Baker & Hostetler LLP
45 Rockefeller Plaza
New York, New York 10111
Telephone: (212) 589-4200
Facsimile: (212) 589-4201
David J. Sheehan
Email: dsheehan@bakerlaw.com
Seanna R. Brown
Email: sbrown@bakerlaw.com
Jacqlyn R. Rovine
Email: jrovine@bakerlaw.com
Hearing Date: July 12, 2011
Hearing Time: 10:00 A.M. (EST)
Objection Deadline: May 31, 2011
Reply Deadline: June 21, 2011
Attorneys for Irving H Picard, Trustee
for the Substantively Consolidated SIPA Liquidation
ofBernard L. Madoff Investment Securities LLC
and Bernard L. Madoff
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION
CORPORATION,
Adv. Pro. No. 08-01789 (BRL)
Plaintiff-App 1icant,
SIPA Liquidation
v.
(Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Defendant.
In re:
BERNARD L. MADOFF,
Debtor.
NOTICE OF MOTION FOR AN ORDER APPROVING AN INITIAL ALLOCATION OF
PROPERTY TO THE FUND OF CUSTOMER PROPERTY AND AUTHORIZING AN
INTERIM DISTRIBUTION TO CUSTOMERS
PLEASE TAKE NOTICE that Irving H. Picard, as trustee ("Trustee") for the
liquidation of the business ofBernard L. Madofflnvestment Securities LLC ("BLMIS") under
the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. ("SIPA"), and the substantively
consolidated estate of Bernard L. Madoff ("Madoff'') (collectively, "Debtor"), will move (the
"Motion") before the Honorable Burton R. Lifland, United States Bankruptcy Judge, at the
United States Bankruptcy Comi, the Alexander Hamilton Customs House, One Bowling Green,
New York, New York 10004, on July 12,2011 at 10:00 a.m., or as soon thereafter as counsel
may be heard, seeking entry of an order (the "Order") 1 (1) approving an initial allocation of
property to the fund of customer property ("Customer Fund"); and (2) authorizing an interim
distribution to customers whose claims for customer protection under SIPA have been allowed
for amounts exceeding the statutory limits.
PLEASE TAKE FURTHER NOTICE that written objections to the Motion
must be filed with the Clerk of the United States Bankruptcy Court, One Bowling Green, New
York, New York 10004 by no later than 4:00 p.m. on May 31, 2011 (with a comiesy copy
delivered to the Chambers of the Honorable Bmion R. Lifland) and must be served upon (a)
Baker & Hostetler LLP, counsel for the Trustee, 45 Rockefeller Plaza, New York, New York
10111, Attn: David J. Sheehan, and (b) the Securities Investor Protection Corporation, 805
Fifteenth Street, NW, Suite 800, Washington, DC 20005, Attn: Kevin H. Bell, Esq. Any
objections must specifically state the interest that the objecting patiy has in these proceedings
and the specific basis of any objection to the Motion. Objecting pmiies need not attend the
Hearing for the Bankruptcy Court to consider their objections.
PLEASE TAKE FURTHER NOTICE that replies to objections, if any, must be
filed with the Clerk of the United States Bankruptcy Court, One Bowling Green, New York,
New Y ark 10004 by no later than 4:00 p.m. on June 21, 2011 (with a courtesy copy delivered to
the Chambers of the Honorable Bmion R. Lifland).
1
A form of proposed order is annexed hereto as Exhibit A.
2
Dated: May 4, 2011
Respectfully submitted,
Is/ David J. Sheehan
David J. Sheehan
Email: dsheehan@bakerlaw.com
Seanna R. Brown
Email: sbrown@bakerlaw.com
Jacqlyn R. Ravine
Email: jrovine@bakerlaw.com
Baker & Hostetler LLP
45 Rockefeller Plaza
New York, New York 10111
Tel: (212) 589-4200
Fax: (212) 589-4201
Of Counsel:
Baker & Hostetler LLP
3200 National City Center
Cleveland, Ohio 44114
Telephone: (216) 621-0200
Facsimile: (216) 696-0740
Brian A. Bash
Email: bbash@bakerlaw.com
Thomas Wearsch
Email: twearsch@bakerlaw.com
Attorneys for Irving H Picard, Trustee
for the Substantively Consolidated SIPA
Liquidation of Bernard L. Madoff Investment
Securities LLC and Bernard L. Madoff
3
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UNITED STATES BAJ\'KRUPTCY COURT
SOUTHERN DlSTRJ CT OF NE\V YOlU.:
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lVIOTJON FOR .AN ORDER i-\FPROVING AN INITL'\L ALLOCATION OF PROPERTY
TO THE FUND OF CUST01V1ERPROPERTY AND AUTHORIZING ANINTERIIVI
D1STR1BUT10N TO CUSIOIVlERS
l of l
5/4/2011 2:55 J
Baker & Hostetler LLP
45 Rockefeller Plaza
New York, New York l Olll
Telephone: (212) 589-4200
Facsimile: (212) 589-4201
David J. Sheehan
Email: dsheehan@bakerlaw.com
Seanna R. Brown
Email: sbrown@bakerlaw.com
Jacqlyn R. Rovine
Email: jrovine@bakerlaw.com
Hearing Date: July 12.2010
Hearing Time: I 0:00A.M. (EST)
Objection Deadline: May 31, 2010
Reply Deadline: June 21,2010
Atlorneysfor Irving H. Picard, Trustee
for the Substantively Consolidated SIPA Liquidation
of Bernard L Jviado.ff Investment Securities LLC
and Bernard L Mado.ff
UN1TEDSTATESBANKRUPTCYCOURT
SOUTHERN DISTRICT OF NEW YORK
SECURJTJES INVESTOR PROTECTION
CORPORATION,
Adv. Pro. No. 08-01789 (BRL)
Plaintiff-Applicant,
SIPA Liquidation
v.
(Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURJTIES LLC,
Defendant.
In re:
BERNARD L. MADOFF,
Debtor.
MOTION FOR AN ORDER APPROVING AN INITIAL ALLOCATION OF PROPERTY
TO THE FUND OF CUSTOMER PROPERTY AND AUTHORIZING AN INTERIM
DISTRIBUTION TO CUSTOMERS
TABLE OF CONTENTS
Page
I.
PRELIMINARY STATEMENT ....................................................................................... 1
ll.
PROCEDURAL HISTORY ............................................................................................... 6
lll.
THE LIQUIDATION PROCEEDING, CLAIMS PROCESSING & THE NET
EQUITY DISPUTE ........................................................................................................... 8
IV.
ALLOCATION OF PROPERTY & DISTRIBUTJON SCHEME UNDER SlPA ......... 12
A.
Allocation OfProperty ......................................................................................... 12
B.
Distribution Under SIPA ...................................................................................... 13
C.
Allocation Of Assets To The Fund Of Customer Property And Related
Reserves ............................................................................................................... 14
D.
V.
1.
Assets In Trustee's Possession As Of The Fourth Interim Report &
Certain Related Reserves ......................................................................... 16
11.
Undisputed Recoveries To The BLMIS Estate Since The Fourth
Interim Report .......................................................................................... 17
111.
Disputed Recovery-The Pi cower Settlement ........................................ 19
JV.
Summary Of Requested Allocation ......................................................... 23
Determination Of Allowable Net Equity Claims & Related Reserves ................ 23
INTERIM CALCULATION OF PRO RATA SHARE DISTRIBUTION OF
CUSTOMER FUND ........................................................................................................ 26
A.
No Interim Distribution Of General Estate .......................................................... 32
VI.
DEPARTMENT OF JUSTICE FORFEITURE FUNDS ................................................. 33
VJI.
MISCELLANEOUS ........................................................................................................ 33
VJII.
A.
Notice ................................................................................................................... 33
B.
Waiver OfMemorandum Of Law ........................................................................ 34
CONCLUSION ................................................................................................................ 34
-1-
TO THE HONORABLE BURTON R. LIFLAND,
UNITED STATES BANKRUPTCY .JUDGE:
Irving H. Picard, as trustee ("Trustee"') for the liquidation of the business of Bernard L.
Madoff Investment Securities LLC ("BLMIS'') under the Securities Investor Protection Act,
J5
1
U.S.C. § 78aaa et seq. ("SIPA"), and the substantively consolidated estate ofBernard L. Madoff
("Madoff") (coiiectively, "Debtor"), respectfully submits this motion (the "Motion") pursuant to
SIPA §§ 78111(4), 78fff(a)(l)(B), 78fff-2(b), and 78fff-2(c)(l), and Rule 9013 of the Federal
Rules of Bankruptcy Procedure (the "Bankruptcy Rules") seeking entry of an order (l)
approving an initial allocation of property to the fund of customer property ("Customer Fund");
and (2) authorizing an interim distribution to customers whose claims for customer protection
under SIPA have been allowed for amounts exceeding the statutory limits.
This Court has
jurisdiction over this Motion pursuant to SJPA §§ 78eee(b)(2), 78eee(b)(4), 28 U.S.C. §§ l 57
and l 334, and Bankruptcy Rule 5005. This Motion is based upon the law set forth below as well
as the facts set forth in the affidavit of Matthew Cohen ("Cohen Aff."), filed herewith.
Jn
suppmi of this Motion, the Trustee alleges and represents as follows:
I.
PRELIMINARY STATEMENT
l.
In order to protect customers of an insolvent broker-dealer such as BLMIS,
Congress established a statutory framework pursuant to which customers of a debtor in a SIPA
liquidation are entitled to preferential treatment in the distribution of assets from the debtor's
estate. The mechanism by which customers receive preferred treatment is through the creation
of a fund of "customer property" as defined in SIPA § 78lll(4), which is distinct from a debtor's
general estate. Customers holding allowable claims are entitled to share in the Customer Fund
1
For convenience, subsequent references to sections of the Act shall follow the form: "SIP A§_."
based on each customer's "net equity" as of the filing date, to the exclusion of general creditors.
SlPA § 78fff-2(c).
2.
To protect customers further, Congress authorized the Securities Jnvestor
Protection Corporation ("SIPC") to advance to the Trustee up to $500,000 for each customer
\Vith an allowed net equity claim if customer property is insufficient to satisfy the customer's
claim. SJPA § 78fff-3(a). Because determining the total amount of customer property and the
ratable share owed to each customer takes time, SJPA authorizes SJPC to advance funds to the
Trustee, who in turn may promptly pay amounts up to the SlPA limits to customers with allowed
claims. SIPA §§ 78fff-2(b)(l), 78fff-3(a)(l). Thus, even ifultimately there is enough customer
prope11y to make a customer whole without the use of SlPC funds, SJPA does not make the
customer wait until the Trustee has collected customer property before partially or fully
satisfying his or her claim.
With the exception of those claims in litigation or involved in
settlement discussions, the Trustee has advanced or committed to advance SJPC funds to each
customer with an allowed net equity claim.
3.
In order to make distributions from the Customer Fund, the Trustee must
determine or be able to sufficiently estimate: (a) the total value of customer property available
for distribution, or the "numerator" (including reserves for disputed recoveries), and (b) the total
net equity of all allowed claims, or the "denominator" (including reserves for disputed claims).
Each element of this equation-the customer property numerator and the net equity claims
denominator-is inherently complex in a liquidation of this magnitude.
The Trustee has
calculated reserve amounts on a "worst-case" basis, such that the ultimate resolution of disputed
amounts will not adversely affect any customers' allowed or disputed net equity claims.
-2-
4.
There are many unresolved issues in this liquidation proceeding that will requ1re
the maintenance of substantial reserves with respect to both the customer property numerator and
the net equity claims denominator. Nonetheless, this liquidation proceeding has progressed to a
stage at which it is now possible for the Trustee, on an interim basis, to determine: (a) the
allocation of property to the Customer Fund, or the "numerator" (taking into account reserves);
(b) the amount of allowable net equity claims, or the "denominator'" (also taking into account
reserves); and (c) the calculation of each customer's minimum ratable share of the Customer
Fund. Each ofthose determinations is set forth herein.
