The curious case of the BINDQ liquidation trust

If you are looking for an actionable idea you can quit right away, because the BIND Therapeutics stock has been cancelled months ago so there is nothing that can be bought or sold anymore. But if you like reading something about a bizarre situation you are at the right address here.

History

For those who don’t know anything about the story, a little bit of background information. BIND Therapeutics filed for chapter 11 bankruptcy protection in early 2016. It managed to sell its assets to Pfizer for enough money to pay back all creditors with some money left over for equity holders. So far all pretty straightforward, but the liquidation plan came with an interesting twist. The company picked a sort of random date (August 30, 2016) as the record date of which shareholders would be eligible to receive all future liquidation distributions. As a result the stock became basically worthless after that date, but since the stock continued to be traded for some time it offered shareholders a nice way to profit twice. I sold my position for something like $0.30/share which was a substantial windfall since I estimated liquidation distributions to be roughly $1.20/share while I bought the stock around $1.00/share.

Part of the reason that the stock continued trading at an elevated level was probably the involvement of a fund that apparently bought approximately one million shares after the record date. They have been, and still are involved in litigation, against the trustee (and FINRA as well I believe) trying to change the liquidation plan/the record date for future liquidation payments. So far they have been unsuccessful, but they haven’t given up yet. Their latest move is an attempt to convert the liquidation from chapter 11 to chapter 7, presumably to make it possible to work around the the record date confirmed in the chapter 11 plan.

Equity distribution form

While this is already weird, it got even weirder this year. After paying an initial liquidation distribution last year the trustee sent a letter to shareholders that they would be required to fill out an equity distribution form and a form W8/W9 in 180 days in order to be eligible for future distributions. This piece of paperwork proved a bit tricky to complete. You needed to provide the signed tax form to your broker, and your broker needed to sign-off on the number of shares you owned on the record date. A process like this has a lot of points where things can go wrong. Your broker might not notify you of the requirement to do the paperwork,  is unable or unwilling to do the paperwork, or things simply get lost in the mail.

As a result shareholders owning 75.05% of the company provided tax forms and equity certification forms. This means that a relative large part of the shareholder base isn’t getting any money from future distributions, either because of their own inattention or the inability of their broker to process the form. Based on some unhappy shareholder letters in the docket not all brokers were willing to do this. Luckily for me Interactive Brokers proved to be quite capable in handeling this weird situation. As a result the second liquidation payment contains a nice windfall profit for those who did manage to do all the paperwork. The first liquidation payment of approximately $8.0 million resulted in a distribution of~$0.38/share while the second liquidation payment of $8.0 million resulted in a distribution of ~$0.51/share.

As an added twist, because the payment wasn’t made to all shareholders it couldn’t be processed by the Depository Trust Company (DTC) and instead shareholders got a paper check. In the Netherlands checks haven’t been used in decades, and this was the first time ever in my life to receive one, but luckily my bank is able to handle them for a nice fee… It also creates a nice tax headache for those owning the stock in for example an IRA account since you are effectively doing a withdrawal from your account.

What about short sellers

Directly distribution money to shareholders while bypassing the depository raises an interesting question: how the hell do you handle this if people have lend out shares and other people have sold stock short. I think it’s mostly a theoretical question. As far as I know I didn’t lend out any shares on the record date, and I got the full payment per share. There are no issues for me. But imagine how messy it would be there would be a lot of people short. A potential scenario:

  1. I own 100 shares.
  2. I lend them out to a short seller
  3. He sells them to person X.

So how to deal with this situation? If I would claim ownership of 100 shares, and person X would claim ownership of 100 shares the liquidation trust is going to pay money to the same shares twice. If I couldn’t claim ownership of the shares, but only person X (I think this is the most correct implementation) I wouldn’t be able to fill out the equity distribution form. Maybe person X doesn’t fill out the equity distribution form. So there is no payment to X, and the short seller could claim that there should also be no payment to me. But lets say that I owned another 100 shares that I did successfully fill out the paperwork on. Now it’s clear that I got a certain payment per share. The short seller is supposed to pay me whatever I would have gotten on the shares if I would not have lend them out. So he would be on the hook for the $0.51/share payment. But how would that money get to my account? I know I got the payment, but it’s a paper check. My broker doesn’t know how much if any money I got and the same goes for the depository. And even if they would know, can they fix it on an account by account basis?

If this is not yet messy enough, if I would have owned all the shares and done the paperwork the distribution/share would have been a little bit lower for everybody (still assuming X didn’t do the paperwork). So maybe the short seller shouldn’t pay the full $0.51/share? Or what about the case when the short seller closed his brokerage account in the time between the cancellation of the stock and this liquidation payment. Is his broker then on the hook for it?

