will allow the cost of dealing with the matters involving
                                                                     the Contingent Litigation Creditors to be quarantined and enable
                                                                     the affairs of the corporate entity (LB Australia) and distributions
                                                                     to general creditors to be finalised earlier.         This is not
                                                                     necessarily the case with the Gowings Proposal.
                                        Distribution to Litigation

A separate fund (LCF) is created under both Deed proposals
pursuant to the terms of the Deed of Company Arrangment and
LB Australia’s obligations to the Contingent Litigation Creditors
bound by the Deed are transferred to the LCF. Only under the

    4           Deed Proposals (cont) Operation of LCF                                                                                1.1. The Asia Proposal – Claimants (excluding employees)
                                                                                                             who have a contingent or unliquidated claim against LB
There are a number of differences concerning the operation of                                                Australia which arose prior to 26 September 2008.
the LCF as between the proposals which are discussed below:
                                                                                                        1.2. The Gowings Proposal – eligibility to participate in the
Proposed Operation                 LB ASIA Proposal                     Gowings Proposal
                                                                                                             LCF is to be determined by the LCF Administrator with
Assets to be transferred    Cash $36.0m from General Deed       Initally cash $36.0m from General            any disputes to be referred to Senior Counsel for final
to LCF                      Fund                                Deed Fund
                                                                                                             determination.   No criteria for eligibility have been
                            Proceeds of any insurance           A further amount up to $23.2m
                            claims                              under ‘high’ case.                           disclosed, however, it appears that LCF creditors will
                                                                Proceeds of any insurance claims
                                                                                                             comprise retail and wholesale investors who acquired
                                                                                                             certain CDO’s from LB Australia (which are listed at
Administrators of LCF       Stephen James Parbery and Neil      Stephen James Parbery and Neil
                            Geoffrey Singleton, however, the    Geoffrey Singleton, however, the             Annexure F).
                            Contingent Litigation Creditors     Committee of Contingent Litigation
                            may resolve to appoint              Creditors may resolve to appoint      2. Calculation of Participating Creditor Claims
                            alternative Administrators to the   alternative Administrators to the
                            LCF                                 LCF

Committee of Creditors      A committee is to be formulated     A committee is to be formulated       2.1.   The Asia Proposal – Claims at 26 September 2008 are
of LCF                      comprising of Litigation Creditor   comprising of Litigation Creditor
                            representatives to consult with     representatives to consult with              to be adjudicated upon by the LCF Administrators in
                            Administrators in relation to       Administrators in relation to                accordance with the procedures laid down in the
                            insurance claims                    insurance claims
                                                                                                             Corporations Act i.e on the same basis as claims against
                                                                The Committee will have power to
                                                                appoint lawyers to conduct                   the General Deed Fund. Contingent Litigation Creditors
                                                                litigation and convene a meeting of          are not required to sell their investments to establish a
                                                                Contingent Litigation Creditors to
                                                                consider the appointment of                  claim against the LCF.
                                                                alternative Administrators to the
                                                                                                             The relevant provisions of the legislation governing
Figure 13 – Summary of LCF Operation
                                                                                                             dealings with proofs of debt are set out in the Participating Creditors and Assessment of Creditor                                                   Corporations Regulations 5.6.39 – 5.6.55
                                                                                                      2.2.   The Gowings Proposal – provides that LCF creditor
Creditor claims in respect of the LCF are proposed to be dealt                                               claims will be calculated to reflect the loss of value of the
with as follows:                                                                                             CDO’s against the face value as determined by a
                                                                                                             valuation undertaken by Structured Credit Research and
                                                                                                             Advisory        on        26         September         2008.

1. Participating Creditors include:

      4      Deed Proposals (cont)

          Following calculation of the nominal claims, creditors will         commenced prior to the apointment of the Administrators;
          be entitled to participate for distribution from the LCF on         and
          the following basis:
                                                                        ii.   Provide for any insurance recoveries paid into the LCF to
                                                                              be firstly distributed in accordance with Section 562 of the
          Unsophisticated (Retail) Investors (Section 761G,
                                                                              Corporations Act. The Administrators refer to section 8.3
          Corporations Act) who acquired CDO’s on advice, at the
                                                                              of the report to Creditors dated 19 March 2009 regarding
          rate of 100% of the estimated loss;
                                                                              insurance recovery. It is important that to note that the
                                                                              ability to recover any monies from insurers depends upon
          IMP Clients (being those who executed an individually
                                                                              whether, in respect of each individual claim by a
          managed portfolio agreement with LB Australia), at the
                                                                              Contingent Litigation Creditor, the liability of LB Australia
          rate of 95% of the estimated loss; and
                                                                              to that Contingent Litigation Creditor is established by a
                                                                              judgment against LB Australia or a settlement approved
          Sophisticated (Wholesale) Investors (Section 761G,
                                                                              by the relevant insurer, whether the claim is covered by
          Corporations Act) who acquired CDO’s on advice, at the
                                                                              any relevant insurance, whether the insurance has been
          rate of 75% of the estimated loss.
                                                                              exhausted by other claims made on the insurance (noting
                                                                              that the insurance issued by Insurer B is a policy issued
          Contingent Litigation Creditors are not required to sell
                                                                              to LB Inc.) and whether the LB Asia and Gowings
          their investments to establish a claim against the LCF.
                                                                              Proposals preserve the ability of the Contingent Litigation
                                                                              Creditiors to establish LB Australia's liability. In addition,
          Notwithstanding the above regime for dealing with
                                                                              Contingent Litigation Creditors need to note that LB
          creditor claims, the proposal then requires contingent
                                                                              Austrailia has a claim on the the insurance in respect of
          creditor claims to be dealt with in accordance with the
                                                                              the amounts paid by LB Australia prior to the appointment
          Corporations Act.       Under these provisions, the
                                                                              of the Administrators (referred to in section 8.3 of the
          Administrator would estimate the claim and creditors
                                                                              report to Creditors dated 19 March 2009). Creditors
          would have a right to appeal to the Court. There appears
                                                                              should seek their own advice as to the operation of
          to be inconsistency between these two approaches.
                                                                              Section 562. Generally, this section provides for any
                                                                              settlement proceeds paid by an insurer in respect of Distribution of LCF
                                                                              particular claims to be paid to the particular claimant. At
                                                                              this time, we are unable to advise creditors as to whether
In relation to the proposed distribution of the LCF, prospective              any proceeds will be available under the insurance
Litigation Creditors should note that both proposals:                         policies. In the event that a settlement is made on a
 i.       Provide for payment of up to $1.0m from the LCF to those            “global” basis, the
          Contingent Litigation Creditors who have incurred legal
          fees in proceedings against LB Australia which were

