Lehman Brothers

Lehman Brothers Information

Background

On 15 September 2008 Lehman Brothers, a major US investment bank filed for Chapter 11 bankruptcy protection in the United States. Arc Capital & Income plc arranges the underlying investments for its structured products with a range of different banks which all have a high credit rating. We have occasionally used Lehman Brothers International (Europe) to provide those investments. The situation at Lehman Brothers affects 3 Plans that are currently in issue and led to the withdrawal of 3 other Plans where investments had been provisionally arranged with Lehman Brothers.

Plans in Issue

The following 3 Plans have investments arranged with Lehman Brothers

The Fixed Income Plan 6

Stepped Kick Out Plan 5

Bull & Bear Enhanced Investment Plan 3

An update to all Planholders who have invested in the three Plans was sent to investors and their advisers on 9 December 2008. If you are an investor in one of the Plans and have not received a letter please contact enquiries@arccapital.co.uk or phone 0845 890 8915

Withdrawn Plans

Investments in respect of the Fixed Income Plan 7, Stepped Kick Out Plan 6 and Protected Commodity Plan had been provisionally arranged with Lehman Brothers International (Europe) but we withdrew from those investments. Investors in the three withdrawn Plans have been written to with details of how to claim a refund and, for those that invested through an ISA or ISA transfer, the additional options if they want to transfer their investment to another ISA provider. If you are an invetsor in one of the Plans and have not received a letter please contact enquiries@arccapital.co.uk or phone 0845 890 8915

Other Plans in issue

If your Plan is not named above the issuer of the investments arranged for your Plan was not Lehman Brothers. The name of the issuer will be included on your Initial Transaction Statement you received after the investments for your Plan were purchased and will be included on your Annual Valuation Statements.

However, if you are concerned about the security of your investment or need clarification about the issuer of the investments linked to your Plan please contact enquiries@arccapital.co.uk or phone 0845 890 8915

Further Information

The various Lehman Brothers' Administrators have indicated that it may take some time to provide substantive information about specific investments. The information below provides details of some of the frequently asked questions we are asked by customers affected by this issue and their advisers. We will continue to update investors of developments as soon as possible after we become aware of them.

Lehman Brothers and Arc Capital & Income products - Your Questions

- Does the Lehman Brothers situation affect my Plan?
- If I have invested in one of the affected Plans - what is the position with my investment?
- What is the current status of the issuing institutions?
- Was the risk of the issuing bank not meeting its obligations included in the product literature?
- Barclays Bank plc has bought some elements of Lehman Brothers - will this help the situation?
- Is the Financial Services Authority doing anything about the situation?
- Can I make a claim to the Financial Services Compensation Scheme?
- I applied for a plan which was due to invest on 26 September 2008
- Can I encash an existing Plan?

IMPORTANT DEVELOPMENT - New York Courts set bar date for the filing of claims. All affected investors should read the information about Lehman Brothers Holding Inc ("LBHI") below.

Does the Lehman Brothers situation affect my Plan?

Arc Capital & Income plc arranges the underlying investments for all of our Plans through a "counterparty". The Plans currently in issue were arranged with a range of different banks which, at the time of issue were rated at least "A" by a reputable credit rating agency such as Standard & Poor's. Such a rating denotes a high level of security.

Only 3 Plans in issue were arranged with Lehman Brothers -

- Fixed Income Plan 6,
- Bull & Bear Enhanced Investment Plan 3,
- Stepped Kick Out Plan 5.

We have written to investors in those Plans and their independent financial advisers to provide specific information about the situation in relation to their investments.

If your existing Plan is not one of the 3 mentioned above your Plan's investments were not arranged with Lehman Brothers and are not affected by the situation.

If I have invested in one of the affected Plans - what is the position with my investment?

At the present time we still have very little concrete information concerning individual investments and do not yet know if Lehman Brothers will be able to meet their obligations in respect of the investments arranged with them.

The Lehman Brothers group of companies was a large and complex organization. The investments in connection with your Plan were arranged with the London based UK regulated and authorised Lehman Brothers International (Europe) - "LBIE". The investments themselves were issued by other Lehman Brothers subsidiaries and were underpinned by guarantees by the parent company Lehman Brothers Holdings Inc, - LBHI.