5.
]n this Motion, the Trustee seeks permission to make an initial allocation to the
Customer Fund and an interim distribution to customers whose claims have not been fully
2
satisfied because their net equity claims as of the Filing Date exceeded the statutory SJPA
protection limit of $500,000. The distribution will be made on claims allowed as of March 31,
2011, which relate to 1,224 BLMJS accounts.
6.
Over the course of the twenty-nine months since his appointment, the Trustee has
recovered more than $7.6 billion. Of the "net loser" customers (those BLMJS customers who
did not receive their principal back prior to December 11, 2008) who filed claims with the
Trustee, the amounts recovered thus far represent approximately 44% of the principal lost in this
scheme, totaling approximately $17.3 billion.
3
This means that the Trustee is almost halfway to
the full recovery of principal lost by "net loser" claimants in this liquidation proceeding. lf and
2
ln this case, the Filing Date is the date on which the Securities and Exchange Commission commenced its suit
against BLMIS, December 11, 2008, which resulted in the appointment of a receiver for the firm. See SJPA
§ 78lli(7)(B) and infra~ 6.
3
The total amount of principal lost by all investors is approximately $19.5 billion. Not every customer with a "net
loser" account, however, filed a claim with the Trustee. Thus, the amount that the Trustee would have to recover in
order to return 100% of the principal lost by those who are eligible to receive a distribution in this proceeding is
approximately $17.3 billion.
-3-
when the Trustee recovers all of the principal lost, it \Viii represent the first time that the '"net
loser.. customers will be caught up to ''net winner'· customers-"net winners'· being those
customers who received all of their principal back prior to December II, 2008.
7.
4
Despite having recovered over $7.6 billion, only approximately $2.3 billion is
available to the Trustee for distribution at this time. The reduced amount is the result of various
appeals that have been filed, including, but not limited to, the appeal relating to the "net equity".
dispute (the "Net Equity Dispute"), discussed infra ~~ 69-79, the appeals relating to the $5
billion Picower settlement, discussed infra
with the Levy family, discussed iJ?fra
~
~~
53-64, and the appeal relating to the settlement
45. The result of these appeals is that instead of a 44%
distribution, the Trustee is only able to make a 4% distribution at this time.
8.
Pursuant to the decision and order of this Court on March 1, 2010 and March 8,
2010, respectively (collectively, the "Net Equity Decision"), only "net loser" customers have a
positive net equity under SJPA such that they are eligible for a distribution from the Customer
Fund. Were the Net Equity Decision to be reversed, those claims of"net winner" customers that
have been denied to date may become allowable and eligible for a distribution from the
Customer Fund. Jn order to ensure that there are funds sufficient to make a pro rata distribution
in that eventuality, the Trustee is maintaining significant reserves, 5 which decrease the amount
available for distribution from approximately 44% to approximately 13%.
9.
While not nearly as significant as a 44% distribution, a 13% distribution at this
stage of the proceeding would be a welcome result for many BLMJS victims. Unfortunately, the
4
Net losers and net winners will not be equal, however, until net winners repay the fictitious profits they received.
5
For this reason alone, no objections to this Motion need be filed by "net winner" claimants to protect any rights to
payment in the event the Net Equity Decision is reversed because the distribution model and related reserves build
in such protection.
- 4-
appeal relating to the Net Equity Dispute is not the only appeal pending that reduces the amounts
the Trustee can distribute to victims. As noted above, certain claimants have appealed the $220
million settlement with the Levy family, requiring the Trustee to hold those funds in reserve
pending the outcome of that appeal.
Moreover, two claimants (on behalf of themselves and
uncertified, putative classes, whose class actions have been enjoined) separately appealed the
most significant settlement obtained by the Trustee to date-that with the estate of Jeffry
Picower for $5 billion-singlehandedly reducing the amounts available from $7.3 billion to $2.3
billion. Because of these appeals, distributions on claims relating to 1,224 accounts must be
reduced from approximately 13% percent to just over 4%.
I 0.
While a 4% recovery may appear to be so de minimus such that it is inadvisable to
make a distribution at this time, there are several factors that tip the balance in favor of a
distribution, even with the pending appeals relating to the Net Equity Dispute, the Levy
settlement, and the Picower settlement.
1 1.
By way of this Motion, the Trustee seeks to distribute more than $272 million
(with an additional $424 million available for distribution to certain net loser accounts, if the
claims relating to their accounts become allowed prior to the time at which the distribution is
made).
6
These distributions will be paid on claims relating to 1,224 BLMIS accounts.
The
average payment amount to those 1,224 BLMJS accounts is $222,551.12. Thirty-nine payments
will go to claimants who qualified for hardship status under the Trustee's hardship program.
12.
Moreover, a significant number of claimants did not have accounts at BLMJS but
instead invested in an entity that was a BLMIS customer.
6
Investors in feeder funds are an
If all of the net loser accounts were allowed prior to the distribution, the total distribution would be approximately
$696 million. SIPC's subrogation claim is approximately $8 million, which as discussed herein, is being currently
deferred pending further developments in this proceeding.
-5-
example of the foregoing. A distribution to a feeder fund would likely benefit those persons who
had invested in the fund.
13.
Given these numbers and factors, the Trustee submits that the liquidation
proceeding is at an appropriate juncture to make a distribution. Further, he does not believe it is
equitable to delay payments however small to thousands of injured customers on account of the
actions of two claimants or a potentially lengthy appellate process over which he has no control.
14.
The proposed allocation and distribution are initial and interim in nature.
Trustee anticipates recovering additional assets through litigation and settlements.
The
Final
resolution of certain disputes will pem1it the Trustee to reduce the reserves he is required to
maintain. \Vhich would allow him to make additional distributions to customers in the future.
The Trustee will seek authorization for these further allocations and distributions upon the
recovery of additional funds and the resolution of significant disputes.
II.
PROCEDURAL IDSTORY
15.
On December 1 1, 2008, Madoffwas arrested and criminally charged with a multi-
billion dollar securities fraud scheme in violation of 15 U.S. C. §§ 78j(b) and 78ff and 17 C.F.R.
§ 240.1 Ob-5 in the United States District Court for the Southem District of New York. See
United States v. Madoff, 08-MJ-2735. Also on December 1 l, 2008, the Securities and Exchange
Commission ("SEC") filed a complaint in the District Court against Madoff and BLMJS, among
others, titled SEC v. Madoff, No. 08-CV- 10791 (LLS) (the "SEC Action").
16.
On December 15, 2008, under SIPA § 78eee(a)(4)(A), the SEC consented to
combine the SEC Action with an application of SIPC. Thereafter, under SIPA § 78eee(a)(3),
SJPC filed the application in the District Court alleging that BLMJS was not able to meet its
obligations to securities customers as the obligations came due and that its customers needed the
protection afforded by SJPA. The District Court entered a protective decree, to which BLMJS
-6-
consented, which, in pertinent part (a) appointed the Trustee for the liquidation of the business
of the Debtor under SIP A
Trustee pursuant to SIPA
~
78eee(b)(3). (b) appointed Baker & Hostetler LLP as counsel to the
~
78eee(b)(3), and (c) removed the case to this Court under SIPA
§ 78eee(b)(4).
17.
By orders dated December 23, 2008 and February 4, 2009, respectively, the
Bankruptcy Court approved the Trustee's bond and found that the Trustee was a disinterested
person.
(ECF Nos. 11, 69).
7
Accordingly, the Trustee is duly qualified to serve and act on
behalf of the estate ofBLMJS.
18.
At a plea hearing on March 12, 2009 in the criminal action filed against him by
the United States Attorney's Office for the Southern District ofNew York, Madoffpled guilty to
an ]]-count criminal information, which included charges of securities fraud, money laundering,
theft, and embezzlement.
Madoff admitted that he "operated a Ponzi scheme through the
investment advisory side of [BLMJS]." (Plea Hr'g Tr. at 23:14-17). On June 29, 2009, Madoff
was sentenced to a term of imprisonment of 150 years.
19.
On August 11, 2009, a former BLMIS employee, Frank DiPascali, pled guilty to
participating in and conspiring to perpetuate the Ponzi scheme. At a plea hearing on August 11,
2009, DiPascali pled guilty to a ten-count criminal infonnation.
DiPascali admitted, among
other things, that Mad off had been operating a Ponzi scheme since at least the late-1980s or early
] 990s. (Plea Allocution of Frank DiPascali at 46, United States v. DiPascali, No. 09-CR-764
(RJS) (S.D.N.Y. Aug. 11, 2009) (ECF No. 11)). Mr. DiPascali has yet to be sentenced.
7
All ECF references refer to pleadings filed in the main adversary proceeding pending before the Bankruptcy Court,
Securities investor Protection Cmporation v. Bernard L. A1adoff investment Securities LLC, Adv. Pro. No. 08-1789
(Bankr. S.D.N.Y.) (BRL), unless otherwise noted.
- 7-
20.
On April 13, 2009, an involuntary bankruptcy petition was filed against MadoJT.
On June 9, 2009. this Couri entered an order substantively consolidating the Chapter 7 estate of
Madoff into the BLMIS SIPA proceeding.
HI.
THE LIQUIDATION PROCEEDING, CLAIMS PROCESSING & THE NET
EQUITY DISPUTE
21.
Section 78fff(b) of SJPA provides that a SJPA liquidation proceeding "shall be
conducted in accordance with, and as though it were being conducted under chapters 1, 3 and 5
and subchapters l and 1l of chapter 7 of title 11 ,. to the extent that these provisions are consistent
with SJPA.
22.
SJPA affords special protection to "customers,'' as defined in SJPA § 7Slll(2),
who receive preferential treatment by having their claims satisfied ahead of general creditors.
See In re Adler Coleman Clearing Corp., 198 B.R. 70, 71 (Bankr. S.D.N.Y. 1996) (recognizing
that a "person whose claim against the debtor qualifies as a 'customer claim' is entitled to
preferential treatment"); In re Hanover Square Sec., 55 B.R. 235, 237 (Bankr. S.D.N.Y. 1985)
("[a]ffording customer status confers preferential treatment").
The amounts owed to each
customer are detennined by valuing his or her "net equity," defined in SJPA § 78lll(l 1), as of the
Filing Date.
23.
While customer protection is a paramount objective of SJPA, the Trustee has
duties under SIPA to the entire bankruptcy estate.
Accordingly, both customers and general
creditors may file claims against the estate in a SJPA liquidation.
24.
In order to establish an orderly liquidation and detem1ination of claims consistent
with SJPA and the Bankruptcy Code, upon application of the Trustee dated December 21, 2008,
this Court entered the Claims Procedures Order, which directed, among other things, that the
Trustee: (a) on or before January 9, 2009, provide notice of the liquidation proceeding and
-8-
claims procedures to all former customers. broker-dealers, and other creditors of the Debtor: (b)
on or before January 9. 2009, publish notice of the commencement of this SIPA proceeding in
The New York Times. The Wa!l Street Journal. The Financial Times, USA Today . .Jerusalem
Post, and Ye 'diot Achronot; and (c) give notice of the February 4, 2009 hearing on
disinterestedness of the Trustee and his counsel and the meeting of creditors to be held on
February 20, 2009. Ex Pmie Application for Order Approving Form and Manner of Publication
and Mailing of Notices (ECF No. 8); Order Signed on Dec. 23, 2008 Approving Form and
Manner of Publication and Mailing of Notices (the "Claims Procedure Order") (ECF No. 12).
25.
As required by the Claims Procedures Order, notice was published on January 2,
2009 in all publications. Affidavit of Publication of John Franks at AlixPartners LLP (ECF No.
