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Tracing Security Ownership

Corporate liquidators often discover that there are security positions (stocks or bonds) registered in the name of the liquidation estate. Discovery may come about through receipt of a bond interest check which means there is a bond outstanding in the name of the payee or a cash dividend on a stock. In my experience, most liquidators will abandoned the security positions if they cannot find the certificates in the corporation’s records since the liquidator cannot be sure that the corporation did not endorse and transfer the certificate before the liquidator was appointed. It is also my experience that some of these security positions can have substantial dollar value and should not be abandoned.

To be sure, beneficial ownership of these security positions cannot be determined with certainty if the debtor’s records are scattered. However, since the stock record of an issuer of securities is presumptive proof of ownership of its securities, for liquidators to presume otherwise is unfair to its creditors. The liquidator can typically request a transcript of the corporation’s security positions with an issuer and get some clues as to ownership through those records. However, that is not always perfect.

Several years ago, a client recovered a substantial sum based on a corporate bond that had been outstanding in the name of its liquidation estate for more than a decade. The client had no record of ownership of the bond other than the record of the bond issuer. When the bond matured, the issuer had escheated its face value and accrued dividends in accordance with the appropriate abandoned property law. Based on the registered ownership and no record of a transfer of the bond, the client asserted a claim to the state holding the funds for recovery of that unclaimed property and was paid the full value of the bond and accrued dividends.

Several years later, after contacting the bond issuer and being told that the value of the bond had been escheated, an actual holder of the missing bond tried to recover the value of that bond from the state. Of course, the state denied the claim because it had previously paid out the proceeds of the bond. The holder then contacted my client who referred the matter to me.

The holder had the original bond, endorsed by my client’s predecessor that he had found it in his father’s safe deposit box and said it had “been there for a long time.” After reviewing the holder’s documents, I concluded it was more likely that his father’s estate had the right to the value of the bond rather than my client. Although there were defenses to the holder’s claim to the bond based on the passage of time, on my advice the client paid the holder the value of the bond and accrued dividends it received from the state.

Since the state could have been on the hook for a second payment of the bond to the holder, it was relieved of that liability when my client paid the estate of the holder.

Chasing actual ownership of securities is not a straight line. Forensic accounting is often necessary.

in Forensic Analysis, Registered Ownership of Securities, RJP's Corporate Bankruptcy / Corporate Liquidations Blog, Securities Tracing

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