The issuing institution for the affected Plans is as follows:

- Fixed Income Plan 6 (all versions) - Lehman Brothers Treasury BV
- Stepped Kick Out Plans issued as an ISA - Lehman Brothers Treasury BV
- Bull & Bear Enhanced Investment Plan 3 issued as an ISA - Lehman Brothers Treasury BV

- Stepped Kick Out Plans not issued as an ISA - Lehman Brothers Securities NV
- Bull & Bear Enhanced Investment Plan 3 not issued as an ISA - Lehman Brothers Securities NV.

The underlying guarantor for all of above the investments was Lehman Brothers Holdings Inc ("LBHI") and affected investors are advised to read the information about LBHI as well as the particular company which issued their underlying investments.

What is the current status of the issuing institutions?

Lehman Brothers Treasury BV ("LBT") is based in The Netherlands. The underlying investments were issued by LBT as part of LBT's Euro Medium Term Note Program ("EMTN Program"). The investments were guaranteed by Lehman's parent company, Lehman Brothers Holdings Inc ("LBHI").

Following LBHI's application for bankruptcy protection in the USA, the Amsterdam District Court granted LBT provisional suspension of payment on 19th September 2008. An Administrator was also appointed and as a consequence the Board of LBT and the Administrator became jointly authorized and responsible for the ongoing management of LBT. At the same time a creditors' meeting was scheduled for 10 December 2008.

On 8 October the Amsterdam District Court revoked the provisional suspension of payment and declared LBT bankrupt with the appointment of a bankruptcy trustee. The meeting planned for 10 December 2008 was cancelled. The Court also announced that it would at an appropriate time set a date for a claims admission meeting.

On 22 December 2008, the bankruptcy trustee ("trustee") issued its first Bankruptcy Report as well as a Notice to holders of Notes issued by LBT under the EMTN Program.

The first Report details the background to the current situation at LBT and spells out the trustee's plan of action with specific reference to his goals in the first quarter of 2009. In the Notice to note holders the trustee states under Dutch law that, in the event of any amounts becoming payable, no payments can be made to note holders until after the claims admission meeting and with the approval of the Amsterdam District Court. No date had been set for the claims admission meeting. In the interim no payments which otherwise would have become due from the investments will be paid.

In his Report the trustee outlined the complexity of the relationships between Lehmans entities and the technical difficulties in valuing claims and that progress in the winding up of LBT and the payment of any values to creditors is largely dependent on progress in respect of the parent company LBHI.

The first Report also states that a final date for the submission of claims has not been fixed. When the trustee was acting as the Administrator, Arc Capital & Income notified him of our interest and we have since been provided with ongoing information such as a notification that the Notice and Report mentioned above had both been issued on 22 December 2008. The trustee will notify us about the procedure for the formal submission of claims.

The Report also contained an annexe detailing the investments issued by LBT under the EMTN Program. Effectively the listing represents the investments of LBT's creditors and we can confirm that all of the investments we hold with LBT were included in the listing.

On 16 April 2009, the Trustee issued his second Bankruptcy Report. Although progress had been made the Trustee reiterated that the legal aspects of the recognition and valuation of the claims of creditors remained complex due to the multiplicity of the underlying investments and the different legal systems involved in this assessment.

The second Report informed us that LBT were trying to reach agreement with the Administrators of LBIE in London for the provision by LBIE to LBT of information relating to the books and records of LBT. The trustee believes the obtaining of these records forms a "core task" in the progress of the bankruptcy. In the third Report he does report some further progress with this task but progress appears to be quite slow in this respect. LBIE undertook a lot of important functions for the Lehman Brothers Group including various administrative functions on behalf of LBT.

The trustee also voiced his support for the Cross Party Insolvency Protocol proposed by LBHI. The aim of this protocol is to assist the cooperation of the different trustees/administrators who are dealing with the insolvency of different Lehman entities throughout the world.

In the second Report the trustee confirmed again that no date had yet been set for the formal filing of claims in respect of the insolvency of LBT. He is obliged under Dutch law to notify us when such a date is set and to notify us of the procedures for filing claims.

