On March 1, 2010, Bankruptcy Judge Burton Lifland rendered an important decision in Bernard L. Madoff Investment Securities LLC1 (BLMIS) as to how customer claims should be calculated in a Securities Investor Protection Act (SIPA) liquidation. In a SIPA liquidation, a customer’s claim (its net equity) fixes the customer’s entitlement to its pro rata share of customer property. Accordingly, if the customer has a higher claim amount, the customer will receive more customer property and a higher percentage recovery.
One of the duties of the SIPA trustee, appointed by the district court to liquidate BLMIS, is to distribute customer property. To do so, the SIPA trustee first needs to determine the amount of customer claims. In making its determinations, the SIPA trustee argued, and the Bankruptcy Court agreed, that net equity should be computed based on the so-called “Net Investment Method”—cash and securities deposited less cash and securities withdrawn by the customer from BLMIS.
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