57); (Cohen Aff. ~ 4). Also on January 2, 2009, 8 more than 15,000 claim forms were mailed to
purported customers, purported customers' alternate addresses, broker-dealers, and general
creditors of the Debtor advising potential claimants of the Court-approved and statutory time
limits for filing claims.
(Cohen Aff. Aff.
~
4).
In this case, all claims-whether customer,
general creditor, or other claims-must have been filed by July 2, 2009 or were barred as
untimely. See SJPA § 78fff-2(a)(3).
26.
In the Claims Procedures Order, the Court set forth the following procedure for
determining claims for customer protection under SJPA. First, the Trustee must review each
customer claim filed and determine whether the asserted claim amount agrees with the "net
equity" for that account, as reflected on the books and records of BLMIS or otherwise
established to the satisfaction ofthe Trustee. Second, the Trustee must send the claimant a letter
setting forth this determination.
8
Third, if the claimant agrees with the Trustee's written
Certain additional notice mailings were completed by January 9, 2009. (ECF No. 76).
- 9-
determination, or if the claimant does not object to the Trustee's determination as required within
30 days of its mailing, then the determined amount becomes the customer's ·'net equity"" claim.
Fourth, if the claimant disagrees with the Trustee's determination, then the claimant is required
to file a written statement with the Court setting forth the basis for the objection, together with
copies of any documents in support of its objection, and serve it on the Trustee within 30 days of
the mailing of the Trustee's detennination letter.
Upon the claimant's objection. the Trustee
shall obtain a hearing date from the Court to hear the dispute.
27.
Aff.
~
As ofMarch 31,2011, the Trustee had received 16,518 customer claims. (Cohen
6). As ofMarch 31,2011, the Trustee had determined 16,268 ofthose claims. (ld.
~
7).
The Trustee allowed 2,409 claims and committed to pay approximately $793 million in funds
advanced to him by SJPC. (ld.). The allowed claims total over $6.8 billion. (Jd.).
28.
Of the remaining determined customer claims, 13,438 were denied, 12 were
detennined as asserting no claim, and 149 were withdrawn. (Id.
~
8). Two hundred and sixty
claims relating to 205 accounts have been "deemed determined," meaning that the Trustee has
instituted litigation against those claimants. (I d.). The complaints filed by the Trustee in those
litigations set forth the express grounds for disallowance of customer claims under section
502(d) of the Bankruptcy Code.
Accordingly, such claims will not be allowed until the
avoidance action is resolved by settlement or otherwise and any judgment rendered against the
claimant in the avoidance action is satisfied. Two hundred and fifty customer claims remain to
be determined, as they are still under review by the Trustee's staff; the value of these claims has
been reserved in the proposed distribution. (Jd.).
29.
As of March 31, 2011, the Trustee received 427 timely and 21 untimely filed
secured priority and unsecured non-priority general creditor claims totaling approximately $1.7
- 10-
billion. The claimants include vendors, taxing authorities, employees, and customers filing
claims on non-customer proof of claim forms.
or these
448 claims, 1OJ are general creditor
claims and fifty are broker-dealer claims, which together total approximately $266 million of the
$ i .7 billion.
30.
9
(Jd ~ 9).
Two thousand, two hundred and ninety (2,290) unique docketed objections to the
Trustee's claims determinations have been filed relating to approximately 3,800 claims, which
will be noticed for hearing if necessary.
(ld
~
11).
These 2,290 objections relate to
approximately 1,150 BLMJS accounts. (ld). The objections raise various issues, including the
proper interpretation of"net equity," the right to interest or time value of money, and whether the
Trustee's calculation of allowed claims amounts are correct, which are among the matters for
which the Trustee is reserving.
3 l.
The Trustee allowed or denied customer claims as described above depending on,
first, whether the claimant was a customer of BLMJ S (i.e., had an account in his/her name) and
second, whether the claimant had positive "net equity," as that term is defined by SJPA.
Jn
calculating each customer's "net equity," the Trustee has credited the amount of cash deposited
by the customer into his BLMJS account, Jess any amounts withdrawn by him from his BLMJS
customer account (the "cash in, cash out method" or the "Trustee's Net Investment Method").
Some claimants have argued that the Trustee is required to allow customer claims in the amounts
shown ("Fictitious Statement Amount") on the November 30, 2008 BLMIS customer statements
(the "Net Equity Dispute").
Nonetheless, this Court upheld the Trustee's Net Investment
9
The 151 secured, priority, and non-priority general claims are explicit "general creditor" claims, such as vendor
and service claims. (Cohen Aff. ~ 9). They do not include "customer" claims, even though each "customer"
claim-both those allowed and denied-has a "general creditor" component. All BLMJS creditors, including
customers whose claims were allowed, customers whose claims were denied, and general creditors, may have claims
as general creditors against BLMJS for misrepresentation, fraud. and breach of contract (assuming they filed
claims). Customers who filet! customer claims need not have specifically filed claims as general creditors to protect
such rights.
- 1l -
Method as the only interpretation consistent with the plain meaning and legislative history of the
statute. controlling Second Circuit precedent, and considerations of equity and practicality (ECF
No. 2020), reported at SJPC v. BLMJS, 424 B.R. 122 (Bankr. S.D.N.Y. 2010) (the "Net Equity
Decision''). The Net Equity Decision is currently on appeal before the Second Circuit.
IV.
ALLOCATION OF PROPERTY & DISTRIBUTION SCHEME UNDER SIPA
A.
AJiocation Of Property
32.
Jn order to protect customers of an insolvent securities broker-dealer such as
BLM IS, Congress enacted a bipartite statutory framework that gives customers priority over
general creditors of the broker-dealer. Pursuant to Sl PA § 78fff-2( c)(l )(B), all customers will
share ratably in the fund of customer property. Pursuant to SIPA § 78fff-2(c), general creditors
and customers, to the extent of their respective unsatisfied net equities, will share in any general
estate. Estate property not allocable to the fund of customer property is distributed in the order
of priority established in section 726 of the Bankruptcy Code. SJPA § 78fff(e). Any property
allocated to the fund of customer property that is not necessary to satisfy customer and other
priority claims will become part ofthe general estate. SlPA § 78fff-2(c).
33.
According to SIPA § 78lll(4), "customer prope1iy" consists of "cash and
securities ... at any time received, acquired, or held by or for the account of a debtor from or for
the securities accounts of a customer, and the proceeds of any such property transferred by the
debtor, including property unlawfully converted."
34.
Among the assets that comprise "customer property" are "any other prope1iy of
the debtor which, upon compliance with applicable Jaws, rules and regulations, would have been
set aside or held for the benefit of customers . . . "
SIP A § 78lll( 4)(D).
Under SIP A §
78lll( 4)(D), a trustee is pennitted to look to the property of the debtor to rectify the actions taken
by the debtor that resulted in a shortfall in customer property.
- ]2 -
See Ferris, Baker, Watts v.
Slephenson (In re M.JK Clearing. Inc.). 286 B.R. 109, 131-32 (Bankr. D. Minn. 2002)
("Application of the plain meaning of 15 U.S.C.
~
781/1(4)(0) provides a means to rectify any
actions taken by, or with respect to. the debtor. that results in such a shOJifall. ... Thus. if the
debtor failed to set aside or hold for the benefit of customers suHicient property, 15 U.S.C. ~
78lll(4)(D) would require the trustee to correct the debtor's error.'').
35.
Thus, if the trustee determines that there is a shortfall in assets such that customer
property is insufficient to satisfy net equity claims, then he may look to other assets of the debtor
and allocate prope11y to the fund of customer prope1iy.
36.
SJPA liquidations generally take a broad and inclusive customer-related approach
to the allocation of property.
For example, in In re Park South Securities, LLC, 99% of the
debtor's estate was allocated to customer property. See Order, No. 03-08024A (Bankr. S.D.N.Y.
Oct. 30, 2008).
° Consistent with prior liquidations, the Trustee expects to allocate most of the
1
BLMIS estate to the Customer Fund, inasmuch as here, recovered property either belonged to
customers or was derived from the misuse of customer property.
10
Accord SiPC v. Lehman Brothers, inc., Adv. Pro. No. 08-01420, Motion for Order Approving Allocation of
Property ofthe Estate at 27-28, n.33 (Bankr. S.D.N.Y. Oct. 5, 2009) (ECF No. 1866) (allocating "most" of debtor's
assets to customer property); in re Vision inv. Grp., inc., Adv. Pro. No. 97-10358, Order Approving Third and Final
Report and Final Accounting of the Securities Investor Protection Corporation (Bankr. W.D.N.Y. Dec. 13, 2005)
(allocating 95% of debtor's estate to customer property); In re Klein Maus & Shire, Inc., Adv. Pro. No. 00-81 93A,
Order Approving Trustee's Final Report and Account, Approving Allocation of Property and Distribution of Fund
of Customer Property, Finding of No Distribution to General Creditors (Bankr. S.D.N.Y. Dec. 15, 2004) (allocating
99% of debtor's estate to customer property); in re MJK Clearing, 286 B.R. at 132 (allocating 100% the debtor's
assets as customer property); in re A.R. Baron & Co., inc., Order Approving Final Report and Account and Related
Relief, Adv. Pro. No. 96-8831A (Bankr. S.D.N.Y. Feb. 10, 2004) (allocating 99% of the debtor's assets to customer
property); in re Hanover, Sterling & Co., Adv. Pro. No. 96-8396A, Order Approving Trustee's Final Report and
Account, Approving Allocation of Property and Distribution of the Fund of Customer Property (Bankr. S.D.N.Y.
Aug. 21, 2002) (allocating 75% of debtor's estate to customer property).
- 13 -
B.
Distribution Under SJPA
3 7.
The SJPA distribution scheme, while complex. can be distilled to a simple
equation.
Each customer is entitled to his or her pro rato share of customer property.
To
determine the percentage that each allowed customer will receive from the fund of customer
property in an interim distribution, the aggregate amount collected to date by the trustee and
allocated to customer proper1y is divided by the aggregate amount of net equity claims allowed
by the trustee. The percentage result is then to be applied to each net equity claim to determine a
customer's pro rata share. The equation is as follows:
Fund of Customer Property ("Numerator")
Allowable Customer Net Equity Claims ("Denominator'")
38.
Customer Pro Rata Share
SJPA § 78fff-2(c)(l) establishes the order of distribution of customer proper1y.
The second and third priorities of distribution are relevant here.
The second priority is to
distribute customer property among customers based on their filing date net equities.
§ 78fff-2(c)(J)(B).
SJPA
The third priority is to distribute customer property to SlPC as subrogee.
SJPA § 78fff-2(c)(l)(C).
Thereafter, any customer property remaining becomes part of the
general estate.
39.
The amount advanced by SJPC to the Trustee in full or partial satisfaction of a
customer claim is based on the difference between the customer's net equity and his share of
customer property, subject to the $500,000 limit of SIPA's statutory protection.
The SJPC
advance does not reduce the customer's net equity or his claim against customer property. 1f the
sum of the amount of a customer's SIPC advance and any subsequent distribution of customer
property exceeds the customer's net equity, SIPC has the right to recoup the excess. In effect,
SJPC becomes subrogated to the claims of customers to the extent it has supplied advances but
- ] 4-
cannot seek recovery from customer property as to any individual customer until the customer
has been fully sLJtisfied. SIPA
~~
78tlf-3(LJ). 78tTf-2(c)( I).
C.
Allocation Of Assets To The Fund Of Customer Property And Related
Reserves
40.
As this Court previously found in its Net Equity Decision, Madoff did not engage
m securities trading on behalf of BLMIS customers. Madoff used customer funds to support
operations and fulfill requests for redemptions to perpetuate the Ponzi scheme. Thus, payment of
"profits'· to any one customer in fact came from another customer's deposit of funds. As BLMJS
was a Ponzi scheme, all of the funds withdrawn by BLMIS customers were simply other
people's money.
