The opinion of the court was delivered by: Judge James B. Zagel
MEMORANDUM OPINION AND ORDER
Seven months ago I appointed a Receiver to control and conduct the business of Enterprise Trust Company in order to protect the interests of the clients of Enterprise and, where necessary, to bring the actions of Enterprise into compliance with applicable laws and regulations. Appointment of the Receiver was made on motion of the Securities and Exchange Commission. The Receiver, Phillip L. Stern, assumed his duties and, as required, reported his actions and his findings at various intervals over the past few months. He submitted a proposed plan of allocation. After considering and resolving some issues, he submitted the Receiver Final Plan of Allocation, to which objections have been filed by some investors.*fn1 I must now decide what is the appropriate plan.
The objections arise, in largest part, in response to the proposal to differentiate among types of clients in determining the percentage of their respective losses for which they will be compensated.
The governing principle is that the Receiver should distribute assets equitably with similarly situated investors treated alike. The Receiver does not perceive all investors to be similarly situated. To many of the objectors all "victimized investors" (non-insider investors) are similarly situated and should all receive the same pro rata share.Moreover, the objectors argue, even pro rata distribution is inequitable whenever an illiquid asset, currently about $9 million of these, in the Receiver's custody and control can be traced directly to a claimant. In those cases, the particular asset should be returned whole to the claimant who provided it to Enterprise without deducting its value from the claimant's share of cash.
Enterprise received about $103 million from clients since it began its business, currently about $28 million remains in liquid assets. There are 1,198 funded accounts and various investors had multiple accounts. Some clients did not permit Enterprise to manage their investments; these clients wanted Enterprise to provide Custodial services (and, perhaps, advice) with respect to those investments. Other account holders sought active management of their investments.
Enterprise is in Receivership because it lost millions for its clients with speculative trading losses in margin accounts. To trade as it did, Enterprise was driven to pledge as collateral the securities of clients who had Custodial accounts and were deceived about how their securities were being used. The majority of these Custodial assets were mutual fund holdings, many of which were held in retirement accounts. Some of the managed account clients, too, were kept in the dark about the nature of the trading and the losses in their accounts.
All the Custodial accounts were to be maintained as is unless change was authorized by the client with exceptions for payment of fees, reinvestment of interest and dividends which Enterprise was authorized to do under the terms and conditions of the account.
The managed accounts were more diverse and divided, sensibly, by the Receiver into four subcategories. In John Lohmeier's sphere, some accounts were actively managed with monthly activity such as margin trading, derivative trading and shorting. Others were actively managed but did not engage in shorting or were opened late in the game. There were accounts brought to Enterprise by David Steckler and by David Disraeli for which strategies different from those employed by John Lohmeier were employed.*fn2
The record keeping/accounting practice at Enterprise made it impossible to trace and verify the value of each account at the time of Receivership, nor could reliable valuation be based upon trading activity. Third party records allowed calculation of total contributions, withdrawals and distributions for each account. The net of these numbers for each account became the "Net Contribution" on which allocation would be based. The objectors now accept this either because (1) it is the best number available, or (2) they do not want to bear the expense (including the full cost of discovery) of finding a tenable alternative.
A major dispute is over the decision to compensate some clients at a higher percentage of the net distribution amount than is given to others.
The Receiver proposes that equity called for compensation to be differentiated on the basis of the nature of risk explicitly assumed by the client. Custodial clients, he concluded, agreed to bear only the market risk associated with their personal decision to own a particular security. Apart from the common understanding that this is the risk that goes along with Custodial accounts, the conduct of Enterprise corroborates this understanding since it thoroughly concealed what it had done in its reports to these clients.
Managed account clients are willing to take on trading risk, that is, the risk that a trading decision made by the manager of the account will go wrong, particularly speculative trading on the margin. Concealment by Enterprise of its actions in this ...