UNITED STATES OF AMERICA

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

ADMINISTRATIVE PROCEEDING

File No. 3-14993

In the Matter of

MIDDLECOVE CAPITAL, LLC and

NOAH L. MYERS,

Respondents.

PROPOSED PLAN OF DISTRIBUTION

1.

Purpose and Background. This proposed plan of distribution (the “Plan”), subject

to the approval of the Commission, has been developed pursuant to Rule 1101 of the

Commission’s Rules on Fair Fund and Disgorgement Plans (“Rules”), 17 C.F.R. § 201.1101. As

described more specifically below, the Plan provides for a distribution of funds collected from

MiddleCove Capital, LLC (“MiddleCove’) and Noah L. Myers (“Myers”) (collectively, the

“Respondents”), as a result of the Respondents’ engaging in fraudulent trade allocations at

MiddleCove, pursuant to a Commission order issued on January 16, 2013.1

The Order found, among other things, that from approximately October 2008 through

February 2011 (the “relevant period”), Myers engaged in fraudulent trade allocation – “cherrypicking” – at MiddleCove. During the relevant period, MiddleCove was a registered investment

adviser. Myers executed his cherry-picking scheme by unfairly allocating trades that had

appreciated in value during the course of the day to his personal and business accounts and

allocating trades that had depreciated in value during the day to the accounts of his advisory

clients. He did this by purchasing securities in an omnibus account and delaying allocation of

the purchases until later in the day (and sometimes the next day), after he saw whether the

securities appreciated in value. When a security appreciated in value on the day of purchase,

Myers would often sell the security and disproportionately allocate the purchase and the realized

day-trading profit to his own accounts or accounts benefiting himself or his family members. In

contrast, for securities that did not appreciate on the day of purchase, Myers would

1

Order Making Findings and Imposing Remedial Sanctions and a Cease-and Desist Order Pursuant to Sections

15(b) and 21C of the Securities Exchange Act of 1934, Sections 203(e), 203(f), and 203(k) of the Investment

Advisers Act of 1940, and Section 9(b) of the Investment Company Act of 1940, Exchange Act Rel. No. 68669 (Jan.

16, 2013) (the “Order”).

disproportionately allocate these purchases to his clients’ accounts and his clients would hold the

position for more than one day. Myers carried out his cherry-picking scheme with regard to

several securities, but was most active with an inverse and leveraged exchange traded fund called

ProShares UltraShort Financials or SKF. Neither MiddleCove nor Myers disclosed to clients

that they were engaged in cherry-picking and that they would favor Myers’s accounts in the

allocation of appreciated securities. As a result of his fraud, Myers realized ill-gotten gains of

$462,022. The Order required the Respondents to pay disgorgement of $462,022, prejudgment

interest of $26,096, and a civil money penalty of $300,000. Neither MiddleCove nor Meyers

made any payment toward their monetary obligations, accordingly, on March 20, 2013, the

Commission filed an Application for an Order Compelling Respondents to Show Cause Why a

Judgment Should Not Be Entered Against Them Pursuant to Section 21(e) of the Securities

Exchange Act of 1934 with the United States District Court for the District of Connecticut (Case

No. 13-mc-00045). MiddleCove and Myers failed to appear, plead, or otherwise defend the

District Court action, thus, on June 28, 2013 the Commission filed a Motion for Default

Judgment. On July 11, 2013, the court issued an order that entered a Default Judgment against

MiddleCove and Meyers. To date, the Commission has collected $33,086.05 towards the

Respondents’ Default Judgment (the “Distribution Fund”). It is anticipated that there will be one

disbursement to the Eligible Clients, as defined in paragraph 4 of this Plan.

The Distribution Fund is subject to the continuing jurisdiction and control of the

Commission and the Distribution Fund has been deposited at the United States Department of

Treasury’s (“U.S. Treasury”) Bureau of Fiscal Service (“BFS”) for investment. Other than

potential interest income from the BFS investment, the Commission does not anticipate that the

Distribution Fund will receive additional funds. If any additional funds are received, those funds

will either be added to Distribution Fund for disbursement to investors, or be sent to the United

States Treasury and not distributed at the discretion of the Fund Administrator. All BFS fees

will be paid by the Distribution Fund.

Under this Plan, the present value of incorrectly collected fees will be distributed to

Eligible Clients, as defined in paragraph 4 below, from the Net Distribution Fund, which is the

Distribution Fund less any reserve for taxes, fees or other expenses of administering the Plan.

2.

Tax Administrator. The Commission has appointed Miller Kaplan Arase, LLP as

the tax administrator (“Tax Administrator”) for the Distribution Fund,2 pursuant to Omnibus

Order Directing the Appointment of Tax Administrator in Administrative Proceedings that

Establish Distribution Funds.3 The Fund Administrator will cooperate with the Tax

Administrator in providing information necessary to accomplish the income tax compliance and

any other work ordered to the Tax Administrator by the Commission. The Tax Administrator

shall be compensated for all reasonable costs and expenses from the Distribution Fund in

accordance with its Revised 2017-2018 Engagement Letter Agreement with the Commission,

and all tax obligations will be paid out of the Distribution Fund.

2

3

Order Appointing Tax Administrator, Exchange Act Rel. No. 81287 (Aug. 2, 2017).