If anyone has anything intelligent about this to say I’m interested. Did you lend out any shares? Did you get paid on these shares? Someone who has been short this stock on the record date? Lending out shares to short sellers is supposed to be sort of risk-less. But I’m pretty sure the process breaks down in this obscure case. My guess is that either some people lend out a few shares, and simply didn’t get paid on those, or the trustee paid twice (or more) for some shares “screwing” everybody else by a tiny amount.

Disclosure

No position in BINDQ, yet still have the right to remain all future liquidation payments

22 thoughts on “The curious case of the BINDQ liquidation trust

  1. Will

    Did you see that note from IB saying “do not cash or deposit your checks yet”? Sort of a ridiculous request considering the late timing of it.

    Dear BINDQ shareholder,

    You are receiving this notice as you were entitled to receive a future distribution for shares of BINDQ as you submitted a valid W-8 or W-9.

    Here is the information we have at this time as this is still under investigation.

    We are reviewing this with the trustee and bankruptcy agent are waiting for a response and resolution from them.

    As such, if you have received a distribution check, please do not deposit or cash it yet as the trustee is still reviewing all of the details with the tax implications.

    We hope to have an answer soon and will keep you informed of the situation as soon as we receive confirmation from the trustee.

    Regards,
    Interactive Brokers Client Services

    Reply
    1. Alpha Vulture Post author

      Yes, I did see that message. But I already send it to my bank, and additionally I don’t think there are any tax implications for me. But for people who hold it in an IRA waiting to cash it would be wise.

      Reply
  2. Michael Hess

    The Bindq distribution is one of many examples that there is a real problem with record dates and ex-dividend dates. Technically nssdaq’s rules state that companies set record dates, but Finra sets ex-dividend dates and in large distributions the ex-dividend date is supposed to line up with the pay-date. But when companies ignore this rule and file in bankruptcy court…. it creates a mess. My experience is that finra and dtc have no idea how to handle this and make different decisions every time. Lol.

    Reply
    1. Alpha Vulture Post author

      I’m not sure BIND Therapeutics broke any rules, as far as I know there is only a rule with regards to dividends. Technically the company distributed a right (to all future distributions, regardless of the timing and their size) and for the distribution of rights there are no rules to my knowledge (but maybe I’m wrong).

      That said, I totally agree with you that it is often a mess with record dates and ex-dividend dates. I wrote earlier this year for example about the T Bancshares dividend https://alphavulture.com/2017/05/12/the-curious-case-of-the-t-bancshares-dividend, and another weird one was PD-Rx pharmaceuticals that announced a dividend, but put the ex-date on a date before the announcement was made. So some shareholders bought stock without knowing that a part of the cash balance of the company would be used to pay a dividend, and that they wouldn’t be getting it. That was definitely against the rules, yet Finra allowed it anyway.

      Reply
  3. Tom

    DOLE illustrates a similar problem. Dole settled a shareholder class action after it had completed its LBO and agreed to an additional payout to all shareholders of record at the time of the merger. Unfortunately, because a number of shares were held short prior to the merger the shares claimed significantly exceeded 100%. Even though the payment was made several years after the merger was completed (and short positions closed out) the brokers reached back into the accounts of the short sellers for the additional payment. I bet you can guess which side of the trade I was on.

    Reply
    1. Alpha Vulture Post author

      I think that case was exactly handled how it should have been. Shorts should be liable to pay exactly what longs would have gotten if they didn’t loan out the shares.

      Reply
  4. Dan

    I bought at $.95 and sold ex-date at about .56. I unfortunately decided to hedge and bought back around 75% of my shares in the low $.20s. Overall I should make 80+% on the deal (with a much higher IRR since I received 1/3 of my money back within the first month of the investment).

    I was not aware that the firm suing had purchased so many shares after the ex-date. No wonder they’re so pissed!!

    Reply
    1. Pietje

      They shouldn’t be pissed.. All filings are very clear and consistent about the record date. This firm made a deliberate bet to buy shares on the cheap after the record date and to sue the trust afterwards for a potential windfall. They force the trust to make extra legal costs that have to be paid by the original holders. If anything, we should be pissed! (ok, actually we should be happy that we sold to these suckers but some “simple” investors might have missed that opportunity).

      Reply
      1. Alpha Vulture Post author

        The filings were clear about the record date, but what about the ex-date? That’s I think why there is such a mess. In my view the company distributed a right to shareholders (to any and all future liquidation payments), but if you view it as a dividend (they also announced their intention to distribute $8 million to shareholders within 90 days) it was a payment of more than 25% of the price of the stock so the special dividend rules should apply and it should only trade ex-dividend after the payment (although those rules don’t apply automatically, and if FINRA doesn’t apply them, though luck…).