41.
BLMJS was organized as a single member limited liability company.
BLMIS
operated a fraudulent investment advisory business (the "lA Business"), a proprietary trading
desk, and a market making desk. Although it had three distinct units, customer funds that were
invested through the IA Business were used to fund not only the IA Business, but all ofBLMJS's
operations.
42.
BLMJS had an obligation to set aside sufficient assets to cover its statutory
obligations to customers. To the extent it did not, even assets that were not directly "proceeds"
of Mad off s fraud are to be treated as "customer property" up to the amount of the deficiency .
11
However, even including such assets in the fund of customer property, all of the assets ofBLMIS
11
SIPA's definitional paragraphs were amended in 1978 to incorporate in the "customer property" definition any
other property of the debtor's estate which, upon compliance with applicable laws, rules, and regulations, would
have been set aside or held for the benefit of customers. Thus, to the extent that prior to the Filing Date BLMIS
failed to maintain cash and securities in compliance with the Net Capital Rule issued by the SEC (Rule 15c3-3), as
affected by the Customer Protection Rule (Rule 15c3-3) (both issued pursuant to the Exchange Act, 15 U.S.C. §
78o(c)(3)(A)), the Trustee is required to allocate property as necessary to remedy such non-compliance. The
Customer Protection Rule effectively requires that a broker-dealer maintain secure control of all property that would
have to be delivered to customers in the event of a liquidation: either the securities themselves or their value in the
form of cash (or equivalents), and cash sufficient to pay net cash obligations to customers.
- 15 -
and MadoiT would nonetheless be insufficient to cover the obligations of BLMIS to its
customers.
43.
For these reasons, and because it is not uncommon for almost all property
available to a broker-dealer to be deemed "customer property," the Trustee seeks the Court's
approval to allocate to the Customer Fund virtually all cash currently in his possession$2,617,974,430.26-as well as those assets specificaliy identified herein as the Picower
Settlement Funds. (Cohen Aff
~
18). See First Fed Sav. & Loan Assoc. of Lincoln v. Bevill,
Bresler & Schulman, Inc. (In re Bevill, Bresler & Schulman, Inc), 59 B.R. 353, 362-66 (D.NJ.
1986) (describing and approving SIPA allocation and distribution scheme simi Jar to that
proposed by Trustee).
i.
44.
Assets In Trustee's Possession As Of The Fourth Interim Report &
Certain Related Reserves
In the Trustee's Interim Report for the period of April 2010 through September
2010 ("Fourth Interim Report"), the Trustee reported that he possessed approximately $1 .S
billion.
12
See Fourth Interim Report, at ~ I (ECF. No. 3038).
These funds were primarily
derived from the following sources: (a) the transfer of BLMIS bank accounts to the BLMIS
estate; (b) pre-litigation settlements; (c) customer preference recoveries; (d) the sale of assets;
and (e) refunds.
45.
One of the more significant pre-litigation settlements approved by this Court was
entered into by the Trustee and the estate ofNonnan F. Levy. Order Pursuant to Section JOS(a)
of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure
Approving an Agreement By and Among the Trustee and Jeanne Levy-Church and Francis N.
Levy (ECF No. l 964). This settlement resulted in the return of $220 million to the BLMIS
12
In addition, the Trustee has in his possession a de minimis amount of unliquidated assets.
- I6 -
estate. (Cohen Aff.
,I
13). Certain claimants. represented by the law firm of Becker & Poliakoll
LLP, moved to vacate this settlement which was heard by this Court on March 30, 2011.
Customers' Motion to Set Aside the Order Approving the Trustee's Settlement with the Levy
Heirs for Failure to Disclose Material Information (ECF Nos. 3860-3862). The Court denied the
motion (ECF No. 3984), and the claimants filed an appeal on April l L 2011 (ECF No. 4005)
(the "Levy Appear'). Because the proceeds of the Levy settlement remain the source of dispute,
the Trustee is prevented from distributing these funds to customers at this time. The Trustee
seeks approval to allocate the full amount of this settlement to the Customer Fund, though the
Trustee will hold the $220 million in reserve pending the appeal.
46.
Other claimants returned $1 L500, 158.34 in preference and other monies to the
BLMJS estate pursuant to agreements that contained clauses relating to the outcome of the Net
Equity Dispute.
(Cohen Aff.
~
14). These agreements provide that if a final, nonappealable
order overruling the Net Equity Decision is entered (such that each customer's "net equity" in
this proceeding shall be calculated as the Fictitious Statement Amount), the funds returned to the
BLMJS estate shall revert to the claimants.
The Trustee seeks approval to allocate the full
amount of these preference and other settlements to the Customer Fund, though the Trustee will
hold the $11,500,158.34 in reserve pending the outcome ofthe Net Equity Dispute.
ii.
47.
Undisputed Recoveries To The BLMIS Estate Since The Fourth
Interim Report
Since the Fourth Interim Report, this Court has approved four significant
settlements between the Trustee and certain parties that greatly increased the amount of funds
recovered to the BLMIS estate. Three of these settlements are undisputed and the proceeds of
which are in the BLMJS estate and available for allocation and distribution.
- 17-
48.
On December 21, 2010, this Coun approved a settlement between the Trustee and
Carl Shapiro, Robert Jaffe, and related entities (the "'Shapiros'") in the amount of $550 million.
Order Pursuant to Section 1OS( a) of the Bankruptcy Code and Rules 2002 and 9019 of the
Federal Rules of Bankruptcy Procedure Approving an Agreement By and Among the Trustee
and the Shapiro Family (ECF No. 3551 ).
transferred $550 million to the Trustee.
On or about December 23, 2010, the Shapiros
(Cohen Aff.
~
15).
The Trustee seeks approval to
allocate the full amount of this settlement to the Customer Fund for distribution in accordance
with this Motion.
49.
On January 6, 2011, this Court approved a settlement between the Trustee and
Swiss bank Union Bancaire Privee ("UBP") that resulted in the recovery of $470 million to the
estate. I""' Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of
the Federal Rules of Bankruptcy Procedure Approving an Agreement By and Among the Trustee
and Union Bancaire Privee (ECF No. 3632). On or about January 24, 201 1, UBP transferred
$470 million to the Trustee. (Cohen Aff.
~
15). The Trustee seeks approval to allocate the full
amount of this settlement to the Customer Fund for distribution in accordance with this Motion.
50.
On March 10, 201 1, this Court approved a settlement between the Trustee and
Hadassah in the amount of $45 million. Order Pursuant to Section 105(a) of the Bankruptcy
Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving an
Agreement By and Among the Trustee and Hadassah, the Women's Zionist Organization of
America, Inc. and Hadassah Medical Relief Association, Inc. (ECF No. 3912). On or about
13
Per the settlement agreement executed on December 6, 2010, UBP agreed to pay the Trustee an additional amount
(the "UBP Guarantee Payment") upon the resolution of actions brought by the Trustee against the Chester and
lrongate family of funds. The UBP Guarantee Payment shall be the difference between $30 million and the sum of
all settlement and judgment amounts received by the Trustee from the Chester and lrongate family of funds. As a
result, the maximum UBP Guarantee Payment will be $500 million.
- 18-
March 28, 201 L Hadassah transferred $45 million to the Trustee.
(Cohen Aff.
~
15).
The
Trustee seeks approval to allocate the full amount of this settlement to the Customer Fund for
distribution in accordance vvith this Motion.
51.
In addition to the above settlements, the Trustee has recovered $89,071,011 .28
smce the Fomih Interim Report as a result of preference and other settlements, of which
$45,981,625.41 is subject to the Net Equity Dispute.
14
(Cohen Aff. ~ 16). The Trustee will hold
the $45,981,625.41 in reserve pending the outcome of the Net Equity Dispute. Therefore, the
Trustee seeks approval to allocate the full amount of these preference and other set1lements to
the Customer Fund, but only $43,089,385.87 of these settlements will be available for
distribution at this time.
52.
To the extent additional settlements are entered into and approved by this Court
prior to the entry of an order on this Motion, the Trustee will seek to allocate those recoveries by
way of a supplemental filing.
iii.
53.
Disputed Recovery-The Picower Settlement
The fourth significant settlement entered into by the Trustee smce the Fourth
Interim Report-that with the estate of Jeffry Picower (the "Picower Settlement" or the "Picower
Settlement Funds")--stands to have the greatest effect on customer recoveries in this liquidation
proceeding. Because of actions taken by certain claimants, however, the Picower Set1lement
Funds have not yet been transferred to the Trustee. Some background regarding the Picower
Settlement Funds will be provided for context and clarity.
14
These agreements provide that if the court enters a final, nonappealable order overruling the Net Equity Decision
(such that each customer's "net equity" in this proceeding shall be calculated as the Fictitious Statement Amount),
the funds returned to the BLMJS estate shall revert to the claimants.
- 19-
54.
On May 12. 2009. the Trustee commenced an adversary proceeding against .Jeffry
Picower and related entities (the "Picower Defendants'·). captioned Picard v. Picmt't'r. Adv. Pro.
No. 09-1197 (Bankr. S.D.N.Y.) (BRL) (ECF No.1). Thereafter. the Trustee and Mrs. Barbara
Pi cower, the executor of the estate of Jeffi·y Pi cower (the "Pi cower Estate''). engaged in
settlement negotiations that resulted in an agreement to settle the Trustee's claims in the amount
of $5 billion.
55.
Mrs. Picower's agreement with the Trustee, however, was contingent on her
reaching an agreement with the United States Government (the "Government'·) to resolve
potential civil forfeiture liability of the Picower Estate pursuant to 18 U.S.C. § 981 (a)( I )(C). As
a result of subsequent negotiations with the GovemmenL Mrs. Picower, on behalf of the Picower
Estate, agreed to forfeit to the Government the amount of $7,206,157,717 (the "Forfeited
Funds"), of which $5 billion was credited and to be paid over to the Trustee. The remainder
represented Mrs. Picower's settlement with the Government.
56.
]n February 2010, while the Picower settlement negotiations were ongoing, Adele
Fox ("Fox") and Susanne Marshall ("Marshall"), each a BLMlS claimant (collectively, the
"Florida Plaintiffs"), commenced putative class actions against the Picower Defendants in the
United States District Court for the Southern District of Florida, West Palm Beach Division
(collectively, the "Florida Actions") for damages relating to BLMIS.
Upon motion of the
Trustee, this Court preliminarily enjoined the Florida Actions (the "Preliminary Injunction
Order"). Picard v. Fox, Adv. Pro. No. 10-3114 (Bankr. S.D.N.Y.) (BRL), Memorandum Order
and Decision Granting Trustee's Motion Pursuant to Bankruptcy Code Sections 362(a) and
105(a) and Bankruptcy Rule 7065 for Enforcement of the Automatic Stay and for a Preliminary
- 20-
Injunction (ECF No. 22). The Florida Plaintiffs appealed the Preliminary Injunction Order to the
District Court for the Southern District ofNew York. Jd.. Notice ofAppeal (ECF No. 25).
57.
ln December 20 I 0. the Trustee moved for an order approving the Picower
Settlement. At the same time. the Government commenced a forfeiture action in the District
Court. United States of America v. $7.206,157,717 On Deposit at JPMorgan Chase. NA in the
Account Numbers Set Forth on Schedule A, No. I 0-CV-9398 (S.D.N.Y.) (TPG) (ECF No. l ).
The Govemment and Mrs. Picower entered into a Stipulation and Order of Settlement (the
"Forfeiture Stipulation"), which was so ordered by the District Court. Jd., Stipulation and Order
of Settlement (ECF No. 2). Thereafter, the Trustee's Picower Settlement was approved by this
Court on January 13, 201 l (the "Picower Settlement Order").