     4            Deed Proposals (cont)

            Administrators would need to seek advice as to how they                           GOWINGS DEED PROPOSAL

            are to be distributed.                                                                                                                            LCF Low        LCF High

The Gowings Proposal provides for distribution to Contingent                                                                                            No.
                                                                                                                                                              ($'Million)    ($'Million)
Litigation Creditors proportionately, based on the amount                                     Total Estimated Assets (Excluding Insurance Recoveries)                 36.2           59.4
admitted in respect of each claim, discussed at above.
                                                                                              Deduct Priority Costs
                                                                                               Administrators 'Static' Remuneration (Estimated)                       0.5            0.5
This LB Asia Proposal provides that distributions to Contingent                                'Static' Legal Fees (Estimated)                                        0.5            0.5
                                                                                                                                                                     35.2           58.4
Litigation Creditors will be made proportionately based on the                                Deduct Priority Creditors
amount admitted in respect of each claim which is dealt with in                                Legal expenses reimbursed                                              1.0            1.0

accordance with the Corporations Act.                                                         Amount available for Litigation Creditor claims                        34.2           57.4

                                                                                              Estimated Litigation Creditors (excluding Gowings)*       307         624.7          624.7
Having regard to the above, the tables below demonstrate the
expected distributions to Contingent Litigation Creditors under                                 Estimated Distribution to Litigation Creditors                      5.5%           9.2%

the two proposals.
                                                                                              Figure 15 – Gowings Distribution of LCF

                                                                                     Allocation of Surplus
                                                                LCF Low        LCF High

                                                          No.                                 The LB Asia Proposal contemplates a situation where a surplus
                                                                ($'Million)    ($'Million)
Total Estimated Assets (Excluding Insurance Recoveries)                 36.0           36.0
                                                                                              may arise in the LCF after dealing with the claims of the
                                                                                              Contingent Litigation Creditors. In these circumstances, the
Deduct Priority Costs                                                                         surplus will be returned to the General Deed Fund.
 Administrators 'Static' Remuneration (Estimated)                       0.5            0.5
 'Static' Legal Fees (Estimated)                                        0.5            0.5
                                                                       35.0           35.0    The Gowings Proposal provides that once all creditors are paid
Deduct Priority Creditors                                                                     in accordance with its stated order of distribution (which sees
 Legal expenses reimbursed                                              1.0            1.0
                                                                                              creditors receive capped amounts that may be less than their full
Amount available for Litigation Creditor claims                        34.0           34.0    claim), the remainder of LB Australia’s property is to be paid to
Estimated Litigation Creditors                            308         625.6          625.6

  Estimated Distribution to Litigation Creditors                      5.4%           5.4% Returns to Contingent Litigation Creditors

Figure 14 – LB Asia Distribution of LCF                                                       On the basis of our analysis of the distribution of the LCF under
                                                                                              the proposals the expected return to creditors are as follows:

     4           Deed Proposals (cont)

                                                                          Low     High      against its professional indemnity insurers, which will be
                                                                           c/$     c/$      subject to liability being established by the Contingent
                                                                                            Litigation Creditors by way of judgment against LB Australia
Asia                                                                      5.4c    5.4c
                                                                                            or settlement approved by the relevant insurer.
Gowings                                                                   5.5c    9.2c
                                                                                            Gowings Proposal – Funds currently available to the
Figure 16 – Comparison of Return to Litigation Creditors under respective Deeds             Administrators of the General Deed Fund are to be
                                                                                            distributed to external trade creditors and the related party
Please note that the above estimated returns are subject to the                             claims. Accordingly, timing of any transfer to the LCF is
following:                                                                                  dependent upon subsquent asset realisations. No guidance
                                                                                            has been provided in this regard.
1. That claims lodged against the LCF will amount to
   approximately $625m.           To date claims lodged are                              4.2.2 Committee of Creditors
   significantly less than this amount; and
                                                                                            LB Asia Proposal - The continuation of the existing
2. The quantum of any insurance proceeds which may be                                       Committee in connection with the general deed fund is not
   received by the LCF (not included for the purposes of our                                specifically addressed in the LB Asia Proposal. We have
   analysis).                                                                               been advised that LBAsia is supportive of a Committee of
                                                                                            Creditors continuing. Timing of Returns to Creditors
                                                                                            Gowings Proposal - It is proposed that the existing
The timing of the return to Contingent Litigation Creditors is                              Committee of Creditors will continue to assist the
dependent upon the timing of the transfer of funds to the LCF                               Administrators including in relation to the realisation of
from the General Deed Fund and the resolution of admitted                                   assets.
creditor claims.
                                                                                         4.2.3 Distribution of General Deed Fund
On the basis of our assessment at Section 2.3 of this
Supplementary Report funds are estimated to be paid into the                             The order of distribution of the General Deed Fund under the
LCF from the General Deed Fund as follows:                                               respective proposals is set out at Annexures G and H.