        I don’t think agree with this argument, but I guess that was their viewpoint. But realistically I think you can only make this argument for the first $8 million payment, not for any subsequent liquidation distribution. And I think the first one is questionable as well since the trust didn’t really declare a dividend when the plan went effective. It was only their intention to distribute that amount, subject to various adjustments and with no specific date. Only when they finalized the amount and the date they really “declared” a dividend.

        But of course, that’s just my view. BEC seems to think very differently based on all the lawsuits they have launched.

        Reply
        1. pietje

          “If any transfers of the Company’s common stock purportedly occur after the Distribution Record Date, any distributions to stockholders, INCLUDING the initial cash distribution, will be made only to the original stockholders of record as of the close of business on the Distribution Record Date.”

          I think this is quite explicit. Honestly, if you bought after the record date and are now suing I think you are a) incredibly stupid or b) you try to exploit the situation (i.e. you bought with the intention to sue).

          I think a ‘common sense’ interpretation of the press release is quite straightforward. Buy after the record date: you get nothing. However I’m sure that lawyers can argue otherwise.

          Reply
          1. Alpha Vulture Post author

            I’m going for option b here. But I think it’s safe to say that both people selling and buying after the record date are trying to exploit the situation. You can’t really take the moral high-ground after selling shares that you think are worthless.

            The true victims of BEC’s litigation are holders who bough before the ex-date, kept their shares, and are now getting a couple of cents/share less in liquidation proceeds because of all the lawyers costs…

          2. pietje

            Not that I really care about the moral highground, but I think there is a difference between ‘gambling’ about the value of a share on the stock market (isn’t that the point of a stock market) and suing the company in question to try to win your bet. In the first case other holders don’t bear additional costs.

  5. Dan

    This is somewhat theoretical I guess because everything is probably set in stone but: is it actually possible that if the case is converted that the new trustee could randomly change the record date and force people to give back money?

    Reply
  6. Pogonific

    Interesting case. I’m definitely not an expert but ive also spent a lot of time thinking about what happens to shorts in chapter 11 and I think you’re thinking is a little muddled. So here goes my attempt at clarifying.

    Contractually, when you short you enter into a contract to make the original owner financially indifferent to having lent you the share PLUS a commitment to pay the interest. For Interactive Brokers this means IB gets half the interest and the account holder the other half (that’s the terms of their stock yield enhancement program). So your question is really to what extent is the above scenario covered by that contract and I suspect (but I have not seen the contract) that the interpretation is as follows:
    1. At no point in the short transaction do 2 people have a claim on the shares. Either the contract is valid in which case the shares are owned by the guy who purchased them from the short position holder of the short contract is invalid in which case the owner is the original owner of the shares. But as there is little to contractually dispute at the short sale point, I’d argue 100 per cent the owner is the person who bought them from the short seller.

    2. Assuming that’s the case, the contract has transferred the liability of the liquidation proceeds to the original owner from the trust to the short holder. The finer question is what is the amount of the liability transferred? This again depends on the wording of the contract but I would be surprised if the answer isn’t “the amount the trust is actually paying out per loaned share” – it would make no sense for this to be “the amount only if you’ve filled in your tax form and depending on your tax situation”.

    Now as you can see it all hinges on the contract and of course any contract can be challenged with a lawyer in a court…. So that’s where it gets messy in a way I can’t help you more with.

    Some points you likely already know but may be useful to other readers
    1. Interactive Brokers margin requirement for shares trading at less than $2.50 is $2.50. If you think the implications of this through it becomes very mad to short shares in chapter 11 – eg if the share is trading at 25c you’d be tying up 10x the margin for every potential cent you can make. The reality of this is that your ability to short this position as a meaningful position of your portfolio becomes very limited.

    2. The longer you stay short through a chapter 11 bankruptcy the more your position becomes a bet on continued market liquidity of the shares than a bet on a share price decline. This is because at some point the market for the shares may disappear before they become cancelled. At that point you’re still contractually on the hook for the short interest and you may have a long wait before the shares are actually cancelled. Effectively at the cancellation point you close your position out by repaying shares that are worth nothing with nothing – before that point you are obliged to pay the interest on the shares you borrowed – and if there’s no market you’re stuck paying the interest.