Picower, Order Pursuant to
Section l 05(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of
Bankruptcy Procedure Approving an Agreement by and Among the Trustee and the Picower
BLMlS Account Holders and Issuing a Permanent Injunction (ECF No. 43).
58.
Under the tem1s of an escrow agreement incorporated by reference into both the
Picower Settlement Order and the Forfeiture Stipulation (the "Escrow Agreement"), the Picower
Estate transferred the full $7.2 billion to the escrow account at JPMorgan Chase Bank, NA (the
"Picower Escrow Account"). Jd. Shortly thereafter, approximately $2.2 billion was transferred
to the Government pursuant to the Forfeiture Stipulation.
59.
The Escrow Agreement provides that the $5 billion remammg in the Picower
Escrow Account is to be transferred to the Trustee upon the entry of the earlier of either: (a) a
final, nonappealable order approving the Trustee's settlement; or (b) a final, nonappealable order
of forfeiture. I d.
- 21 -
60.
13. 20 I 1.
As referenced above, this Court entered the Picower Settlement Order on January
Had fourteen days expired with no appeals taken. the Pi cower Settlement Order
entered by this Com1 vimlld have become final and nonappealable on January 27, 2011.
Pursuant to the Escrow Agreement, the Trustee would have then sought the release of the $5
billion and received such funds within five business days. However. that is not what transpired.
lnstead. the Florida Plaintiffs (certain of which are represented by the law firm of Becker &
Poliakoff, LLP) appealed the Picower Settlement Order to the District Court, meaning that a
final. nonappealable order regarding the Trustee's Picower settlement can be entered only upon
the resolution of those appeals. Picower, Amended Notice of Appeal (ECF No. 45); Notice of
Appeal (ECF No. 49).
As a result, instead of the Trustee receiving the $5 billion in early
February 2011 for distribution to customers, those funds remain in the Picower Escrow Account.
61.
The Government forfeiture action relating to the Picower Estate is pending before
the District Court. Fox filed both a motion to intervene in that action and a claim against the
forfeited funds. $7,206,157,717 On Deposit al JPMorgan Chase. NA in the Account Numbers
Set Forth on Schedule A, Motion to Intervene (ECF Nos. 6-8), Notice of Claim (ECF No. 10).
The Government opposed the motion to intervene and simultaneously filed a cross-motion to
dismiss Fox's claim to the forfeited funds (the "Government Opposition"). Jd, Opposition to
Adele Fox's Motion to Intervene, and Cross-Motion to Dismiss Adele Fox's Claim to the
Defendant in Rem, and for a Final Order of Forfeiture (ECF Nos. 12-1 4). In the Government
Opposition, the Government requested that the District Court enter a final order of forfeiture.
The District Court has scheduled a hearing on May 26, 201 1.
62.
The only way for the Trustee to receive the Picower Settlement Funds for
allocation to the Customer Fund and distribution under SIPA is through either entry of a final,
- 22-
nonappealable order approvmg the Picower Settlement or a final. nonappealable order ol
forfeiture. Upon either event, the Trustee will seek the transfer of$5 billion to the BLMJS estate
from the Escrow Account.
63.
lt is not known at this time whether or when a final order of settlement or
forfeiture will be entered and, thus, whether or when the Trustee will receive the $5 billion paid
in settlement of the Trustee's claims against the Picower Estate. Should those funds come into
the BLMlS estate, there is no question that the $5 billion should be allocated to the Customer
Fund.
64.
The Trustee seeks approval to allocate the $5 billion Picower Settlement to the
Customer Fund upon receipt of such funds.
As discussed more fully below, upon receipt of
those funds and allocation to the Customer Fund, each customer's distribution will increase
markedly.
iv.
65.
Summary Of Requested Allocation
The Trustee, in this Motion, seeks to allocate $2,617,974,430.26 to the Customer
Fund, with $220 million and $57,481,783.75 (a total of $277,481,783. 75) held in reserve pending
the outcome of the Levy Appeal and the Net Equity Dispute, respectively,
leaving
$2,340,492,646.51 available for distribution at this time. (Cohen Aff. ~ 18).
66.
The Trustee also seeks to allocate the $5 billion Picower Settlement Funds to the
Customer Fund. Should the Picower Settlement Funds be transferred to the BLMIS estate before
entry of an order by this Court regarding allocation of the estate, the Trustee will seek pennission
to distribute those funds.
67.
The Trustee does not seek to allocate any funds to the General Estate at this time.
- 23-
D.
Determination Of AIJowable Net Equity Claims & Related Reserves
68.
For distribution purposes, the Customer Fund numerator is only one half of the
equation. In order to calculate each customer's pro rala share of customer property, the Trustee
also needs to establish the denominator, or the amount of allowable net equity claims.
69.
If the Trustee had determined all customer claims and his determinations were
final either through the passage of time or judicial determination, the denominator would simply
equal the amount of allowed claims.
Because the Trustee is seeking to make an interim
distribution prior to a final determination of all customer claims and while certain disputes such
as the Net Equity Dispute are pending, the Trustee cannot use as the denominator the amount of
allowed claims as ofthis date. Doing so could result in an uneven distribution to customers, in
violation of SlPA and the Bankruptcy Code, because there could be less funds to distribute to
claimants whose claims are allowed in the future.
Instead, the Trustee must project as to the
amount of all allowable net equity claims and establish sufficient reserves to ensure that he can
make a pro ra1a distribution to all possibly-eligible claimants, should their claims be allowed. ln
order to do so, he must maintain sufficient reserves.
70.
ln its current posture, the Net Equity Dispute can be resolved in one oftwo ways:
this Court's Net Equity Decision could be upheld by a final, nonappealable order holding that net
equity under SJPA shall be calculated using the cash in, cash out method, or the Net Equity
Decision could be overturned by a final, nonappealable order holding that each customer's claim
must be valued in the Fictitious Statement Amount.
71.
The Trustee, in this Motion, seeks to set the Fictitious Statement Amount of
$57,354,863,950.37 as the "denominator" for purposes of this distribution (the "Net Equity
Reserve Denominator"). (Cohen Aff.
~
25).
- 24-
72.
The Fictitious Statement Amount is the amount shown on the November 30. 2008
BLMIS customer statements.
The total amount of fictitious equity shown on the customer
statements issued by BLMIS on November 30, 2008 was $64,884,303.872.14.
(ld. ~ 20).
However, this $64.884,303,872.14 includes $8,597,048,281.54 in negative equity (i.e., amounts
owed by customers to BLMIS) from twenty-two accounts. (ld.). When this negative equity is
added to the $64.884,303,872.14 fictitious equity of those customer accounts that had a positive
balance, the total fictitious equity for all BLMIS customer accounts as of November 30, 2008
increases to $73.481,352,153.68. (Jd.).
73.
The Trustee has subtracted $16,034,388,246.88 in customer claims, including
those related to the Levy, Picower, and Shapiro accounts that were inevocably withdrawn from
this liquidation proceeding as part of the settlements with those parties, from the Fictitious
Statement Amount. (Jd.
74.
~
21).
During December 2008, seven new accounts opened with cash activity that
resulted in a net deposit of $84,555,432.72.
(Jd. ~ 24).
This activity is not reflected in the
Fictitious Statement Amount but is included in the Net Equity Reserve Denominator.
Also
during December 2008, 250 accounts that are included in the Net Equity Reserve Denominator
had cash activity that resulted in a net withdrawal of $225,604,087.19. (Id.
is not reflected in the Fictitious Statement Amount.
~
22). This activity
One hundred sixteen accounts remitted
$48,948,698.04 to the Trustee based on preference settlements or settlement agreements not
contingent on the Net Equity Dispute, which is also included in the Net Equity Reserve
Denominator. (Jd.
75.
~
22).
Of the Fictitious Statement Amount, approximately $7.2 billion correlates to
customer accounts against which no claims were filed or the claims were withdrawn due to
- 25-
settlement agreements. (ld
,1
26).
Thus, even if the Second Circuit resolves the Net Equity
Dispute against the Trustee such that net equity is valued in the Fictitious Statement Amount, the
Trustee asserts that no distributions should be made on these accounts. However. the Trustee has
still included the $7.2 billion in the Net Equity Reserve Denominator because of certain actions
pending in this Court.
76.
Those actions include a class action filed prior to the statutory bar date against the
Trustee seeking, inter alia: (a) declaratory relief that "net equity" must be valued in the Fictitious
Statement Amount, and (b) a determination that the class action be deemed a class proof of claim
on behalf of all customers who failed to file a customer claim prior to the bar date. See Less v.
Picard, Adv. Pro. No. 09-1265 (Bankr. S.D.N.Y.) (BRL).
77.
Pursuant to a stipulation so ordered by this Court on September I 8, 2009, the
class action was stayed pending the entry of a final, nonappealable order regarding the Net
Equity Dispute. Less, So Ordered Stipulation signed on Sept. 18, 2009 Between Plaintiffs and
Defendant (ECF No. 34). As such, no rulings were made as to the declaratory relief sought in
the class action, including the propriety of filing a class proof of claim in this liquidation
proceeding.
Thus, the Trustee has included in the Net Equity Reserve Denominator
approximately $7.2 billion relating to the fictitious equity of accounts for which no claims were
filed. (Cohen Aff. ~ 25).
78.
After making the
discussed-above
adjustments,
the Net Equity
Reserve
Denominator is $57,354,863,950.37. (Jd. ~ 25). This amount is the highest amount for which
the Trustee will have to reserve because no customer's net equity could be greater than the
- 26-
amount on their November 30. 2008 statement once the adjustments described above have been
made. I ~'i (I d.
79.
~
27).
ln contrast. i r the Net Equity Dispute \Vere not pending, and no other reserves
were required, $17,265.885.837.54 would be the denominator under the Trustee's Net
Investment Method. (ld.
V.
,1
19).
INTERIM CALCULATION OF PRO RATA SHARE DISTRIBUTION OF
CUSTOMER FUND
80.
SJPA § 78ftT-2(c)(l) establishes, in pertinent part, that a customer is to receive his
ratable share from the fund or customer prope1iy. To the extent that the customer has already
been fully satisfied through an advance of funds by SlPC by the time that customer prope1iy is
distributed, SJPC steps into the shoes of the customer as subrogee and receives that customer's
share of customer property. In that manner, a customer does not receive a double recovery on
his claim that was already fully satisfied by the SJPC advance.
81.
As set fOJih above and in the Cohen Affidavit, the Trustee proposes to allocate
$2,617,974,430.26 to the Customer Fund at this time.
(Jd. ~ 29).
Of that amount,
$2,340,492,646,51 is available for distribution (the "Net Customer Fund"). See
Net Equity Reserve Denominator is $57,354,863,950.37. (Cohen Aff.
~
supra~
65. The
29). To detennine the
percentage of each allowed customer net equity claim that can be satisfied from the Customer
Fund, the Net Customer Fund is divided by the Net Equity Reserve Denominator, resulting in the
following percentage ("Scenario J"):
$2.340,492.646.51 (Net Customer Fund)
$57,354,863,950.37 (Net Equity Reserve Denominator)
15
4.081%
There are no additional reserves required for any future avoidance recoveries by the Trustee because such
recoveries will be added to both the numerator and the denominator by operation of Bankruptcy Code § 502(h).
Any subsequent recovery coupled with a corresponding claim for the same amount cannot adversely affect the
distribution because the addition of any amount to both the numerator and denominator can only result in an
increase, not a decrease, of the pro rata distribution to any customer.
-27-
Under Scenario l. the allowed claims relating to l ,214 BLMIS accounts will be panially
satisfied and the allowed claims relating to 10 additional accounts will be fully satisfied. Eight
hundred and sixty-eight accounts have already been fully satisfied or committed to be fully
satisfied by the funds advanced to the Trustee by SiPC. An additional 205 accounts that have
been "deemed determined'. could receive a distribution if and when the status of their claims
moves from "deemed determined" to allowed. Seventy-nine of the 205 accounts would be fully
satisfied by the SJPC advance. The remaining 126 accounts would receive both a SJPC advance
and a distribution in accordance with the Trustee's Motion.