       LB Asia Proposal – The LB Asia proposal provides that
       interim distributions from the LCF may be made, but that the
       administrators of the LCF will pay the Contingent Litigation
       Creditors as soon as practical after payment to the
       administators of the proceeds of all claims by LB Australia

    4             Deed Proposals (cont)

The estimated returns (expressed as cents in the dollar) to each                                                            2. General Creditors (employees) are proposed to be paid in full
of the classes of creditors under each of the scenarios are set                                                                under both proposals. Should the claims exceed the above
out below:                                                                                                                     estimates, the higher claims wil be paid in full;

                                                             Low                                    High                    3. General Creditors (trade)
                                   Claim          LB Asia             Gowings            LB Asia             Gowings             LB Asia: An amount of $8.7m is available to meet known
                                      $M           c/per $              c/per $           c/per $              c/per $           trade creditors claims. This may be increased up to $9m
Administrators                        4.3           100c                    100c           100c                  100c            should creditor claims increase. To date, creditor claims
                                                                                                                                 filed are significantly less that $9m;
Employees                             6.3           100c                    100c           100c                  100c

                                                                                                                                  Gowings: to be paid in full. No cap on the level of claims.
General Creditors
                                                                                                                                  However, Gowings have assessed creditors at $7.7m
      Employees                       0.4           100c                    100c           100c                  100c
                                                                                                                                  compared to our assessment of $8.7m.
      Trade                       8.7/7.7           100c                    100c           100c                  100c

Litigation Creditors         625.6/624.7             5.4c                     5.5c          5.4c                     9.2c
                                                                                                                            4. Contingent Litigation Creditors
                                                 See note &             See note &
                                                                                                                               The initial amount to be transferred to the LCF under both
Lehmans Entities
                                                                                                                               proposals is $36 million (LB Asia) and $36.2m (Gowings). In
      Australia                       5.8           52.1c                   52.2c          100c                  100c          respect of the Gowings Proposal if the claims from General
      LB Asia                      105.6            52.1c                   52.2c          100c                  100c          Creditors (Trade) were to exceed $7.7m, which is possible
      Other Asia                    36.2            52.1c                   52.2c          100c                  100c          given the number of creditors yet to claim, the distribution to
      Overseas                      20.3            52.1c                   52.2c          100c                  100c          the LCF would be reduced by the amount of that excess
      LBA Granica                   87.5               -                      0.5c          28.3                     0.5c      under the ‘low’ case. Under the ‘high case’, an additional
                                                                                                                               amount of up to $23.2milliion may also be transferred to the
Gowings                             2.95      Litigation Creditor       -            Litigation Creditor         68.0c         LCF, depending upon the Net Company Property realised.

                                                            $142.3M                                $247.6M                  5. Lehman Entities
Figure 17 – Estimated Returns to each of the classes of creditors under Deed Proposals
                                                                                                                                  LB Asia: after payment of the distributions at points 1-4
                                                                                                                                  above, any residual funds are to be distributed to the
In relation to the above distributions, creditors should note that:                                                               relevant Lehman creditor companies proportionately. The
                                                                                                                                  amounts estimated to be available to the Lehman Entities
1. The priority claims in respect of the Administrators’ costs and                                                                are $87.4m (low) or $192.7 (high). Under the “high” case,
   employee entitlements are to be paid in full under both                                                                        LB Granica will receive a distribution as all other creditors
   proposals. Should the Administrators’ costs and employee                                                                       have been paid in full or satisfied.
   entitlements exceed the above estimates, the higher amounts
   will be paid in full;

  4      Deed Proposals (cont)

      After the distributions at 1-4 above, the Deed proposed            In addition to the $1 million to be paid to Gowings,
      by LB Asia provides for the following mechanism to be              referred to above, the Gowings proposal provides that
      implemented at this time (at the election of LB Asia):             where the above distributions have been paid and asset
                                                                         realisation generates an excess, that excess will be paid
       The establishment of an unlisted entity to receive the            to Gowings.
       remaining investment assets;
                                                                   4.2.4 Release of Creditor Claims
       Those Lehman Entities other than LB Asia, may
       participate for equity or agree to receive a cash sum in    Each of the proposals provided for the claims of creditors of the
       full satisfaction of their entitlements based upon a        General Deed Fund to be released upon receipt of all their
       valuation at the appropriate time;                          entitlements thereunder.

       The appointment of an investment manager to oversee    LB Asia Proposal
       the realisation of the residual assets; and
       The establishment of an Investment Panel comprising
       representatives of LB Asia, LBHI and the Deed                    In consideration for the Lehman entities reducing their
       Administrators until such time as the Deed is carried            entitlements and agreeing to the creation of the LCF, the
       out.    The Investment Panel will determine the                  following releases are to be provided by the creditors
       appointment of the Investment Manager.                           (including the Contingent Litigation Creditors).        The
                                                                        Administrators note that what is set out below is largely
      Gowings: The distributions to the Lehmans entities are to         taken directly from the LB Asia Proposal and the
      be fixed in the following amounts: $88.2m (low) and               Administrators are unclear as to the precise interaction
      $168.3m (high). These amounts include the distribution            between the required releases and the concept of
      of $0.4m to LB Granica under both low and high cases.             "Preserved Contractual Right". It is essential that the
      Any surplus after payment of the distribution will be paid        releases and any moratorium provided by the Contingent
      to Gowings.                                                       Litigation Creditors in any proposal do not prejudice any
                                                                        insurance recovery. Creditors should take their own advice
6. Gowings                                                              regarding how this issue is dealt with under the LB Asia
     LB Asia: Gowings claim as a Contingent Litigation                  and Gowings Proposals. The Administrators consider that
     Creditor is dealt with through the LCF;                            there is inadequate information contained in the proposals
                                                                        to assess this issue. The required releases are as follows:
      Gowings: a fixed amount of $1m is to be paid to Gowings
      in respect of its Contingent Litigation Creditor Claim
      (assumed at $2.95m).

