In light of the Trustee’s on-going recovery efforts, I reported (at Paragraph 1 and Section IX of my Third Amended Interim Report dated April 14, 2010), that I anticipate making pro rata interim distributions of the fund of customer property (link) (the “Customer Fund”). I hope to file an initial motion with the Court in the Fall 2010 seeking approval of the allocation of all recovered property to the Customer Fund and interim pro rata distributions to former customers, whose claims have been allowed. I anticipate that by then there will be significantly more in recovered property than the current $1.5 billion.

Under the Securities Investor Protection Act, customers of a failed broker dealer with allowed claims are entitled to preferential treatment in the distribution of recovered property by the Trustee through the creation of the Customer Fund as distinguished from the general estate. In the Bernard L. Madoff Investment Securities LLC (“BLMIS”) proceeding, as Trustee I intend to allocate all recovered property to the Customer Fund for ratable distribution to former BLMIS customers with allowed claims, on an interim basis, in the manner described below.

In doing so, I will retain a reserve to cover customer claims that have not as yet been allowed and the possibility that an appellate court may overturn the Bankruptcy Court’s March 2010 decision upholding the money in/money out methodology that I am using. Thus, at this time and until there is a final and unappealable order on the methodology, in determining the percentage to be used in making the initial interim distribution, the best way to deal with such possibility is to use a higher denominator than would be used for the money in/money out methodology.

The two following examples are meant solely to show how the initial allocation and initial pro rata interim distribution would work and are not meant to indicate what the actual numbers may be. For this purpose, I assume in both examples that $6.0 billion of recovered property will be allocated to the Customer Fund.

The first example is based on the assumption that the Trustee’s money in/money out methodology will be upheld on appeal. In addition to the assumption of $6.0 billion of recovered property, I assume the total amount of customer claims that will finally be allowed is $20.0 billion. Thus, the initial pro rata interim distribution would be 30% ($6.0 billion divided by $20.0 billion) of a customer’s allowed claim. The maximum amount to be distributed to any customer is the total amount allowed without reduction for any amount already received from the Trustee. In this example, a customer with an allowed claim of $1,000,000 would receive an initial pro rata interim distribution of $300,000 in addition to any payment already received from the Trustee from funds advanced by the Securities Investor Protection Corporation (“SIPC”).

The second example is based on the assumption that the last statement methodology prevails. In addition to $6.0 billion of recovered property, I assume the total amount of customer claims that will finally be allowed is $60.0 billion. Thus, the initial pro rata interim distribution would be 10% ($6.0 billion divided by $60.0 billion) of a customer’s allowed claim. The maximum amount to be distributed to any customer is the total amount allowed without reduction for any amount already received from the Trustee. In this example, a customer with an allowed claim of $1,000,000 would receive an initial pro rata interim distribution of $100,000 in addition to any payment received from the Trustee from funds advanced by SIPC.
To the extent that as Trustee I recover additional property, I intend to make further allocations and pro rata interim distributions, and the percentage will be adjusted.

IRVING H. PICARD, TRUSTEE

On June 14, 2010, the Liquidators of Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (each of which has liquidation proceedings pending in the British Virgin Islands) filed petitions for recognition of foreign proceedings under Chapter 15 of the United States Bankruptcy Code for the Southern District of New York. Prior to the collapse of BLMIS, Fairfield Sentry Limited had a customer account at BLMIS. Fairfield Sigma Limited and Fairfield Lambda Limited invested their respective funds in Fairfield Sentry Limited and are therefore indirect investors in BLMIS. The Chapter 15 cases are being jointly administered under case no. 10-13164 (BRL). A hearing on such petitions is scheduled for July 20, 2010 at 10:00. Information about the Chapter 15 cases can be found at:www.fairfieldsentry.com, www.fairfieldsigma.com, and www.fairfieldlambda.com.

On April 13, 2010, the Bankruptcy Court entered a Scheduling Order that set forth the dates for briefing and a hearing on the issue as to whether certain claimants ("Objecting Claimants") who invested through entities such as feeder funds were "customers" as that term is defined under SIPA. In accordance with the Scheduling Order, the Trustee filed a Motion on June 11, 2010 seeking to affirm the denial of the claims of the Objecting Claimants, who did not have accounts with BLMIS but instead invested, directly or indirectly, in “feeder funds” that had accounts and invested with BLMIS. In support of the Motion, the Trustee filed a memorandum of law, and the declarations of David J. Sheehan ("Sheehan Declaration") and Matthew B. Greenblatt ("Greenblatt Declaration"), with supporting exhibits. Exhibit 1 to the Sheehan Declaration lists the feeder funds whose investors are the subject of the Trustee's Motion. Exhibits 2 and 3 to the Sheehan Declaration list the specific investors whose claims and objections are included in the Trustee's Motion. Copies of the filings can be accessed here (docket 2411, docket 2412, docket 2413, and docket 2416)

03/08/2010: After full briefing by the Trustee, SIPC, the SEC and various customer claimants, both in support of and in opposition to the Trustee's motion regarding the proper interpretation of "net equity" under the Securities Investor Protection Act, and after a full hearing on the matter, the Honorable Burton R. Lifland, Bankruptcy Judge, issued an opinion on March 1, 2010 approving the Trustee's “net investment” method of determining customer claims in this proceeding. The Trustee has calculated each customer's "net equity" as the difference between the cash invested with BLMIS and the amounts withdrawn. The Court upheld this methodology, and rejected the argument made by certain claimants that customer claims must be allowed in the amounts shown on the final BLMIS customer statements. A copy of the opinion can be viewed by clicking here. The final resolution of this issue will be determined on appeal.

On March 8, 2010, Judge Lifland entered an order implementing that decision and certifying the order for immediate appeal to the United States Court of Appeals for the Second Circuit. A copy of the order and certification can be viewed by clicking here. Notices of appeal have been filed.