CFTC v. Eustace (Distributions)

2008 WL 471574 (E.D.PA.2008)

CFTC v. Eustace, 2008 WL 471574 (E.D.PA.2008), is a good case to support the use of pooling funds and pro rata distributions in receivership cases. In this case, a court-appointed receiver requested approval of a second interim distribution to investors of $72M in settlement proceeds. In the first interim distribution, the Receiver had created two classes of investors based on the investment vehicles involved, two domestic and one off-shore. Eustace, 2008 WL 471574, at *2. However, the Receiver proposed a pro rata distribution for the second interim distribution based on additional information he had discovered in the intervening time period, including evidence of commingling of funds, the joint marketing of funds, and the investors’ belief that the funds were being traded pari passu. Id. at *2-3. The Cayman Islands Joint Official Liquidators for the off-shore fund vehemently objected to the Receiver’s second distribution motion arguing that the off-shore fund was the only fund with an interest in the settlement proceeds and that, after representing that there was no basis for pooling in the first interim distribution motion, the Receiver was now precluded from making a case for pooling. Id. at 4-5. The Court weighed the Receiver’s arguments for pooling and noted that it is well within the Receiver’s discretion to change his position regarding a distribution methodology based on subsequently learned facts. Id. at 7-8. Based on the Receiver’s arguments, the Court ordered a second interim distribution to be made on a pro rata basis as recommended by the Receiver. Id. In making its decision, the Court gave considerable weight to the Receiver’s determination of the method of distribution that would be most equitable to all investors. Id. at 5-6. The Court found persuasive the fact that the funds were jointly marketed (thus encouraging perceptions of one enterprise) and that, though commingling of funds was not systematic, the instances of commingling did show “blurring” of the distinctions between the receivership entities. The Court relied upon the Supreme Court case of Cunningham v. Brown 256 US1, 13 (1924), where in the Court suspended the use of tracing in favor of a pro rata pooled distribution in a Ponzi Scheme case.

– Phillip S. Stenger