  4       Deed Proposals (cont)

       LB Australia. The claims of a general creditor (bound by
       the Deed, but not a Contingent Creditor) against LB                   In addition to the releases referred to above, the general
       Australia and Lehman entities will be forever released,               creditors and the Contingent Litigation Creditors purport
       discharged and extinguished when the creditor has                     to covenant with the Administrator for the benefit of LB
       received its entitlements (if any) under the Deed. Any                Australia and the Lehman entities that they will not bring
       claims of a Contingent Litigation Creditor bound by the               any claims against LB Australia or the Lehman entities
       Deed against LB Australia or a Lehman entity, which are               (Covenant).
       not Preserved Contractual Rights (see next paragraph),                In the event that a Contingent Litigation Creditor elects to
       will be forever released, discharged and extinguished                 pursue claims against a third party that Contingent
       when they have received their entitlements (if any) under             Litigation Creditor will grant an indemnity in favour of the
       the Deed.                                                             Lehman entities (including each of their directors and
       The release of LB Australia will not, however, operate so
       as to release or discharge any existing or future right a             The indemnity in favour of each Lehman entity will
       Contingent Litigation Creditor has to seek performance of             provide for the recovery of all loss and damage (including
       a contractual obligation, or claim damages for a breach of            any legal costs) that a Lehman Entity may suffer arising
       such obligation arising after 26 September 2008, where                from such proceedings against a third party. If requested
       such rights arise under any contract between the                      by any Lehman entity the Contingent Litigation Creditor
       Litigation Creditor and a Lehman Entity (Preserved                    will execute a document in the form to be attached to the
       Contractual Rights), a Lehman Entity being LB Australia               Deed.
       and its Related Bodies Corporate (as that term is defined
       in the Corporations Act), including any entities that were      Administrators' comments in relation to the releases,
       Related Bodies Corporate in the 6 month period prior to         covenants and indemnities
       15 September 2008 (together, the Lehman Entities).
                                                                       Section 444D of the Corporations Act provides that a deed of
       The directors and officers of the company, all Lehman           company arrangement binds all creditors of a company so far as
       entities and all directors and officers of any Lehman           claims arising on or before the day specified in the deed
       entity;                                                         (relevantly, 26 September 2008).
                                                                       Section 444G also operates to bind LB Australia, its officers and
In addition, LB Australia will release the directors and officers of   members (including directors) and the deed administrators.
LB Australia, all Lehman entities and all directors and officers of
any Lehman entity;                                                     It is not clear whether LB Australia has claims against it’s
                                                                       officers, the Lehman entities and/or the officers of the Lehman
Covenants and Indemnities from creditors                               entities upon which the purported releases would operate. The

   4      Deed Proposals (cont)

Administrators are not aware of any such claims nor being                   Article V11 Sections 1-11 of the Amended and Restated
aware of any such claims being made by creditors of LB                      By-Laws for LBHI, provides for indemnification to certain
Australia against LB Australia's officers, the Lehman entities              parties, including “Subsidary Officer” (Annexure T of our
and/or the officers of the Lehman entities, either prior to or              19 March Report). We are aware of the existence of a
following their appointment. . It is also not clear whether the             “Management Liability and Reimbursement Insurance
required releases are intended to operate so as to require the              Policy”, in the name of LBHI, in support of this indemnity.
creditors of LB Australia (and not just LB Australia itself) to
release LB Australia's officers, the Lehman entities and/or the   Gowings Proposal
officers of the Lehman entities.
                                                                      No releases are provided to any directors or related parties of
The combined effect of sections 444D and section 444G is also         LB Australia. Specifically, the Gowings Proposal provides that
not clear. In particular, whether if such a release is provided,      notwithstanding that creditors receive their entitlements under
those sections and others in the Corporations Act would operate       the Deed and their claims are extinguished, they will continue to
to bind all creditors of LB Australia in respect of any claims they   have rights against the directors of LBA “at all times”.
may have against LB Australia’s officers, the Lehman entities
and/or the officers of the Lehman entities.                           4.2.5 Reporting to Creditors

The Administrators understand that the reason these wide              Both proposals provide for the Administrators to report to the
ranging releases have been required in the LB Asia Proposal, is       creditors (General Fund and LCF) at least quarterly.
that the Provisional Liquidators of LB Asia Holdings, in
consideration for agreeing to reduce its entitlements, want to        4.2.6 Remuneration of Administrators
ensure that the Lehman Brothers group is released from all
potential future litigation because any claims brought against LB     Both proposals provided that the remuneration of the Deed
Australia's officers or the Lehman entities and/or the officers of    Administrators is to be calculated on the basis of the rates
the Lehman entities, would if successful, ultimately be paid by       normally charged by their firm.
LB Asia Holdings as a result of :

       Clause 31 of the Constitution of LB Australia which
       provides for an indemnity to every officer of the company.
       (refer to Annexure S of our 19 March Report).
       Accordingly any claim made against the officers of LB
       Australia are essentially claims against LB Australia and
       would circumvent the purpose of the Deed.