82.
Jfthe $5 billion Picower Settlement Funds were to come into the BLMIS estate
and be allocated to the Customer Fund, each customer's ratable share of the Customer Fund
would accordingly increase ("Scenario 2"). (ld.
~
33).
Rather than 4.08%, each customer's
share would be calculated as follows:
$7,340,492.646.5 l (Net Customer Fund)
$57,354,863,950.37 (Net Equity Reserve Denominator)
12.798%
Under Scenario 2, when combined with amounts advanced to the Trustee by SJPC,
claims relating to l, 177 accounts would be partially satisfied and the allowed claims relating to
47 additional accounts would be fully satisfied. Eight hundred and sixty-eight accounts have
already been fully satisfied or committed to be satisfied by the funds advanced to the Trustee by
SJPC.
An additional 205 accounts that have been "deemed determined" could receive a
distribution if and when the status of their claims moves from "deemed detennined" to allowed.
Seventy-nine of the 205 accounts would be fully satisfied by the SJPC advance. Three additional
accounts would be fully satisfied with the SIPC advance plus their pro rata share of the
-28-
Customer Fund.
The rema1n1ng 123 accounts would receive both a SIPC advance and a
distribution in accordance with the Trustee·s Motion.
83.
If this Court's Net Equity Decision were upheld by a finaL nonappealable order
holding that net equity under SIPA shall be calculated using the cash in, cash out method, and no
reserves for the Levy Appeal were required, each customer's ratable share of the Customer Fund
would accordingly increase ("'Scenario Y). (Jd.
~
34). Rather than l 2.80%, each customer· s
share would be calculated as follows:
$? .617.974.430.26 (Customer Fund)
$17,265,885,837.54 (Net Equity Reserve Denominator)
=15.163%
Under Scenario 3, when combined with amounts advanced to the Trustee by SIPC
claims relating to I ,168 accounts would be partially satisfied and the allowed claims relating to
56 additional accounts would be fully satisfied. Eight hundred and sixty-eight accounts have
already been fully satisfied or committed to be fully satisfied by the funds advanced to the
Trustee by SlPC. An additional 205 accounts that have been "deemed detennined" could receive
a distribution if and when the status of their claims moves from "deemed detennined'' to
allowed. Seventy-nine of the 205 accounts would be fully satisfied by the SlPC advance. Three
additional accounts would be fully satisfied with the SlPC advance plus their pro rata share of
the Customer Fund. The remaining 123 accounts would receive both a SlPC advance and a
distribution in accordance with the Trustee's Motion.
84.
]f this Court's Net Equity Decision were upheld by a final, nonappealable order,
the Pi cower Settlement Funds of $5 billion were to come into the BLMIS estate to be ailocated
to the Customer Fund, the Levy funds were available, and no other reserves were required, each
customer's ratable share of the Customer Fund would accordingly increase ("Scenario 4"). (ld.
35). Ratherthan4.08% or 15.16%, each customer's share would be calculated as follows:
- 29-
~
$7.617.974.430.26 (Customer fund)
$17.265,885,837.54 (Net Equity Reserve Denominator)
=44.122%
This means that each customer would receive approximately 44.1 cents on the dollar.
Under
Scenario 4_ when combined with amounts advanced to the Trustee by SIPC, claims relating to
994 accounts would be partially satisfied and the allowed claims relating to 230 additional
accounts would be fully satisfied.
Eight hundred and sixty-eight accounts have already been
fully satisfied or committed to be fully satisfied by the funds advanced to the Trustee by SIPC.
An additional 205 accounts that have been "deemed detennined'- could receive a distribution if
and when the status oftheir claims moves from "deemed determined'" to allowed. Seventy-nine
of the 205 accounts would be fully satisfied by the SIPC advance. Fifteen additional accounts
would be fully satisfied with the SIPC advance plus their pro rata share of the Customer Fund.
The remaining Ill accounts would receive both a SIPC advance and a distribution in accordance
with the Trustee's Motion.
85.
The following chart provides an example of the four distribution scenarios for a
customer with an allowed claim of $575,000:
- 30-
Category
Scenario I:
Funds on
Hand
("FOII .. l
Customer
Pro Rata
Amount
/\mount or
lnt eri m
Allocation to
Customer
Total To
Claimant
(SlPC
Advance+
Amount of
Allocation to
Customer)
Customer
Pro Rata
Share
Allowed
Amount
SIPC
/\dvance
$0.0-108
$575.00
0
S5UU.OOO
sn,-t64
so
$13,-164
$5:::'].46-1
$0.1:::'80
$575.00
0
$500.000
$73,591
so
$73,591
S57J.591
SO.! 516
$575.00
0
5500.000
$87 ,I 86
$1:::',1 86
$75,000
$575.000
$0.44 I 2 .
$575,00
0
$500,000
$253.699
s 178,699
$75.000
$575,000
SIPC
Subrogation
Scenario :::':
<FOJI +
Picowcr)
Scenario 3:
(FOH t net
equity
upheld ~
Levy)
Scenario -1:
<Fmi +
Picower-'net equity
upheld~
Levy)
86.
While the Trustee would prefer to implement Scenario 4, pending the final
resolution of the Net Equity Dispute, the Levy Appeal, and the Picower Settlement, he cannot do
so. Thus, the Trustee at this time seeks to implement Scenario l.
87.
Accordingly, the Trustee has determined that each customer's ratable share ofthe
Net Customer Fund shall be no Jess than 4.08% of the customer's net equity claim. (Id.
~~
29-
30). By this Motion, the Trustee seeks the authority to make a distribution of the Net Customer
Fund equal to 4.08% of the customer net equity claims (the "Proposed Interim Distribution").
Under the Proposed Interim Distribution, actual distributions from the Customer Fund will only
be made to those customers whose claims have not already been fully satisfied.
88.
SIPC, as subrogee, is entitled to receive partial repayment of its cash advances to
the Trustee pursuant to SIPA § 78fff-3(a)(l ), which, in this case, total $793,149,690.14. (!d.
- 31 -
~
7).
Further. SIPC is entitled to receive repayment as to any given customer to the extent the
customer's claim was fully repaid by a combination of the SIPC advance and the Trustee's initial
distribution. See In re Bell & Beclnvith, 104 B.R. 852 (Bankr. N.D. Ohio 1989). affd, 937 F.2d
1104 (6th Cir. 1991). However, in light of the Net Equity Dispute and other considerations,
SIPC has agreed to defer receipt of any subrogation amounts from this initial distribution.
Instead, any monies that would otherwise be paid to SIPC will, at present. be retained by the
Trustee pending further developments in the case.
89.
If the Court approves this Motion with current numbers, the allowed claims
relating to 1,214 accounts will be pmiially satisfied and the allowed claims relating to l 0
additional accounts will be fully satisfied.
Eight hundred and sixty-eight accounts have been
fully satisfied by the funds advanced to the Trustee by SIPC. An additional 205 accounts that
have been "deemed determined" could receive a distribution if and when the status of their
claims moves from "deemed determined" to allowed. Seventy-nine of the 205 accounts would
be fully satisfied by the SIPC advance. The remaining 126 accounts would receive both a SIPC
advance and a distribution in accordance with the Trustee's Motion. (Cohen Aff.
90.
~
28).
As noted above, the Trustee is only making an interim distribution of the
undisputed property allocated to the Customer Fund and he expects additional recoveries
allocable to the Customer Fund.
91.
The numbers contained herein are based on recoveries and claims allowed as of
March 31, 201 1. To the extent that additional claims are allowed, or additional recoveries are
made by the Trustee, those events will alter the allocation and/or the calculation of the
distribution. To the extent that additional claims are allowed, or additional recoveries are made,
- 32-
the Trustee will supplement this filing accordingly with final calculations lm the relief sought in
this Motion.
A.
No Interim Distribution Of General Estate
92.
Under SIPA § 78fff(e), funds from the general estate satisfy the administrative
costs and expenses of a Debtor's estate and a liquidation proceeding.
To the extent that the
general estate is insufficient, SJPC makes advances to the Trustee for the payment of such costs
and expenses. SIPA § 78fff-3(b)(2). All administrative advances made by SIPC are recoverable
from
the
general
estate
under
section
507(a)(2)
of the
Bankruptcy
Code.
SIPA
§§ 78eee(b)(5)(E), 78fff(e). The general estate is distributed in accordance with section 726 of
the Bankruptcy Code. with section 507(a)(2) expenses receiving second priority.
16
SIPA
§ 78fff(e).
93.
As noted previously, see supra
~
29, the Trustee has received 427 timely and 21
untimely filed secured priority and unsecured non-priority general creditor claims totaling
approximately $1.7 billion. The claimants include vendors, taxing authorities, employees, and
customers filing claims on non-customer proof of claim forms. One hundred and one of these
448 are general creditor claims and 50 are broker-dealer claims which together total
approximately $266 million of the $1.7 billion. Inasmuch as the Trustee proposes to allocate no
assets to the General Estate, see supra~ 67, there are no funds in the General Estate from which
to make a distribution to general creditors at this time. Accordingly, "[no] purpose would be
served" by the examination of or the institution of actions seeking to disallow such claims. See ii
U.S.C. § 704(5).
16
There are no§ 507(a)( I) expenses in this liquidation proceeding.
- 33-
VI.
DEPARTMENT OF JUSTICE FORFEITURE FUNDS
94.
The United States Attorney·s Office for the Southern District of Nevv York
("'USAO") is in the process of forfeiting billions of dollars of assets relating to the fraud that
occurred at BLMIS (the "Forfeiture fund .. ).
Victims are entitled to petition for mitigation or
remission of forfeiture in accordance with the criteria set forth in 28 C.f.R. Part 9.
The
Government may contract with a special master to notify petitioners. process petitions. and make
recommendations with regard to forfeited property.
28 C.f.R. § 9.9(c).
Pursuant to this
authority, the Depm1ment of Justice has announced that it would retain Mr. Picard to serve as
special master to assist the USAO and the Department of Justice ("'DOJ") in the petition process
to be conducted in connection with BLMJS-related forfeitures, in accordance with applicable
regulations.
Thus, Mr. Picard would wear "t\VO hats," one as SJPA Trustee and one as DOJ
special master.
95.
]t is anticipated that many of the customers to which the Trustee proposes to
distribute pursuant to this Motion may also be eligible for distributions from the forfeiture Fund.
Any determination as to the amounts owed to a claimant-whether a "customer'' under SJPA or
a "victim" under the forfeiture regulations-will take into account monies received fi·om either
fund such that no claimant receives in this SlPA proceeding more than their net equity claim
under SJPA.
VH.
MISCELLANEOUS
A.
Notice
96.
Pursuant to Bankruptcy Rules 2002(a)(6), 2002(f)(8), and 2002(h), the Trustee
has given notice of the hearing on the Trustee's Motion by first class mail, postage prepaid, to all
claimants that filed a claim in the liquidation proceeding, and all counsel that have appeared in
the main liquidation proceeding. Copies of the Application have been transmitted to SJPC, the
- 34-
SEC and other parties in interest. The Trustee believes that no further notice need be given of
this or any further matter in the proceeding.
B.
Waiver Of Memorandum Of Law
97.
The Trustee respectfully requests that this Court wa1ve the requirement under
Local Bankruptcy Rule 9013-1 (b) for the submission of a separate memorandum of law or,
alternatively, deem this Application as satisfYing that requirement.
VIII. CONCLUSION
98.
This Motion and the reliefrequested by the Trustee are consistent with the policy
and purposes underlying SJPA and are in the best interests of the customers of BLMIS. the
Debtor estate, its creditors, and SIPC
99.
