First Pro Rata Interim Distribution

As of February 15, 2012, pro rata distributions from the Customer Fund to BLMIS customers whose claims have been allowed by the SIPA Trustee totaled $325.7 million. The first interim pro rata 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. The motion approved was filed by the SIPA Trustee on May 4, 2011 to allocate $2.6 billion of recoveries to the BLMIS Customer Fund and to make an initial, interim distribution of approximately $272 million to BLMIS customers with allowed claims. Because the SIPA Trustee sought approval in the May 4th motion to distribute additional recoveries made between March 31, 2011 and the ultimate date of distribution, further court approval was not required to distribute increased amounts.

Status of Recoveries, Customer Fund and Required Reserves

Significant 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.

Appeals of settlements:

Two claimants have separately appealed the most significant settlement obtained to date – the $5 billion settlement with the estate of Jeffry Picower. Other funds affected by appeals include the $1.025 billion Tremont settlement. Until those appeals are resolved and the funds are collected, they cannot be allocated to the Customer Fund or distributed to BLMIS customers with allowed claims.

Additional funds unavailable due to appeals include the $220 million settlement with the Norman F. Levy family. Also, approximately $198.5 million relating to settlement reserves and other matters must be held in reserve.

Appeal of net equity decision:

The net equity methodology, or the SIPA Trustee’s formula for determining eligibility for pro rata distributions to BLMIS customers with allowed claims from the Customer Fund based on cash-in, cash-out of BLMIS, also remains under appeal.

On August 16, 2011, the United States Court of Appeals for the Second Circuit upheld the SIPA Trustee’s determination regarding the calculation of net equity and rejected the use of the fictitious November 2008 BLMIS statements in determining the value of claims. Petitions for a panel rehearing of that decision, or, in the alternative, for rehearing en banc, were denied.

As of February 6, 2012, three parties petitioned for Writs of Certiorari with the Supreme Court of the United States, requesting further review of the net equity decision. Until a final, unappealable decision is reached on net equity, the Trustee must hold funds in reserve as if net equity appellants had prevailed and eligibility for distributions from the Customer Fund were based on the final, November 2008 BLMIS statements.

Other reserves:

Once a final, unappealable decision is reached on net equity, there are additional unresolved matters that will then require determination, including constant dollar, the time value of money or interest. All of these matters will be heard and determined by the courts and, until resolved, require reserves.

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, including those discussed above – chiefly the appeal of the net equity definition and the appeals of the Picower and other settlements – that require maintenance of substantial reserves with respect to both the customer property “numerator” and the net equity claims “denominator.”

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.

Because the amount of allowable claims is under dispute, the SIPA Trustee must use the highest possible “denominator” which is, in this case, an adjusted amount reflecting the BLMIS fictitious statements as of November 30, 2008, or approximately $52 billion. (This number differs from the widely reported $65 billion because it eliminates claims that have been irrevocably withdrawn from this SIPA liquidation proceeding).

If the net equity methodology were indisputably resolved, the denominator for the amount of potentially allowable claims would be significantly less, providing for a much greater distribution to BLMIS customers with allowed claims.