       4       Deed Proposals (cont)

4.2.7 Powers of Administrators                                           2.          Financial assets are realised generally at maturity (or call
                                                                                     date whichever is the earlier):
            LB Asia Proposal
                                                                         3.          Related Party Receivables are recovered as follows:
Provides for the Administrators to have exclusive control of LB
Australia’s business and affairs together with the specific powers        i.         Prior to 31 December 2010 in respect of funds avaliable to
set out at paragraph 2 of the Prescribed Provisions of the                           the Administrators of LBAF and LBAH;
Corporations Act.
                                                                          ii.        The balance post December 2010.
            Gowings Proposal                                             Creditors should note that these assumptions are common
                                                                         between the two proposals and any change from those
Generally provides for the Administrators to be responsible for          assumptions will impact both proposals in respect of the ability
the management of LB Australia’s affairs and implementation of           to return funds to Creditors. Our assessment, based on these
the Deed, subject, however, to ceding control to a Committee of          assumptions, is demonstrated at Annexure I.
Creditors in respect of insurance litigation.
                                                                         Generally, in relation to the timing of creditor returns, we note
4.3         TIMING OF THE RETURN TO CREDITORS                            the following:

The ability to return funds to creditors of the General Deed Fund                     LB Asia Proposal
is dependent upon a number of matters including:
 i.        Immediately available resources;                              Provides for early discharge of all external creditor claims from
                                                                         funds immediately available i.e. by July 2009 subject to finalising
 ii.       The timeframe taken to realise assets which in turn is        creditor claims. The risk in delays from realisation of financial
           subject to a view on the direction of financial markets and   assets and inter-company receivables lies with the Lehman
           the administration of various overseas Lehman entities;       companies.
                                                                                      Gowings Proposal
iii.       Assessment of admitted creditor claims.
                                                                         Provides for early discharge of external creditor claims,
Our assumptions are set out below:                                       however, distributions to all other categories of creditor are
1.         Funds on hand are able to be distributed within 3 months      spread over a longer timeframe. However, we note that:
           following determination of relevant creditor claims i.e. by          i.     Partial Distributions in favour of Lehman entities are
           31 July 2009.                                                               accelerated from funds immediately available; and

  4           Deed Proposals (cont)

                                                                                 Gowings Proposal
      ii.    The distribution to the LCF is deferred until such time as
             the Administrators realise sufficient financial assets and
             inter-company receivables to constitute the LCF, likely      The entitlements of the Lehman Group entities have been
             post December 2010.                                          reduced to allow a higher return to the external unsecured
                                                                          Creditors of the Group and the Contingent Creditors.

4.4         RELATED PARTY CREDITORS                                       The Gowings Proposal provides for a dividend to LB Granica
                                                                          under the ‘low’ and ‘high’ cases.
For the purposes of the Supplementary Report, related party
creditors are defined as those entities within the Lehman
Brothers Group in Australia where there are common
Administrators.   As independent practitioners have been
appointed to overseas Lehman Group companies, we do not
consider them to be related for the purposes of this
Supplementary Report.

The alternative Deed proposals deal with the claims by Lehman
Group entities as follows:

            LB Asia Proposal

Dividends in respect of all claims by Lehman Group entities
(Australia and Overseas) are deferred until after a dividend has
been paid or provided for, to all other categories of creditor.

A dividend would be paid to LB Granica under the ‘high’ case
after all other creditors have been paid in full. Under this
proposal the entitlements of the Lehman Group entities have
been reduced to allow a higher return to the external unsecured
Creditors of the Group.


                                                                                                                                                            LOW VALUE
The Administrators’ views in relation to the relative merits of LB
Australia being placed into liquidation compared to either of the                                                                Liquidation                       Deed of Company Arrangement

alternative proposals for a Deed of Company Arrangement are                                                               Litigation          Litigation
set out below:                                                                                                           Successful          Unsuccessful           Asia             Gowings
                                                                     Category of Creditor                                     c/$                 c/$               c/$                c/$
                                                                       Employees                                                 100.0                100.0                100.0               100.0
The prospective returns to each category of creditor under the         General Creditors                                          74.0                 13.0                100.0               100.0
various Liquidation and Deed scenarios are set out in the tables
                                                                       Lehman Group Companies
below under the low and high value scenario.                           (excluding LBAG)                                           74.0                 13.0                 52.1                 52.2

                                                                       Litigation Creditors                                            0.0             13.0                  5.4                  5.5
We note the following:
                                                                       Gowings                                                         0.0              n/a                  n/a                  n/a

          Litigation Successful – means that Liquidators               Subordinated Creditor - LBAG                                    0.0              0.0                  0.0                  0.5
          successfully defend claims brought by the Contingent
                                                                     Figure 18 – Liquidation and Deed Scenarios – Low Value
          Litigation Creditors.
                                                                                                                                                            HIGH VALUE
          Litigation Unsuccessful – means the Liquidators
                                                                                                                                  Liquidation                      Deed of Company Arrangement
          unsuccessfully defend claims brought by the
          Contingent Litigation Creditors.                                                                                Litigation          Litigation
                                                                                                                         Successful          Unsuccessful           Asia             Gowings
                                                                     Category of Creditor                                     c/$                 c/$               c/$                c/$

                                                                       Employees                                                  100.0               100.0                100.0                 100.0