On 22 July 2009, the trustee issued his third Bankruptcy Report. The first thing to note is that the trustee will not request the Amsterdam District Court to set dates for the filing of claims and the claims admission meeting until 2010. Prior to that the trustee will try to reach agreement regarding the amount of represented claims (we have already notified the trustee of our interest).

In his next report due in mid-October 2009 he will attempt to outline a basis for the valuation of claims and prospective claimants will have the opportunity to respond to those proposals. The Trustee hopes to announce the final valuation principles in his report in January 2010 and will not request dates for the filing of claims until after publication of the definitive valuation principles.

The trustee signed the Cross Party Insolvency Protocol proposed by LBHI and attended meetings in London on 17 July 2009 with the representatives of other Lehman Brothers entities - please see below for more information about the Cross Party Insolvency Protocol.

On 11 June 2009, the trustee placed an amended list of investments issued by LBT on its website. All of the investments issued to Arc Capital and Income plc are included in the revised list.

The Report also points out that the US Courts have set Bar Dates for the filing of claims to LBHI and more information about this is included below under the heading Lehman Brothers Holdings Inc ("LBHI")

The trustee is our primary source of information. He will be issuing quarterly updates through the issue of further Bankruptcy Reports and other Notices. All of the Reports, Notices and listing referred to above can be read in full at www.lehmanbrotherstreasury.com. We will post details of such Reports on this website as well as in periodic letters to investors.

Lehman Brothers Securities NV ("LBS") is based in the Netherland Antilles and was a wholly owned subsidiary of Lehman Brothers Asia Holdings Limited based in Hong Kong which in turn was a wholly owned subsidiary of the parent company LBHI. Unlike most Lehman companies LBS did not immediately pass into Administration or its equivalent following LBHI's application for bankruptcy protection in the United States. However, we were informed in December 2008 that following a review LBS took the decision to file for a moratorium of payments and/or bankruptcy under the laws of the Netherlands Antilles.

We have notified LBS of our interest and on 6 January 2009 received an email form them acknowledging their receipt of that notification.

We subsequently received notification that on 30 January 2009 the Court of First Instance of the Netherlands Antilles adjudicated LBS bankrupt. Ms A.M.P Geelhoed has been appointed the supervising judge in charge of the bankruptcy with Mr. M.R.B Gorsira appointed as trustee.

On 12 March 2009, the trustee issued the first of his bankruptcy reports. He will issue further such reports on a quarterly basis. The report briefly outlines in general terms the assets and liabilities of LBS. The most significant of these are amounts payable to and receivable from other Lehman Brothers entities and in Paragraph 6.3 of his report the Trustee concludes that LBS' financial position is very much dependent on developments within the Lehman Brothers Group and most notably the progress of the Chapter 11 proceedings in respect of LBHI in the United States. The trustee is therefore presently unable to provide an assessment of the prospects for LBS' creditors.

We also received a letter from the law firm VanEps Kunneman VanDoorne on behalf of Mr. Gorsira following which we have submitted a claim in respect of the investments with LBS to VanEps Kunneman VanDoorne.

There is no indication of what amounts, if any, may be distributed as a result of this claim nor of how long the claims process will take.

On 29 July 2009, the trustee issued his second Bankruptcy Report. The first thing to note is that the Supervisory Judge has not yet set a bar date for the filing of claims or a date for a claims admission meeting. The Trustee does not know at this time when he will make a request to the judge for the establishment of these dates.

The LBS trustee signed the Cross Party Insolvency Protocol proposed by LBHI and attended meetings in London on 17 July 2009 with the representatives of other Lehman Brothers entities - please see below for more information about the Cross Party Insolvency Protocol.

However, the trustee has reported that he currently has no funds with which to carry out his obligations. This is particularly important with regard to obtaining information from LBIE who acted as arranger, dealer and calculation agent in respect of LBS issued investments as well as structuring the investments. Almost all legal documents and accounts of LBS are held on LBIE's systems and the trustee reports that LBIE is only prepared to provide information against the settlement of costs. The trustee does expect to receive estate funding to progress in his tasks.

The trustee has placed an amended list of investments issued by LBS on its website. All of the investments issued to Arc Capital and Income plc are included in the revised list.

