A Rising Tide Distribution (RTD) is commonly used by courts to distribute recovered assets to defrauded investors. Money is disbursed in a fashion that leaves as many investors as possible with the same percentage recovery of their total investment, after consideration for any prior distributions. The name is an analogy to a rising tide lifting boats on a beach.
As one court order[1] explains,
16. In analyzing the method of distribution to be used in this case, the Receiver considered the two most widely accepted methods of distribution used in receiverships similar to this case: (1) pro-rata payments based on the Rising Tide calculation; and (2) pro-rata payments based on each investor’s net loss (the “Net Loss” method of distribution).
17. The fundamental difference between these two methods is the way that prior payments are treated and accounted for in determining amounts to be distributed from the receivership estate to investor claimants.
18. Under the Net Loss method, prior payments to each investor are subtracted from the investor’s total investment amount to determine the investor’s net claim amount. All investors who suffered a net loss receive pro rata distributions in accordance with their net claim amounts.
19. Under the Rising Tide method, however, prior payments to each investor are credited against investors’ pro-rata distributions from the receivership. In effect, an individual investor’s loss is deemed to be the gross amount actually invested in the scheme. Payments received by the investor prior to the scheme’s collapse are treated as “distributions” on par with the distributions to be made by the Receiver, so that prior amounts paid by Parish are credited against (i.e., subtracted from) the amount that would otherwise be paid from the receivership estate. Under this method, investors who received prior payments are entitled to receive a smaller pro-rata payment from the receivership estate than those who received no prior payment. Moreover, investors who previously received payments exceeding their pro rata amount of the total distribution will receive no distribution from the receivership estate.
20. Because of the manner in which prior payments are treated under the two methods, investors who received little or no payments during the course of the Ponzi scheme stand to receive more in distributions from the receivership estate under the Rising Tide method of distribution than they would under the Net Loss method.
21. After considering the application of both methods, the Receiver and his counsel recommend the use of the Rising Tide method in this case.
As an example, consider four investors defrauded in a Ponzi scheme:
How should recovered assets be fairly distributed, assuming that no investor should have to return any portion of prior distributions? An RTD assumes that the money should be distributed in a fashion that leaves as many investors as possible with the same percentage recovery of their total investment, after consideration for any prior distributions.
To calculate this, first sort by percentage recovery (i.e., Prior Distributions divided by Investment):
Dana receives all of the recovered funds until she has the same percentage recovery as Cain. If additional money is available, Dana and Cain both receive money, pro rata to their investments, until they reach Alan’s 10%, then those three until they match Barb’s 15%, then all receive funds. Implicit in this is a breakpoint for each investor:
What the breakpoints mean is this: Dana receives all of the money up to the first $5000, which puts her on par with Cain. Then Dana and Cain share money in some ratio up to $14,000, until coming to par with Alan. Alan joins the party after that, and if over $25,500 is recovered, so does Barb.
What are the share ratios? Consider Dana. She gets 100% of the first $4000. After that, she receives her share of the total investment of she and Cain, i.e., 100/(100+80) = 55.6% and Cain receives the 44.4%. When Alan joins the fray at $14,000,
- Dana receives 100/(100+80+50) = 43.5%
- Cain receives 80/(100+80+50) = 34.8
- Alan receives 50/(100+80+50) = 21.7% (which brings the total to 100%)
So for Dana, her distribution at each breakpoint looks like this:
She receives 100% of the first $5000, 55.6% from $5000 to $14,000, 43.5% from $14,000 to $25,500, and 34.5% of anything over that. Here’s another way to look at those numbers that makes them somewhat easier to calculate:
Dana receives 100% of everything (Wait! That’s not fair!). But for amounts over $5000, she has to give back 44.4%, and for amounts over $14,000 another 12.1%, and for amounts over $25,000, another 9%. Those are differential rates from one breakpoint to the next, and the result is exactly the same as above. Each investor has a similar differential rate vector:
Cain receives nothing until the first breakpoint, then 44.4% of everything above that (exactly the amount Dana gives back), then gives up 9.7% after the third breakpoint, then another 7.2% after the last. Alan receives nothing until the third breakpoint, then 21.7%, then gives up 4.5% at the fourth breakpoint. The total of the first column is 100%, the total of each other column is 0, so the total of the whole array is 100%, as one would expect.
Here are some examples:
Figure 7 $5000 Recovered |
The workbook shows two examples, one using formulas, and one using VBA.
[1] US District Judge David Norton in SEC v. Parish Economics, http://haysconsulting.net/wp-content/uploads/2012/10/Order-Approving-Rising-Tide-and-Claim-Schedules.pdf, retrieved 20 Jan 2013