Dec. 19 (Bloomberg) -- Lehman Brothers Holdings Inc. customers may not recover $1 billion held by a German subsidiary of the failed bank, according to PricewaterhouseCoopers, the administrator directing the insolvency.

The money was deposited with Lehman Brothers Bankhaus AG, a German unit of Lehman Brothers International Europe, according to a PwC report yesterday. Lehman International, the bank’s European arm, had about $2.1 billion in client money, of which about $1 billion has been recovered, PwC said.

“There is currently considerable uncertainty surrounding the timing and extent of the recovery of the deposit of client monies” in the Bankhaus unit, PwC said. “There are a number of significant issues affecting the return of client money, which need to be fully resolved to ensure fairness to all client money claimants.”

Lehman International, which ran Lehman’s London-based prime brokerage, had about 3,500 hedge funds and other asset managers as clients. More than three months after Lehman’s bankruptcy, the customers still don’t know the status of their positions after the failure froze at least $65 billion in brokerage assets.

“The German insolvency process has yet to provide any guidance on the financial position of Bankhaus,” said PwC spokeswoman Stephanie Howel in an e-mailed statement.

Long Way

“We’ve got a long way to go to figure out how much money there is, or if there’s a shortfall how big that will be,” Tony Lomas, the PwC partner leading the administration, told about 1,000 creditors and their attorneys in London on Nov. 14. “We wouldn’t want to advise anyone on what the recovery might be.”

PricewaterhouseCoopers said the U.K.’s Financial Services Authority, the German financial-services regulator BaFin, and German insolvency administrator have been in contact “to expedite the return of client money.” Customers may be able to make a claim for their positions with the German Deposit Protection Fund, PwC said.

The administrator plans to hold its first creditor meeting for the Bankhaus issue in March.

“The resolution of the status of liabilities claim will not be known until the German administrator has formed a view and communicated it,” PwC’s Howel said.

Lehman filed the biggest bankruptcy in history on Sept. 15, citing bad investments linked to subprime home loans.

The bank’s failure proved to be a fatal blow for some hedge funds that relied on the firm to provide loans, clear trades and handle administrative tasks. MKM Longboat Capital Advisors LLP will close its $1.5 billion Multi-Strategy fund in part because assets are stuck at Lehman.

GLG Partners Inc., a hedge fund with about $17 billion, estimated it has at least $95 million in trades stuck at Lehman. It has since written the value down to zero.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

Last Updated: December 19, 2008 13:43 EST