The Report also points out that the US Courts have set Bar Dates for the filing of claims to LBHI and more information about this is included below under the heading Lehman Brothers Holdings Inc ("LBHI")

A full copy of the Reports, Notices and other information referred to above can be read in full at www.ekvandoorne.com/bankruptcylbs/index.html

Lehman Brothers Holdings Inc ("LBHI")

The guarantee in respect of all investments we have arranged with Lehmans was given by LBHI. We have always been aware that as well as liaising with the authorities in the Netherland and Netherlands Antilles there was a strong probability that we would pursue matters in the US.

Earlier this year we contacted legal advisers in the United States to assist us in the event that we would need to make a formal claim in the US in respect of the guarantees of LBHI.

At the time of our last update no date had been set for the period during which any such claims should be submitted. On 2nd July Judge Peck of the United States Bankruptcy Court, Southern District of New York set various bar dates for filing claims in the Chapter 11 bankruptcy proceedings of LBHI. The bar date in respect of claims in respect of the Lehmans Program Securities List is 2nd November 2009. Please note that this differs from the 22 September 2009 date which has been widely reported but is the Bar Date set for other creditors. As planned earlier in the year we have therefore formally engaged the law firm Willkie Farr & Gallagher LLP to advise and assist us in filing claims in the US and drafting of the claims has commenced.
Details of the Bar Dates, including an example of the Claim Form, as well as other information can be found on the website www.lehman-docket.com Please click on the "Bar Date Information and Forms" heading once you reach the site. Please note that the information relating to the investments connected to your Plan or ISA is that contained under the heading "Lehman Programs Securities And The Securities Programs Bar Date"

The information on the site also includes the final list of Lehman Programs Securities which was issued on 17 July 2009. As well as being included on the respective LBS and LBT listings referred to above all of the investments connected to affected Arc Capital & Income plc plans are included on the final list.

In the Order it is established that a representative can submit claims on behalf of the beneficial owners and we are working with our legal advisers on this basis. This means that we will make the claim(s) and keep you informed of the progress of those claim(s)

It is not anticipated that Plan holders will be required to take any action with regard to the claims we will be filing the United States.

We will let investors and their advisers know as soon as any action is required by them.

It is important to note that although the announcement of the Bar Dates represents a significant development and some concrete progress; the process of assessing and valuing those claims does not commence until after the Bar Date. We anticipate that further progress will continue to be slow, particularly given the important role of LBIE in the operations of LBS and LBT in the period prior to the collapse of Lehman Brothers and the present difficulties in the speed of exchange in information between LBIE and those two organisations.

LBHI has also signed the Cross Party Insolvency Protocol and took part in meetings on 17th July 2009 in London.

Lehman Brothers International Europe ("LBIE")

The investments were arranged with the London based LBIE. LBIE entered Administration on 15th September 2008 with Pricewaterhouse Cooper's ("PwC") being appointed as the Administrator. Much of our early correspondence was with PwC and we have notified them of our interest as a potential creditor.

Although we are strictly creditors of LBT and LBS we will continue to liaise with LBIE in order to reflect the interests of our customers as widely as possible until such time as the overall situation becomes clearer.

On 14 April 2009 PwC issued a report on their progress for the period form 15 September 2008 to 14 March 2009. The Report which runs to 90 pages is available on the PwC website.

PwC as the appointed Administrator of LBIE has not signed the Cross Party Insolvency Protocol but does continue to liaise with other Lehman entities on a bilateral basis.

Cross Party Insolvency Protocol.

The trustees/administrators of LBS, LBT, LBHI as well as a number of other "Official Representatives" of other worldwide Lehman entities have signed a Cross Party Insolvency Protocol. The aim of the Protocol is to assist in the handling of the Lehman Brothers administration process, to bring about consistencies and co-ordination of this process as far as possible bearing in mind the global nature of the Lehmans business and different insolvency laws and practice in the different jurisdictions.

We welcome this initiative and hope that the ambitions of the Protocol can be achieved in practice. A meetings took place in London on 17 July 2009 and a second meeting is planned in October 2009 and will take place in London or Amsterdam.