No prior application for the relief sought herein has been made to this or any other
100.
WHEREFORE, the Trustee respectfully requests that this Court enter an order
Court.
(a) approving (i) the proposed initial allocation of property to the Customer Fund and to the
General Estate; (ii) the proposed interim distribution of the Customer Fund; and (b) granting
such other and further relief as may be deemed just and proper.
- 35-
Dated: May 4, 2011
Of Counsel:
Baker & Hostetler LLP
3200 National City Center
Cleveland, Ohio 441 14
Telephone: (216) 621-0200
Facsimile: (216) 696-0740
Brian A. Bash
Email: bbash@bakerlaw.com
Thomas Wearsch
Email: twearsch@bakerlaw.com
Respect fully submitted,
Is/ Dovid J Sheehan
David J. Sheehan
Email: dsheehan@bakerlaw.com
Seanna R. Brown
Em a iI: sbrown@bakerlaw .com
Jacqlyn R. Ravine
Emai I: j rov ine@bakerlaw .com
Baker & Hostetler LLP
45 Rockefeller Plaza
Nevv York. New York 10111
Tel: (212) 589-4200
Fax: (212) 589-4201
Allorneysfor Irving H Picard, Trustee
for the Substantively Consolidated SIPA
Liquidation o_lBernard L ModoflJnvestment
Securities LLC and Bernard L Modojf
- 36-
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION
CORPORATION,
Adv. Pro. No. 08-01789 (BRL)
Plaintiff-Applicant,
SIPA Liquidation
v.
(Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Defendant.
In re:
BERNARD L. MADOFF,
Debtor.
[PROPOSED] ORDER APPROVING AN INITIAL ALLOCATION OF PROPERTY TO
THE FUND OF CUSTOMER PROPERTY AND AUTHORIZING AN INTERIM
DISTRIBUTION TO CUSTOMERS
Upon consideration ofthe motion (the "Motion") dated May 4, 2011 by Irving H.
Picard, as trustee ("Trustee") for the liquidation of the business of Bernard L. Madofflnvestment
Securities LLC ("BLMIS") under the Securities Investor Protection Act, 15 U.S.C. § 78aaa et
seq. ("SIPA"), and the substantively consolidated estate of Bernard L. Madoff ("Madoff'')
(collectively, "Debtor"), for an Order Approving the Trustee's Initial Allocation ofPropetiy to
the Fund of Customer Propetiy and Authorizing An Interim Distribution to Customers, and the
Affidavit of Matthew Cohen, executed May 4, 2011, and the exhibits thereto, and it appearing
that due and proper notice ofthe Motion and the relief requested therein have been given, and no
other or futiher notice needing to be given; and a hearing having been held on the Motion; and
the Court having reviewed the Motion, responsive pleadings, the arguments of counsel and the
record in this case; and the Comi, as set fmih in the transcript ofthe hearing, having determined
that the legal and factual bases set forth in the Motion establish just cause for the relief granted
herein, and after due deliberation and sufficient cause appearing therefor, IT IS HEREBY:
ORDERED that the relief requested in the Motion is hereby granted; and it is
further
ORDERED, that prior to making future distributions, the Trustee shall make an
application for and obtain the Court's approval.
Dated: New York, New York
_ _ _,2011
HONORABLE BURTON R. LIFLAND
UNITED STATES BANKRUPTCY JUDGE
2
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION
CORPORATION,
Adv. Pro. No. 08-01789 (BRL)
Plaintiff-Applicant,
SIPA Liquidation
v.
(Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Defendant.
In re:
BERNARD L. MADOFF,
Debtor.
AFFIDAVIT OF MATTHEW COHEN IN SUPPORT OF THE TRUSTEE'S MOTION
FOR AN ORDER APPROVING AN INITIAL ALLOCATION OF PROPERTY TO THE
FUND OF CUSTOMER PROPERTY AND AUTHORIZING AN INTERIM
DISTRIBUTION TO CUSTOMERS
STATE OF NEW YORK
)
)
COUNTY OF NEW YORK )
ss:
Matthew Cohen, being duly sworn, deposes and says:
1.
I am a Managing Director of AlixPartners LLP. I make this affidavit to transmit
to the Comi information relevant to the motion by Irving H. Picard, trustee ("Trustee") for the
liquidation of the business of Bernard L. Madofflnvestment Securities LLC ("BLMIS") under
the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. ("SIPA"), and the substantively
consolidated estate ofBernard L. Madoff("Madoff') (collectively, "Debtor"), for an Order
Approving the Trustee's Initial Allocation of Property to the Fund of Customer Propetiy and
Authorizing an Interim Distribution to Customers (the "Motion").
2.
AlixPartners has served as the Trustee's Claims Agent and as the accountant for
the BLMIS estate since December of2008 pursuant to SIPA § 78fff-1(a)(l). As the Claims
Agent, AlixPartners was responsible for both mailing the notice of the liquidation and claim
forms to potential claimants and causing the notice of the liquidation to be published.
AlixPartners has also been responsible for processing all claims submitted to the Trustee and
assisting the Trustee in reviewing each customer claim filed to determine whether the asserted
claim amount agrees with the "net equity" for that account, described herein more fully
at~
10.
In addition, as the accountants for the BLMIS Estate, AlixPartners has assisted and continues to
assist the Trustee in accounting for the assets of the BLMIS Estate, including the cash and cash
equivalents available to the Trustee.
3.
I have been actively involved in the liquidation ofBLMIS and the claims process
since December 2008 and have personal knowledge of the matters set forth herein.
The Claims Process
4.
In accordance with the Comi's order ofDecember 23, 2008 (ECF No.8), on or
about January 2, 2009, AlixPatiners mailed more than 15,000 claim forms to purported
customers ofBLMIS, purported customer's alternate mailing addresses, broker-dealers, and
general creditors ofthe Debtor advising potential claimants ofthe Comi-approved and statutory
time limits for filing claims. AlixPatiners completed cetiain additional notice mailings by
January 9, 2009. (ECF No. 76).
5.
In accordance with the Comi's December 23, 2008 order, AlixPartners caused
notice of the (i) SIPA liquidation proceeding; (ii) claims procedures; (iii) February 4, 2009
hearing on disinterestedness ofthe Trustee and his counsel; and (iv) February 20, 2009 meeting
2
of creditors to be published on January 2, 2009 in The New York Times, The Wall Street Journal,
The Financial Times, USA Today, Jerusalem Post, and Ye 'diot Achronot. (ECF No. 57).
6.
As of March 31, 2011, the Trustee received 16,518 customer claims.
7.
As ofMarch 31,2011, the Trustee determined 16,268 ofthose claims. The
Trustee allowed 2,409 claims, and committed to pay approximately $793 million in funds
advanced to him by SIPC. The allowed claims total over $6.8 billion.
8.
Ofthe remaining determined customer claims, 13,438 claims had been denied, 12
had been determined as asserting no claim, 149 had been withdrawn, and 260 had been "deemed
detennined," which means that the Trustee has instituted avoidance litigation against those
claimants. As ofMarch 31,2011,250 customer claims remained to be detennined, as they were
still under review by the Trustee's staff; the value of these claims has been reserved in the
proposed distribution.
9.
As ofMarch 31, 2011, the Trustee has received 427 timely and 21 untimely filed
secured priority and unsecured non-priority general creditor claims totaling approximately $1.7
billion. The claimants include vendors, taxing authorities, employees, and customers filing
claims on non-customer proof of claim forms. 101 of these 448 are general creditor claims and
fifty are broker-dealer claims which together total approximately $266 million ofthe $1.7
billion.
10.
The Trustee allowed or denied customer claims as described above depending on,
first, whether the claimant was a customer ofBLMIS (i.e., had an account in his/her name) and,
second, whether the claimant had positive "net equity," as that term is defined by SIPA. In
calculating each customer's "net equity," the Trustee has credited the amount of cash deposited
by the customer into his BLMIS account, less any amounts already withdrawn by him from his
3
BLMIS customer account (the "cash in, cash out method" or the "Trustee's Net Investment
Method"). This methodology is in dispute and is the subject of a pending appeal (the "Net
Equity Dispute").
11.
As ofMarch 31,2011, 2,290 unique docketed objections to the Trustee's claims
determinations have been filed relating to approximately 3,800 claims. These 2,290 objections
relate to approximately 1,150 BLMIS accounts.
Recoveries by the Trustee
12.
As of September 30,2010, the effective date ofthe Trustee's Fourth Interim
Report, the Trustee had recovered approximately $1.5 billion. These funds were primarily
derived from the following sources: (a) the transfer ofBLMIS bank accounts to the BLMIS
Estate, (b) pre-litigation settlements, (c) customer preference recoveries, (d) the sale of assets,
and (e) refunds. (ECF No. 3083).
13.
The $1.5 billion recovered by the Trustee as of September 30,2010 includes $220
million from a pre-litigation settlement entered into by the Trustee with the estate ofNorman F.
Levy, which was approved by this Court on February 18,2010. (ECF No. 1964). Cetiain
customers have moved to set aside the Comi' s Order approving the Levy settlement. The Comi
denied the motion (ECF No. 3984), and the claimants filed an appeal on April 11, 2011 (ECF
No. 4005) (the "Levy Appeal"). Therefore, while these funds are being allocated to the
Customer Fund, they are not available for distribution at this time and must be held in reserve
pending the outcome of the Levy Appeal.
14.
The $1.5 billion recovered by the Trustee as of September 30, 2010 also includes
$11,500,158.34 in preference and other monies returned by claimants to the BLMIS estate
pursuant to agreements that contain clauses relating to the outcome of the Net Equity Dispute.
4
These agreements provide that if a final, nonappealable order is entered overruling the Net
Equity Decision 1 (such that each customer's "net equity" in this proceeding shall be calculated as
the Fictitious Statement Amount), the funds returned to the BLMIS estate shall revert to the
claimants. Therefore, while these funds are being allocated to the Customer Fund, they cannot
be distributed at this time and must be held in reserve pending the outcome of the Net Equity
Dispute.
15.
Since September 30, 2010, the proceeds ofthree undisputed settlements have
entered the BLMIS estate and are available for distribution. The Court approved settlements
between the Trustee and: (i) Carl Shapiro, Robert Jaffe, and related entities (the "Shapiros"), in
the amount of $550 million on December 21, 2010 (ECF No. 3551 ); (ii) Union Bancaire Privee
("UBP"), in the amount of $470 million on January 6, 2011 (ECF No. 3632); and (iii) Hadassah,
in the amount of$45 million on March 10, 2011 (ECF No. 3912). These settlements total
$1,065,000,000 and are available for distribution at this time.
16.
In addition to the above settlements, the Trustee has recovered $89,071,011.28
since September, 30 2010 as a result of preference and other settlements. Ofthe $89,071,011.28,
$45,981,625.41 is subject to the Net Equity Decision and must be held in reserve pending the
outcome of the Net Equity Dispute. Therefore, only $43,089,385.87 ofthe $89,071,011.28 is
available for distribution at this time.
17.
The fourth significant settlement entered into by the Trustee since September 30,
2010 was with the estate of Jeffry Picower (the "Picower Settlement Funds") in the amount of$5
billion. Picard v. Picower, Adv. Pro. No. 09-1197 (BRL) (ECF No. 43). However, because the
Pi cower Settlement Funds remain in escrow until the earlier of an entry of a final, nonappealable
1
All capitalized terms that are not otherwise defined herein shall have the meaning ascribed to them in the Motion.
5
order approving the Trustee's settlement or a final, nonappealable order of forfeiture, these funds
are not available for allocation and distribution at this time.
18.
