* US $2 billion will be divided among clients
* Lehman Brothers International mixed client cash with its own
* Ruling could complicate business for investment banks
By Naomi O'Leary
LONDON, Feb 29 (Reuters) - The British supreme court ruled cash earmarked as belonging to clients when Lehman Brothers International collapsed should be divided up among all its clients, including those whose cash the investment bank had mixed with its own.
By law, firms must keep money they trade on clients' behalf separately to their own, keeping it safe from creditors seeking to recuperate losses in the event of a bankruptcy.
The ruling said that Lehman Brothers International failed to do this "on a truly spectacular scale".
The firm kept $2.16 billion of client money separately, but mixed far greater sums of others with its own, causing vast confusion when subprime mortgage losses caused it to collapse in 2008, marking the height of the financial crisis.
The ruling may affect clients of U.S. futures trader MF Global UK, who are struggling to recover their cash following the firm's collapse last year.
Lehman "routinely" failed to treat options and derivatives transactions as client money, the ruling said.
The biggest group of clients claiming money were the firm's own affiliates, who are trying to recover more than $3 billion.
Legal firm Allen and Overy said the ruling that investment banks hold client money 'on trust' from the moment they receive the money -- and not from the close of day which so far had been the case -- could create a headache for the banks.
It would also mean further delays for creditors.
"The decision will come as a blow to creditors of LBIE who have been waiting for over 3 years to get their money back," said Jennifer Marshall, a partner at Allen and Overy.
"It seems inevitable that there will be more litigation, regarding what money should be added to the pot and who is entitled to it, which could delay distributions for some time," she added.