                                                                       General Creditors                                          100.0                26.0                100.0                 100.0

                                                                       Lehman Group Companies
                                                                       (excluding LBAG)                                           100.0                26.0                100.0                 100.0

                                                                       Litigation Creditors                                            0.0             26.0                  5.4                   9.2

                                                                       Gowings                                                         0.0              n/a                  n/a                  68.0

                                                                       Subordinated Creditor - LBAG                                67.0                 0.0                 28.3                   0.5

                                                                     Figure 19 - Liquidation and Deed Scenarios – High Value

   5      Comparison of Liquidation and Deed (cont)

5.2    LIQUIDATION VS DEED                                            1. It is highly likely that lengthy and time consuming and costly
                                                                         litigation will proceed in respect of claims brought by the
Prior to discussing the relative merits of the alternative Deed
                                                                         Contingent Litigation Creditor. As a result of the cost of
proposals, we are of the view that there are significant
                                                                         litigation, the asset pool may become significantly diminished
differences between a liquidation and either of the Deed
                                                                         by an amount between $1.6m and $26.1 resulting in reduced
scenarios which warrant discussion.
                                                                         returns to creditors.

LIQUIDATION                                                           2. Whilst employees may expect to receive their entitlements
                                                                         shortly, it will not be possible to permit any dividend to
A winding up of LB Australia will likely incorporate the following:
                                                                         ordinary unsecured creditors until such time as the final
                                                                         extent of admitted creditor claims are known, which is
1. Orderly realisations of assets during the period 2009 – 2016
                                                                         unlikely to be determined until all litigation against LB
   which reflects the maturity profile of the financial assets
                                                                         Australia is determined.
   (Bonds, CDO’s) and provides an appropriate period for the
   affairs of global Lehman companies to be wound up and any
                                                                      However, creditors should also be aware of the following:
   distributions paid to related party creditors such as LB
   Australia. The ultimate realisation timeframe for the financial
                                                                      1. A winding up will permit the Contingent Litigation Creditors to
   assets may change having regard to market conditions;
                                                                         have their claims heard by the Court and, should they be
                                                                         successful, to be treated equally with other ordinary
2. Litigation with the Contingent Litigation Creditors to
                                                                         unsecured creditors. It is expected that mediation efforts to
   determine the extent of any valid claims against LB Australia;
                                                                         resolve these claims will continue between the parties
                                                                         throughout the litigation process with a view to a fair outcome
3. Pursuit of insurance claims and other third party creditors;
                                                                         for all parties;
                                                                      2. There are many aspects of LB Australia’s affairs which will
4. Payment in full of entitlements of employees under Section
                                                                         continue to be unclear for some time, including:
   556 of the Corporations Act with interim distributions paid to
   unsecured creditors from time to time following settlement of         i.   The state of financial markets and the likely realisation
   litigation and creditor claims. Any proceeds of insurance                  values of assets;
   claims would be available to all creditors subject to the
   priority afforded under Section 562 of the Act.                      ii.   The prospect of claims under insurance policies being
In a winding up, we believe creditors will generally be
disadvantaged as follows:

   5           Comparison of Liquidation and Deed (cont)

                                                                         General Deed Fund (under both the low and high case
  iii.     The extent of the contingent and related party creditor
           claims being determined. A winding up will allow these
           matters to be determined whilst creditors rights are
                                                                         Under the ‘low’ value scenario, both proposals commit
                                                                         approximately $36m to the LCF. However, the amount
3. At any time during the winding up process it is open for any          ultimately distributed to the LCF under the Gowings
   relevant party (including the Liquidator or a Creditor) to            Proposal will be reduced if amounts owing to trade creditors,
   propose a Deed of Company Arrangement. In the current                 which receive a prior distribution, exceed $7.7m. Under the
   circumstances when there is considerable uncertainty, this            “high” value scenario, the Gowings proposal reallocates a
   may be an appropriate scenario.                                       further significant level of funds, $23.2m from Lehman
                                                                         entities to the Contingent Litigation Creditors Fund providing
DEED OF COMPANY ARRANGMENT                                               a total return of $59.4m before costs.
The proposals for a Deed of Company Arrangement provide for
                                                                         Under both the ‘low’ and ‘high’ value cases, the LB Asia
settlement, or at least ring fencing, of the Contingent Litigation
                                                                         Proposal provides for an earlier transfer of funds ($36.0m)
Creditor claims which we consider to be a significant benefit to
                                                                         to the LCF (from funds immediately avaialable to the
creditors compared to the prospective outcomes under
                                                                         Administrators) enabling those funds to generate income
liquidation. In particular, settlement of Contingent Litigation
                                                                         and potentially facliltate an earlier distribution to Contingent
Creditor claims may permit an earlier return of funds to creditors.
                                                                         Litigation Creditors.
                                                                         In relation to the general creditors (excluding Lehman
In relation to the alternative proposals for a Deed of Company           entities and Contingent Litigation Creditors), both proposals
Arrangement, we refer you to the description of the main                 offer payment in full on the basis of known creditor claims.
features of each at Section 4.2 of this Supplementary Report.            There is a marginal advantage in the LB Asia proposal
We make the following comments:                                          which estimates that the distribution will be paid in full from
                                                                         available funds in priority to the Lehman entities receiving
5.3.1 Returns to Creditors (Amount and Timing)                           any dividend. Alternatively, the funds available to general
                                                                         creditors (trade) are capped at $9.0m. There is no cap
           The estimated available assets of the General Deed Fund       under the Gowings proposal. At this time, we expect trade
           are the same under both proposals ($142.3m low;               creditor claims to be less than $9m.
           $247.6m high).