Thus, $2,617,97 4,430.26 is available to be allocated to the Customer Fund, with
$220 million and $57,481,783.75 (a total of$277,481,783.75) ofthe $2,617,974,430.26 held in
reserve pending the outcome ofthe Levy Appeal and the Net Equity Dispute, respectively. That
leaves $2,340,492,646.51 available for distribution at this time.
The Net Investment Method Denominator
19.
The Trustee's Net Investment Method Denominator is the allowed amount of all
accounts that have an allowed claim plus the net cash balance for all accounts into which more
funds were deposited than withdrawn for which a claim has been filed, but not yet allowed. As
of March 31, 2011, the Trustee's Net Investment Method denominator is $17,265,885,837.54.
This number is subject to change as additional accounts are determined.
The Net Equity Reserve Denominator
20.
The total amount of fictitious equity shown on the customer statements issued by
BLMIS on November 30,2008 was $64,884,303,872.14. However, this $64,884,303,872.14
includes $8,597,048,281.54 in negative equity from twenty-two accounts. When this negative
equity is added to the $64,884,303,872.14 fictitious equity ofthose customer accounts that had a
positive balance, the total fictitious equity for all BLMIS customer accounts as ofNovember 30,
2008 increases to $73,481,352,153.68.
21.
Customer claims relating to accounts with $16,034,388,246.88 in November 30,
2008 fictitious equity related to the Levy, Picower, and Shapiro accounts have been irrevocably
withdrawn from this liquidation proceeding and, therefore, $16,034,388,246.88 must be deducted
from the $73,481,352,153.68.
6
22.
During December 2008, 250 accounts that are included in the Net Equity
Denominator had cash activity that resulted in a net withdrawal of $225,604,087.19. This
activity is not reflected in the November 30, 2008 statements and, therefore, must be deducted
from the $73,481,352,153.68.
23.
One hundred sixteen accounts remitted $48,948,698.04 to the BLMIS estate as a
result of preference settlements or settlement agreements that are not contingent on the Net
Equity Dispute must be added to the $73,481,352,153.68 because the claims related to these
settlements have been increased by the amount of the settlements paid by the claimants.
24.
During December 2008, seven new accounts opened with cash activity that
resulted in a net deposit of$84,555,432.72. This activity is not reflected in the November 30,
2008 statements and, therefore, must be added to the $73,481,352,153.68.
25.
After making the adjustments discussed above, the "denominator" for the Net
Equity Reserve (the "Net Equity Reserve Denominator") is $57,354,863,950.37. The table
below summarizes this calculation.
Total November 30,2008 Fictitious E
Settlement Exclusions
December 2008 Cash Activi
Preference Agreements & Settlement Agreements Not Contingent Upon
Net E ui Decision
26.
64,884,303,872.14
(8,597,048,281.54
73,481,352,153.68
16,034,3 88,246.88
(225,604,087 .19)
48,948,698.04
84,555,432.72
57,354,863,950.37
Approximately $7.2 billion ofthe $57,354,863,950.37 is attributable to customer
accounts against which no claims were filed or for which any filed claims were withdrawn due to
settlement agreements. However, the $7.2 billion cannot be removed from the
$57,354,863,950.37 because of certain litigation and pending appeals.
7
27.
$57,354,863,950.37 is the highest amount for which the Trustee will have to
reserve because no customer's net equity could be greater than the amount on their November
30, 2008 statement once the adjustments described above have been made.
Interim Calculation of Pro Rata Share
Distribution of Customer Fund
28.
As of March 31, 2011, 2,092 accounts for which a claim had been filed were
allowed. In addition, there are 205 accounts that have a positive net equity that have been
"deemed determined." Thus, there are 2,297 accounts that are eligible for a distribution. Of
these 2,297 accounts, 947 accounts have been or could be fully satisfied by the SIPC advance,
leaving 1,350 accounts that have not been fully satisfied. Of these 1,350 accounts, 1,224 were
allowed as ofMarch 31,2011 and will receive a payment ifthe Comi approves the Trustee's
Motion. The 205 "deemed determined" accounts will receive payment of either the SIPC
advance, or the SIPC advance and a distribution, if the status of their claims move from "deemed
determined" to allowed. If and when that occurs, 79 of the 205 accounts will be fully satisfied
by the SIPC advance. The remaining 126 accounts will receive both a SIPC advance and a
distribution in accordance with the Trustee's Motion if the status oftheir claims move from
"deemed determined" to allowed.
29.
As set forth above, the Trustee proposes allocating $2,617,974,430.26 to the
Customer Fund at this time, of which $277,481,783.75 must be held in reserve due to the Levy
Appeal and the Net Equity Dispute. Thus, $2,340,492,646.51 is available for distribution (the
"Net Customer Fund"). The Net Equity Reserve Denominator is $57,354,863,950.37. To
detennine the percentage of each allowed customer net equity claim that can be satisfied from
the Customer Fund, the Net Customer Fund is divided by the Net Equity Reserve Denominator,
resulting in the following percentage:
8
$2,340,492,646.51 (Net Customer Fund)
$57,354,863,950.37 (Net Equity Reserve Denominator)
30.
=
4.081%
Accordingly, each customer's ratable share of the Net Customer Fund shall be no
less than 4.08% ofthe customer's net equity claim.
31.
Ifthe Court approves the proposed initial allocation and interim distribution with
the current numbers, the allowed claims relating to 1,214 accounts will be partially satisfied and
the allowed claims relating to I 0 additional accounts will be fully satisfied. Eight hundred and
sixty-eight accounts have already been fully satisfied or committed to be fully satisfied by the
funds advanced to the Trustee by SIPC. An additional 205 accounts that have been "deemed
determined" could receive a distribution if and when the status of their claims moves from
"deemed determined" to allowed. Seventy-nine ofthose 205 accounts would be fully satisfied
by the SIPC advance. The remaining 126 accounts would receive both a SIPC advance and a
distribution in accordance with the Trustee's Motion.
32.
As noted above, the Trustee is only making an interim distribution ofthe property
allocated to the Customer Fund at this time and he expects additional recoveries allocable to the
Customer Fund. Three other scenarios are possible, should the contingencies discussed above
resolve themselves:
33.
Scenario 2: If the Picower Settlement Funds were to come into the BLMIS estate
and be allocated to the Customer Fund, each customer's ratable share of the Customer Fund
would accordingly increase. Each customer's share would be calculated as follows:
$7,340,492,646.51 (Net Customer Fund)
$57,354,863,950.37 (Net Equity Reserve Denominator)
=
12.798%
Under Scenario 2, when combined with amounts advanced to the Trustee by SIPC,
claims relating to 1,177 accounts would be partially satisfied and the allowed claims relating to
9
47 additional accounts would be fully satisfied. Eight hundred and sixty-eight accounts have
already been fully satisfied or committed to be fully satisfied by the funds advanced to the
Trustee by SIPC. An additional 205 accounts that have been "deemed determined" could receive
a distribution if and when the status of their claims moves from "deemed determined" to
allowed. Seventy-nine of the 205 accounts would be fully satisfied by the SIPC advance. Three
additional accounts would be fully satisfied with the SIPC advance plus their pro rata share of
the Customer Fund. The remaining 123 accounts would receive both a SIPC advance and a
distribution in accordance with the Trustee's Motion.
34.
Scenario 3: Ifthis Comi's Net Equity Decision were upheld by a final,
nonappealable order holding that net equity under SIPA shall be calculated using the cash in,
cash out method, and no reserves for the Levy Appeal were required, each customer's ratable
share of the Customer Fund would accordingly increase. Each customer's share would be
calculated as follows
$2.617.974,430.26 (Customer Fund)
= 15.163%
$17,265,885,837.54 (Net Equity Reserve Denominator)
Under Scenario 3, when combined with amounts advanced to the Trustee by SIPC,
claims relating to 1,168 accounts would be pmiially satisfied and the allowed claims relating to
56 additional accounts would be fully satisfied. Eight hundred and sixty-eight accounts have
already been fully satisfied or committed to be fully satisfied by the funds advanced to the
Trustee by SIPC. An additional 205 accounts that have been "deemed determined" could receive
a distribution if and when the status of their claims moves from "deemed determined" to
allowed. Seventy-nine of the 205 accounts would be fully satisfied by the SIPC advance. Three
additional accounts would be fully satisfied with the SIPC advance plus their pro rata share of
the Customer Fund. The remaining 123 accounts would receive both a SIPC advance and a
10
distribution in accordance with the Trustee's Motion.
35.
Scenario 4: Ifthis Court's Net Equity Decision were upheld by a final,
nonappealable order, the Picower Settlement Funds were to come into the BLMIS estate and be
allocated to the Customer Fund, the Levy funds were available, and no other reserves were
required, each customer's ratable share of the Customer Fund would accordingly increase. Each
customer's share would be calculated as follows:
$7,617,974,430.26 (Customer Fund)
44.122%
$17,265,885,837.54 (Net Equity Reserve Denominator)
Under Scenario 4, when combined with amounts advanced to the Trustee by SIPC,
claims relating to 1,994 accounts would be partially satisfied and the allowed claims relating to
230 additional accounts would be fully satisfied. Eight hundred and sixty-eight accounts have
already been fully satisfied or committed to be fully satisfied by the funds advanced to the
Trustee by SIPC. An additional 205 accounts that have been "deemed detennined" could receive
a distribution if and when the status of their claims moves from "deemed determined" to
allowed. Seventy-nine ofthe 205 accounts would be fully satisfied by the SIPC advance.
Fifteen additional accounts would be fully satisfied with the SIPC advance plus their pro rata
share of the Customer Fund. The remaining 111 accounts would receive both a SIPC advance
and a distribution in accordance with the Trustee's Motion.
By: Is/ Jvfatthew Cohen
Matthew Cohen
Sworn and subscribed to before me this 4th
day ofMay, 2011
Is/ Sharyn P. Doyle
Sharyn P. Doyle
Notary Public, State ofNew York
No. 01D05051953
II
Qualified in New York County
Commission Expires Nov. 13, 2013
12
EXHIBIT A
Irving H. Picard, Trustee for BLMIS LLC
Assets to be Allocated to the Customer Fund
December 1, 2008 through March 31, 2011
-;,~~-~~}~i~J;~tlli~fl~\~i~~~~~~;
Transfer from Debtors Estate- Securities
Transfer from Debtors Estate - BNY account
Transfer from Debtors Estate - Chase account
Transfer from Debtors Estate - Other
Interest and Dividends
Closeout of Proceeds - Broker Dealers
Closeout of Proceeds - NSCC
Closeout of Proceeds - DTCC
Sale of Debtors Assets
Sports Tickets
Bank Debt Participation
DTTC Shares
Maket Making Business
$291 ,203,371.40
$336,660,934.06
$235,156,309.36
$4,036,145.08
$13,718,036.11
$37,273,877.23
$21,783,082.40
$17,368,079.91
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$89,690.80
$2,583,599.32
$204,170.51
$1 ,220,886.80
$0.00
$0.00
$0.00
$0.00
$752,963.00
$9,841.45
$177,247.15
$157.00
$61,567.20
$793.61
$402,859.56
$144,500.00
$50.84
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$132,989,034.46
$1,520,381,048.00
$225,000.00
$532,850.39
$10,674.74
$12,777.56
$314,134.72
$308,948.49
$183,683.79
$96,816.23
$71,298.73
$0.36
$2,617,97 4,430.26
$57,481,783.75
$220,000,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$277,481,783.75
Refunds
BLM Air Charter
Refunds - Deposits
Dues/Subscriptions
Car Registration
Vendors
Transit Cards
Insurance Workers Comp
Ref- Political Contributions
Ref- Other
Recoveries - Litigation Related
Customer Avoidances
Pre-Litigation Settlements
Donation Settlements
Vendor Preferences
Employees
Taxing Authorities
Class Actions
NASDAQ
NYSE
Transaction Fee
Other
Miscellaneous
TOTAL