LBIE has not signed the Protocol but did invite the official representatives of the entities with which LBIE has inter-company positions for a meeting which took place on 16 July 2009.

Was the risk of the issuing bank not meeting its obligations included in the product literature?

The product literature relating to our Plans makes it clear that there was a risk that if the issuing bank could not fulfill its obligations either in part or in full this may lead to an investor losing some or all of their investment.

A number of reputable agencies constantly monitor the financial strength of financial institutions, probably the most well known of these is Standard & Poor's. All of our Plans have been arranged with financial institutions which were rated at least "A" or equivalent by Standard & Poor's or another rating agency. Such a rating denotes a high level of capital strength and Arc Capital & Income plc as well other financial industry firms believed it was highly unlikely that an "A" rated institution would fail to meet its obligations.

Immediately before applying for bankruptcy protection on 15 September 2008, Lehman Brothers was still an "A" rated institution and its rapid demise was a shock and surprise both to Arc Capital & Income and to the financial services industry generally

Barclays and the Japanese bank Nomura have bought some elements of Lehman Brothers - will this help the situation?

Barclays bought some parts of the Lehman Brothers operation, predominantly in connection with Lehman's operations in the USA. Similarly, Nomura bought parts of Lehmans operations in Europe, Asia and in other jurisdictions. Based on the information we have, it seems unlikely that these deals will bring any direct benefit to creditors in respect of the investments arranged for the above mentioned Plans

If Lehman Brothers or its subsidiaries are unable to meet their obligations, can I make a claim to the Financial Services Compensation Scheme?

No, The FSCS covers "designated investment business" as defined in the FSA's Handbook. In this respect you would be covered in the event of the insolvency of Arc Capital & Income plc. The issue of securities by LBS and LBT is not covered by the FSCS and investors do not therefore have the ability to claim from FSCS as a result of Lehman Brothers' insolvency.

Is the Financial Services Authority doing anything about the situation?

We wrote to the Financial Services Authority ("FSA") shortly following the application of LBHI for Chapter 11 protection. FSA subsequently contacted us with regard to work they are undertaking with regard to structured products providers and their exposure to Lehmans. We understand this is part of a Europe wide exercise amongst European regulators.

We originally provided broad based information to FSA concerning the products with a Lehman's exposure as well as the numbers of customers and total investments in each of the affected Plans. In common with other providers of structured products we have been asked for more detailed information to assist them in their research and continue to provide information to and liaise with FSA as they request.

In May, the FSA and Ombudsman agreed that the issues relating to Lehmans-backed structured products should be considered under the "Wider Implications" process., The Wider Implications process is intended to provide a transparent means of bridging potential regulatory gaps or overlaps between the FSA, Ombudsman and Office of Fair Trading on 'significant issues', including those that may give rise to widespread consumer detriment.

The review is aimed to allow the FSA to explore all options to achieve the best outcome for consumers.

On 14 August 2009, the FSA updated the Ombudsman on its. Although the FSA reports that it has completed several elements of its work, it has asked the Ombudsman to continue to defer by a further three months the consideration of complaints connected to the collapse of Lehmans to allow the FSA to consider the remaining aspects.

We also understand that FSA is working closely with PricewaterhouseCoopers -"PwC", the appointed Administrator for LBIE.

More information about the FSA and Lehman can be found on their website www.fsa.gov.uk

Can I encash an existing Plan?

If you are invested in one of the three existing Plans arranged through Lehman Brothers the present situation means it is highly unlikely that you will be able to encash your Plan until the circumstances and status of investments held with Lehman Brothers have been clarified. We will continue to monitor the situation in this regard and keep you informed

If you are invested in one of the other Plans in issue your circumstances are unchanged.

Arc Capital & Income plc is not authorised to give advice on your investments and cannot make any recommendations on what action you should take at the present time.

We strongly recommend you contact your independent financial adviser before making a decision to encash or transfer your investment.

The information above is based on information which, to the best of our knowledge and belief was accurate as at 21 August 2009.

We would like to thank all of our customers and the financial advisers who have invested with Arc Capital & Income plc for their patience and support at this time. We will continue to use our best endeavours to provide update information about the ongoing situation at Lehmans as quickly as we are able.