    3. The “whose liability is it anyway” point you raise in the post also arises in distressed bonds. I bought bonds in genon before it was obvious they would go to chapter 11. At the point I bought the bonds the liability for the interest since the last payment date transferred from genon to me. They then proceeded to announce they’re going to chapter 11 as a result of which the next interest payment would not be made. Post that announcement selling the bonds did not shed the liability to pay the interest to the people I bought the bonds from – so effectively they got their portion of the last interest payment before ch11 despite the company going bkpt. One I chalked up to the education fund 🙂 but definitely a cheaper lesson than the crazy who bought BIND post record date!

    Reply
    1. Alpha Vulture Post author

      1. At no point in the short transaction do 2 people have a claim on the shares.

      I totally agree that would be the most sensible, but as the Dole case illustrates (as mentioned in the comments above) that’s apparently not always how it works in practice. Both the person lending out the shares, and the person who really owns them on the record date can successfully claim ownership. But technically it should be easy to fix. With voting rights it works just fine for example.

      2. Assuming that’s the case, the contract has transferred the liability of the liquidation proceeds to the original owner from the trust to the short holder. The finer question is what is the amount of the liability transferred? This again depends on the wording of the contract but I would be surprised if the answer isn’t “the amount the trust is actually paying out per loaned share” – it would make no sense for this to be “the amount only if you’ve filled in your tax form and depending on your tax situation”.

      I think it’s a safe bet that the contract is worded a lot more general, and is more something along the lines that as a short you have to pay the same amount of money as what the original long would have gotten if he didn’t lend out his shares. There is probably no specific language for this obscure case, and normally everything works fine. If everybody gets exactly the same amount it’s clear what shorts must pay, and in cases where people don’t get an identical distribution it’s usually structured as a tender offer and if you tender your shares you can’t loan them out at the same time.

      About the other points:

      1) Yes, this is a big problem with shorting low value stocks.
      2) Yes, that’s alway why I would be very reluctant to short this. I didn’t even try to do this after the record date.
      3) Interesting, didn’t know about that one.

      Reply
  7. monkeyface

    Your theory on short sellers make sense.
    But no one would have been short a liquidation where NAV was known. The market isn’t stupid. Why short something at $1 (the price you paid) if NAV is $1.3 + borrow fee.
    You can’t make money

    Reply
    1. Alpha Vulture Post author

      Sure, that’s probably why there weren’t a lot of shorts and this whole things is mostly a theoretical exercise. But there is probably always someone who has shorted a few shares for one reason or another (maybe market maker that didn’t end up flat at the end of the day, algorithm that shorted for some reason, someone sort because of some flawed thesis etc etc). And with even a few shares short someone should really figure out how to properly deal with it.

      In this case my bet is that some shares have simply been claimed twice. But since in the end the total amount of shares that did the right paperwork was 75% no-one really cares. But probably the payment/share should have been a bit higher, that percentage should have been a bit lower, and some short should have been paying part of the liquidation distribution as well.

      Reply
  8. Ploppy

    Hi, regarding the shorts, I once found myself in this exact position. My boss had me work all night researching all instances where Chapter 11 had ruled in favour of distribution to the equity holders and combing IDSA and GMRA language for short sale treatment. The crux of it is this: if you are short, whoever is the title owner of the position is responsible for making the beneficial owner whole. That is to say that the short seller is obliged to ‘manufacture’ all distributions gross of tax, even in Chapter 11 (it’s slightly more complex under ISDA language, but it works out the same). The stock loan desks of the respective brokers will arrange this amongst themselves, so a lack of take up on s corporate action unfortunately doesn’t translate to a free lunch. If A lends stock to B who sells it to C; then A will make a direct claim on B and C will make a direct claim on the issuing company. Of course, this relies on a certain level of honesty in the chain and for local law to be properly drafted. There are a few instances where it’s possible for parties to make more than one claim on the same corporate action. There was a loophole like this in Denmark and an accompanying scandal involving Interpol a few years ago, involving multiple claims on tax rebates by foreign nationals.

    If the account is closed before the distributions are realized, then it is the broker who is on the hook, as they have economically admitted that the trade between them and their client no longer stands and now effectively are running a short position themselves (in cases where their client is unable to return the stock to settle).

    Anyhow, really enjoying the blog, this has been a great find!

    Reply
    1. Alpha Vulture Post author

      Thanks, and thanks for clarifying a tiny part of this story 🙂

      It doesn’t clarify though how things would work in this case. With normal corporate actions there is no free lunch. It can actually be quite dangerous to be short during things like tender offers. Because maybe just 5% of the outstanding shares are accepted in a self tender above the market price, but perhaps 100% of the shares you sold short were accepted in the offer.

      But as soon as you start doing distributions outside the DTC-system/brokers there is no way anymore to match up short sellers with longs.

      Reply

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