Third Pro Rata Interim Distribution

The third pro rata interim distribution from the Bernard L. Madoff Investment Securities LLC (BLMIS) Customer Fund to eligible customers commenced March 29, 2013, with a record date of March 22, 2013. As of May 17, 2013, approximately $507.9 million has been distributed to BLMIS accounts with allowed claims in the third distribution, representing approximately 4.721% of the allowed claim amount of each individual account, unless the claim is fully satisfied. After the third pro rata interim distribution, 1,075 accounts with allowed claims remain partially satisfied and entitled to participate in future interim distributions.

Second Pro Rata Interim Distribution:

As of May 17, 2013, distributions from the Customer Fund via the second pro rata interim distribution to BLMIS customers whose claims have been allowed by the SIPA Trustee totaled $3.638 billion. The second pro rata distribution commenced on September 19, 2012, based on August 22, 2012 approval by the United States Bankruptcy Court for the Southern District of New York.

First Pro Rata Interim Distribution:

As of May 17, 2013, distributions from the Customer Fund via the first pro rata interim distribution to BLMIS customers whose claims have been allowed by the SIPA Trustee totaled $501.5 million. The first pro rata interim distribution commenced on October 5, 2011, based on July 12, 2011 approval by the United States Bankruptcy Court for the Southern District of New York.

Interim Distribution Calculation:

To make interim distributions from the Customer Fund, the SIPA Trustee must determine or estimate both the total value of customer property available for distribution (including reserves for disputed recoveries) and the total net equity of all allowed claims (including reserves for disputed claims).

There are unresolved issues that require maintenance of substantial reserves with respect to both the customer property “numerator” and the net equity claims “denominator.” This includes the expected increase of approximately $6.5 billion in the value of allowed claims due to the 169 additional claims that have been deemed determined by the SIPA Trustee pending the outcome of litigation, the time value of money and appeals of other settlements.

Nevertheless, even when taking reserves into account, it is possible for the SIPA Trustee, on an interim basis, to determine the (a) allocation of property to the Customer Fund or the “numerator”; (b) amount of allowable net equity claims or the “denominator”; and (c) calculation of each allowed claimant’s minimum pro rata share of the Customer Fund.

The equation is as follows:

For the purposes of interim distributions, the SIPA Trustee’s calculations must take into consideration all unresolved issues and establish sufficient reserves to ensure that he would be able to make a pro rata distribution to all potentially eligible claimants, whether or not their claims are allowed at the time of distribution.

There are two primary reasons why significant funds are not available for distribution at this time: required reserves and ongoing appeals.

Required Customer Fund Reserves for Deemed Determined Claims

As of May 17, 2013, while there are 2,503 allowed claims and the dollar amount of allowed claims is approximately $11.08 billion, both the number of allowed claims and the dollar amount will increase over time. There remain 169 claims have been "deemed determined" by the SIPA Trustee, but their status as "allowed" claims is not yet final, pending the outcome of ongoing litigation. If allowed, these claims would become eligible for all pro rata distributions to date. For this potential scenario, the SIPA Trustee must set aside a reserve for the two interim distributions of 42.879 percent of potential payments, and has therefore to date reserved approximately $2.783 billion. The ultimate amount of additional allowed claims depends on the outcome of the litigation, and could be more than $6.5 billion.

Court-Ordered Time-Based Damages Reserve

The United States Supreme Court announced on June 25, 2012, that it had denied two writs for certiorari that asked the Supreme Court to review the net equity methodology, thereby making the “cash-in, cash-out” formula for determining eligibility for pro rata distributions from the BLMIS customer fund final.

On July 26, 2012, the SIPA Trustee for the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS) filed a motion in the United States Bankruptcy Court for the Southern District of New York seeking approval for an allocation of recovered monies to the BLMIS Customer Fund and for a second pro rata interim distribution from the Customer Fund to BLMIS customers with allowed claims.

On August 22, 2012, the Honorable Burton R. Lifland approved the motion for the allocation and distribution and ordered the SIPA Trustee to reserve 3 percent for the time-based damages issue, which allowed for the distribution of approximately 33.5 percent of the allowed claim amount of each individual account, unless the claim is fully satisfied. The second pro rata interim distribution commenced on September 19, 2012 with a record date of September 12, 2012.

More than 1,200 objections have been filed relating to the time-based damages issue. On February 12, 2013, the United States Bankruptcy Court issued an amended time-based damages scheduling order setting forth the briefing schedule for the time-based damages issue. Briefing will extend through the summer of 2013, with a hearing before the Bankruptcy Court to follow.

Until a final, unappealable order is reached on the issue of time-based damages, the SIPA Trustee must hold the 3 percent court-ordered reserve of approximately $1.358 billion.

Other Customer Fund Required Reserves

Other reserves, including reserve for deferred payments and unallocated funds: $10.363 million.

Amount Unavailable to the Customer Fund Due to Required Reserves and Appeals

Portions of recoveries and settlement agreements have not yet been collected, due to appeals, the timing of payments of certain settlement monies and other issues. Therefore, these funds cannot be either allocated to the Customer Fund or distributed to BLMIS customers with allowed claims until these issues are resolved. Required reserves include the $220 million settlement with the Norman F. Levy family and approximately $222.8 million relating to settlement reserves and other matters must be held in reserve.

Advances Reimbursed to SIPC on Fully Satisfied Accounts

In the Bernard L. Madoff Investment Securities LLC (BLMIS) liquidation, the Securities Investor Protection Corporation (SIPC) has made cash advances – up to a maximum of $500,000 – available to the court-appointed Securities Investor Protection Act (SIPA) Trustee to distribute to customers with allowed claims, as a way to expedite financial relief to these customers. As of May 17, 2013, SIPC has committed approximately $808.2 million to the BLMIS liquidation for this purpose. SIPC-committed advances will continue to increase as claims that are currently in litigation are allowed as a result of settlements or the conclusion of litigation.

According to the provisions of SIPA, SIPC is reimbursed for its advances to customers once each respective customer claim is fully satisfied. As of the third pro rata distribution in the BLMIS liquidation proceeding, SIPC received $102.81 million in reimbursement from the Customer Fund for advances paid on fully satisfied accounts.

Reimbursement payments to SIPC are calculated as follows:

On a claim that has been allowed in the amount of $700,000:

In another example, if a claim was allowed in the amount of $2 million, distributions to date would be as follows: