“Net equity” in this instance is the difference between BLMIS customers’ cash deposits and withdrawals. This time-tested method to determine losses in Ponzi schemes has been used many times before in similar cases.
Some BLMIS customers, over time, withdrew more than they had actually deposited. Because they received more money from BLMIS than they actually invested, they are often referred to as “net winners.” Other BLMIS customers withdrew less than they had deposited or none at all. Because they got little or none of their money back, they are often referred to as “net losers.”
Under the SIPA statute and U.S. Bankruptcy code, BLMIS net losers have a priority position to receive pro rata distributions from the Customer Fund and must be made “whole” first. This is the only way to achieve a level of equity among defrauded BLMIS customers.
The SIPA Trustee will continue to pursue the return of monies received by BLMIS customers over and above their actual investment, for distribution to “net losers.” The SIPA Trustee understands that many “net winners” acted in good faith when they withdrew funds. Nevertheless, even if acting in good faith, BLMIS customers who withdrew more than they deposited are still in possession of funds that belong to other BLMIS customers and they must, if possible, return excess funds for distribution to those who lost all or a portion of their original BLMIS deposits.
As noted elsewhere on this website, the SIPA Trustee also understands that some of the good faith “net winners” have extenuating circumstances regarding their financial situations, and that returning all or even some of the excess funds they withdrew may represent hardship. The SIPA Trustee, in these cases, has discretion to dismiss actions seeking excess funds, and he has exercised this discretion approximately 275 times since December 11, 2010 via the Hardship Program.
Certain parties disputed the SIPA Trustee’s “Cash In/Cash Out” formula and pursued appeals at all levels that would seek to use the fictitious November 2008 BLMIS statements in determining the value of the claims. The legal actions of these appellants were not only without any precedent or basis in law, but were also responsible for reducing and delaying distributions, especially to the hardest-hit of the BLMIS customers.
On March 1, 2010, the United States Bankruptcy Court for the Southern District of New York granted the SIPA Trustee’s motion for an order denying customer claims for amounts listed on last customer statement and affirming the SIPA Trustee’s determination of net equity. On August 16, 2011, the United States Court of Appeals for the Second Circuit upheld the net equity methodology for determining the value of claims. Petitions for a panel rehearing of that decision, or, in the alternative, for rehearing en banc, were denied. Three petitions for writs of certiorari were filed with the Supreme Court of the United States requesting further review of the net equity decision. On June 4, 2012, one of the writs of certiorari was withdrawn, a result of settlement with the SIPA Trustee. On June 25, 2012, the Supreme Court refused to grant the petitions, thereby allowing lower court decisions regarding the net equity methodology to stand and resolving the matter.