         The Administrators’ Remuneration and Expenses and
         Priority Employee entitlements are treated similarly in terms
         of quantum and timing of receipt of distributions from the

     5       Comparison of Liquidation and Deed (cont)

     The return to the Lehman entities is accelerated under the              Litigation Creditors limited to an amount of $36 million
     Gowings proposal however, the amount they receive is less               (without any uplift in the event asset realisations improve)
     under the “high” value scenario by approximately $25m.                  leaves the Deed open to potential attack by a Contingent
                                                                             Litigation Creditor who will assert that the Deed is unfairly
     Under the Gowings proposal, distributions to LB Granica are             discriminatory and it does not provide that creditor with a
     limited to $0.4m (low and high case).           In ordinary             better return than liquidation.
     circumstances, where creditors are paid 100c in the dollar
     LB Granica would be entitled to the surplus in respect of its     ii.   Separate Contingent Litigation Creditors Fund and
     Subordinated claim (high case); and                                     separate Administrators - The proposal makes provision
                                                                             for the creation of the Contingent Litigation Creditors Fund
     Gowings may receive up to $2.0m (high case) which would                 (LCF) which is different from the General Deed Fund.
     equate to a distribution in excess of its that paid ot other            There is also provision for the appointment of an alternate
     Contingent Litigation Creditors.                                        administrator to the LCF if the creditors so resolve. It is
                                                                             our view that this may not be possible under a Deed as the
     Under the LB Asia Proposal (high case) and after the                    Deed Administrator is appointed to LB Australia and not
     proposed distributions have been effected, the excess will              the Deed Fund.          In other words, LB Australia’s
     be applied in reduction of the LB Granica debts which in turn           administrator must be the Deed Administrator and there
     will be available to the creditors of that company.                     cannot be two different sets of Deed Administrators. In our
                                                                             view the only basis upon which this could be achieved
     In contrast, any surplus under the Gowings proposal will be             would be through the creation of a separate Creditors'
     retained by Gowings in circumstances where its Contingent               Trust for the Contingent Litigation Creditors. However, the
     Litigation Creditor may be paid in full providing an equity             status of beneficiaries under a Creditors Trust is very
     style return in circumstances where it has not made any                 different to their status as creditors of a company under a
     outlay.                                                                 Deed with all the protections and rights given to them by
                                                                             the Corporations Act. In our view, the benefits of a
5.3.2 Implementation of the Deed
                                                                             Creditors Trust in this case clearly do not outweigh the
There are a number of perceived deficiencies in respect to the               benefits of a Deed structure (for example, there is no new
                                                                             money being injected by a third party who wishes to take
implementation of both proposals.
                                                                             over the company).
i.       The creation of two separate funds for different
         creditors – Notwithstanding Contingent Litigation Creditors
         have contingent claims that will be difficult to value,
         whereas the related party creditors have liquidated debts,
         the creation of two separate funds with the Contingent

5    Comparison of Liquidation and Deed (cont)

The Gowings proposal is deficient for a number of areas          to dispute the Administrators’ decision in Court. This
including:                                                       may effectively result in the continuation of
                                                                 proceedings being brought by the Contingent Litigation
     The absence of any criteria for determining                 Creditors and thereby undermining a core purpose of
     participating Contingent Litigation Creditor in the LCF;    the Deed which is to prevent litigation;

     The signifcant risk that there will be insufficient funds   The proposal requires that extensive releases be given
     on hand to ‘seed’ the LCF ($36.0m) upon execution of        to Lehman companies their directors and officers and
     the Deed as funds immediately available are to be           that indemnities be provided by Contingent Litigation
     distributed to priority creditors and Lehman entities.      Creditors to Lehman companies in circumstances
     To satisfy this requirement of the proposal, assets may     where claims are brought against any third parties.
     need to be realised at a significant discount to maturity   The Administrators understand that the enforceability
     values;                                                     of these types of provisions in deeds of company
                                                                 arrangements are yet to be considered by the courts.
     The proposal provides that any income received by the
     Deed Administrators from the Bonds/CDO’s are to be          Participating creditor claims are to be admitted on the
     avaliable to top up the distributions under the fourth      basis of estimated losses, having regard to the loss
     tranche. Under the “low” value scenario, where funds        calculated by SCRAPL. However, the proposal also
     would not extend to payment of a fourth tranche             requires that proofs of debt be dealt with in
     dividend, this provision would not be appropriate.          accordance with Sections 553 to 554C of the
                                                                 Corporations Act which provides for the Administrator
The LB Asia proposal is deficient for a number of reasons,       to estimate the value of the claim and allows creditors
including:                                                       to appeal to Court against that decision.        There
                                                                 appears to be an obvious contradiction in these
     It does not specify the basis upon which certain assets     positions.
     of LB Australia that are under the control of the
     Administrators may come under the control of an
     alternate Administrator for the LCF (which is a sub-
     fund of the General Deed Fund);

     The process by which the adjudication of Contingent
     Litigation Creditors claims is to be conducted by the
     LCF Administrator in accordance with the provisions of
     the Corporations Act. As there is no agreed formula
     for determining those claims, creditors will have a right


6.1     GENERAL                                                          ii.    whether it would be in the creditors' interests for the
                                                                                administration to end;
At the creditors meeting scheduled for 27 May 2009 at 10:00
a.m., creditors will be asked to determine the future direction of       iii.   whether it would be in the creditors' interests for the
LB Australia.                                                                   company to be wound up;

