Where a receivership trust lacks sufficient assets to fully repay investors and the investors’ funds are commingled, a distribution plan may properly be guided by the notion that “equality is equity,” and pro rata distribution is appropriate.
“The goal in both securities-fraud receiverships and liquidation bankruptcy is identical- the fair distribution of the liquidated assets. See In re Envirodyne Indus., 79 F.3d at 583. Equitable subordination promotes fairness by preventing a redeeming investor from jumping to the head of the line and recouping 100 percent of his investment by claiming creditor status while similarly situated non-redeeming investors receive substantially less. See Elliott, 953 F.2d at 1569.”
“The district court faithfully applied these principles in endorsing the receiver’s proposed pro rata distribution in this case. The court considered the claims of investors who attempted to redeem their equity and determined that the substance of those claims was identical to the claims of nonredeeming equity shareholders. By subordinating the objectors’ claims and effectuating a pro rata distribution of assets, the district court avoided the inequity of giving some investors preference even though all investors’ claims were substantively the same. See United States v. Vanguard Inv. Co., 6 F.3d 222, 226- 27 (4th Cir. 1993); Elliott, 953 F.2d at 1569. This was a reasonable exercise of the court’s discretion.”
09-4090 SEC v. Wealth Management, LLC
Appeal from the United States District Court for the Eastern District of Wisconsin, Griesbach, J., Sykes, J.