Section 439C of the Corporations Act provides that creditors           In relation to the above alternatives, the Administrators provide
may resolve to either:                                                 their further comments below.
1. Approve the entering into of a Deed;                                6.2.1 End the Administration (not recommended)
2. End the administration and hand LB Australia back to the            If creditors resolve to end the administration, control of the
   Directors; or                                                       Group would revert back to the Directors.             In such
                                                                       circumstances, creditors would have to pursue their own means
3. Place LB Australia into liquidation.                                of recovery against the Group, which in all likelihood would
                                                                       culminate in the Group being wound up.
No further adjournments of this meeting will be permitted other
than for a few business days.
                                                                       As the Group is insolvent, we do not recommend that creditors
                                                                       end the administration.
                                                                       6.2.2 Execute Deed (not recommended)
It is a matter for the creditors of LB Australia to determine, which
of the proposals, if any, best suit their requirements. In our
                                                                       The Administrators are concerned about the enforceability of the
experience, forecasted financial dividends are just one
                                                                       required releases and the indemnities from creditors (in certain
consideration for creditors. Others include the period of time
                                                                       circumstances) under the LB Asia Proposal in favour of LB
which it is likely to take before any dividend will be paid and the
                                                                       Australia, its officers and the Lehman entities and their officers
degree of certainty that can be reasonably be expected.
                                                                       and the potential for such provisions to breach section 445D of
                                                                       the Corporations Act. The 19 March 2009 Report was provided
The Corporations Act requires that we state our opinion as to
                                                                       before the Administrators had received a "final" proposal from
each of the following matters:
                                                                       LB Asia. It is the subsequent requirement for the provision of
                                                                       the extensive releases and indemnities that has caused the
   i.   whether it would be in the creditors' interests for the        Administrators to revise their opinion concerning the
        company to execute a deed of company arrangement;              recommended course that is in the best interests of all creditors
                                                                       as a whole.

   6      Alternatives Available to Creditors (cont)

While the Gowings Proposal does not provide for the same
extensive releases and indemnities, it does not have the same
degree of certainty for the end of the actual and potential
litigation against LB Australia directly, if creditors seek to pursue
LB Australia's insurers, or indirectly if creditors seek to pursue
LB Australia's officers (resulting in such officers claiming against
LB Australia under its obligation to indemnify its officers).

It is essential that the releases and any moratorium provided by
the Contingent Litigation Creditors in both the LB Asia and the
Gowings Proposals do not prejudice any insurance recovery in
relation to the claims by Contingent Litigation Creditors.
Creditors should take their own advice regarding how this issue
is dealt with under the LB Asia and Gowings Proposals. The
Administrators consider that there is inadequate information
contained in the proposals to assess this issue.

For the reasons set out therein, and notwithstanding the benefits
arising from a potential resolution of creditor claims, we are
unable to recommend either of the proposals for a deed of
company arrangement in their current form. If such proposals
can be amended prior to the reconvened meeting of creditors,
the Administrators may reconsider and recommend to creditors
that LB Australia execute a deed of company arrangement.

6.2.3 Wind up the LB Australia (recommended)

For the reasons outlined in this Supplementary Report, and
particularly the difficulties with the present from of the Deed
Proposals, the Administrators recommend that creditors resolve
to wind up LB Australia.


                                                                    7.3.1 Remuneration to completion of Voluntary
We have previously obtained approval for our remuneration as              Administration
                                                                    On the basis that creditors resolve in favour of Liquidation or a
      For the period 26 September to 5 December 2008 in the         Deed, Creditors will be asked to approve the Administrators
      sum of $494,320.77 plus GST by the Committee at the           future fees for the period 9 May 2009 to the end of the
      Committee meeting held on 16 December 2008.                   administration in the amount of $450,000. This amount is a cap
                                                                    and provides for the possibility that a Deed, if approved by
      For the period 6 December 2008 to 6 February 2009 in the      creditors, will not be executed until the 21st day following the
      sum of $273,111.63 plus GST by the Committee at the           Third Meeting of Creditors. If the Deed is executed earlier than
      Committee meeting held on 16 December 2008.                   the 21st day, or the company is placed in liquidation, we would
                                                                    expect our remuneration calculated in accordance with our
      For the period 7 February to 13 March 2009 in the amount of   schedule of rates approved by creditors, to be well below this
      $343,936.90 plus GST by creditors generally at the Second     cap.
      Meeting of Creditors held on 30 March 2009.
                                                                    7.3.2 Future Remuneration of Liquidators or Deed
7.2     APPROVAL SOUGHT FOR CURRENT REMUNERATION                          Administrators

At the forthcoming meeting creditors will be asked to consider      With respect to our future ‘static’ fees i.e. fees that would be
the work conducted by the Administrators, their Partners and        incurred regardless of whether LB Australia is placed into
staff for the period 14 March to 8 May 2009 in the amount of        liquidation or executes a Deed, we expect these to be in the
$641,024.75 plus GST, and to approve payment of their               order of $2 million until completion of this matter.
remuneration for that period. In support of this Supplementary
Report, we have attached at Annexure J a schedule setting out       In view of the above, at the forthcoming meeting of creditors we
the calculation of those costs.                                     will be seeking approval of our remuneration up to the amount of
                                                                    $750,000 on account of this remuneration and note that in the
                                                                    instance we accrue. Remuneration in excess of this amount, we
                                                                    will seek the approval of such amounts with the Committee (if
                                                                    formed) or Creditors in the general meeting.


This Supplementary Report and the accompanying Annexures
are prepared in accordance with Section 439A of the Act for
Lehman Brothers Australia Limited (Administrators Appointed).

Dated this 18th day of May 2009

Joint and Several Voluntary Administrator


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