Exchange Act Rel. No. 81057 (Jun. 30, 2017).

2

3.

Fund Administrator. Michael S. Lim, Attorney-Adviser in the Commission’s

Division of Enforcement’s Office of Distributions, is proposed to be the administrator of the

Distribution Fund (the “Fund Administrator”). The Fund Administrator will, among other

things: oversee the administration of the Distribution Fund, obtain mailing information for the

Eligible Clients, distribute money from the assets of the Distribution Fund to Eligible Clients in

accordance with the Plan, resolve disputes, prepare a final accounting with assistance from the

Tax Administrator, and provide the Tax Administrator with funds to pay tax liabilities and tax

compliance fees and costs. As a Commission employee, the Fund Administrator receives no

compensation from the Distribution Fund for his services in administering the Distribution Fund.

In accordance with Rule 1105(c) of the Rules, 17 C.F.R. § 201.1105(c), no bond is required since

the Fund Administrator is a Commission employee. In carrying out his duties, the Fund

Administrator may be assisted by other Commission staff acting under his supervision. The

Fund Administrator may be removed at any time by order of the Commission or hearing officer.

4.

Specification of Eligible Clients. The Fund Administrator shall distribute funds

from the Net Distribution Fund to those clients (individually, each an “Eligible Client,” and

collectively, the “Eligible Clients”) who were allocated trade losses in SKF identified by

Professor Lawrence Harris in Exhibit 20 of his expert report to the Commission. Professor

Harris was retained by the Commission in its lawsuit against the Respondents to examine records

of trades by Myers and how those trades affected investor accounts. An Eligible Client is

deemed harmed only if that Eligible Client was allocated trade losses in SKF when Myers

unfairly allocated trades that had depreciated in value during the day to the accounts of his

advisory clients. The Fund Administrator identified 141 potentially Eligible Clients to receive

distribution payments.

5.

No claims-made process. This Distribution Fund is not being distributed

according to a claims-made process, so the procedures for providing notice and for making and

approving claims are not applicable.

6.

Qualified Settlement Fund. The Distribution Fund constitutes a Qualified

Settlement Fund under Section 468B(g) of the Internal Revenue Code, 26 U.S.C. § 468B(g), and

related regulations, 26 C.F.R. §§ 1.468B-1 through 1.468B-5.

7.

Methodology for Determining Distribution Amounts. The Fund Administrator

determined the amount to be distributed to each Eligible Client in the following manner.

a. The Fund Administrator identified each Eligible Client who was allocated traded

losses in SKF identified by Professor Lawrence Harris in Exhibit 20 of his expert

report to the Commission.

b. The Fund Administrator staff then totaled all allocated traded losses for all Eligible

Clients to obtain the total Eligible Client losses (“Total Eligible Client Losses”).

c. The Fund Administrator calculated the pro rata loss for each Eligible Client (“Pro

Rata Loss for Each Eligible Client”) by dividing that Eligible Client’s allocated trade

losses in SKF by Total Eligible Client Losses.

3

d. The Fund Administrator multiplied the Pro Rata Loss for Each Eligible Client by the

Net Distribution Fund to determine the estimated distribution amount to be paid to

each Eligible Client (“Estimated Distribution Amount”).

In the view of the Fund Administrator and Commission staff, this methodology

constitutes a reasonable allocation of the Net Distribution Fund. Based on this methodology, it is

anticipated that there will be one (1) distribution to the Eligible Clients, which will take place as

outlined in paragraph 10 below. If the Fund Administrator is unable to locate a potentially

Eligible Client or the potentially Eligible Client has not provided adequate tax information to the

Fund Administrator, that potentially Eligible Client will be removed from the distribution and

that potentially Eligible Client’s Estimated Distribution Amount will be added to the Net

Distribution Fund and a recalculation of the amounts to be distributed to the remaining Eligible

Clients will be performed.

8.

Procedures for Locating and Notifying Eligible Clients. On the basis of

information obtained by the Commission staff and based on a review and analysis of applicable

records, the Fund Administrator identified the Eligible Clients. Within thirty (30) days of the

Commission’s approval of this Plan, the Fund Administrator will send each Eligible Client a

notice by electronic mail, United States Postal Service, or other mail delivery service regarding

the Commission’s approval of this Plan, including as appropriate, a statement characterizing the

distribution, a link to this Plan on the Commission’s website and instructions for requesting a

copy of the Plan, a description of the tax information reporting and other related tax matters, the

procedure for the distribution as set forth in the Plan, and the name of the Fund Administrator to

contact with questions regarding the distribution (the “Plan Notice”).

Eligible Clients will be asked to provide documentation if they disagree with the

estimated Pro Rata Loss for Each Eligible Client. The Fund Administrator will coordinate with

the Tax Administrator to request contact and other information from each Eligible Client that is

needed to accomplish the distribution in accordance with applicable tax requirements relating to

the Distribution Fund.

If a Plan Notice is returned as undeliverable within sixty (60) days of approval of the

Plan, the Fund Administrator will make all reasonable efforts to ascertain the Eligible Client’s

correct address. The Fund Administrator will then resend the Plan Notice to the Eligible Client’s

new address within thirty (30) days of receipt of the returned Plan Notice. If the Plan Notice is

returned again, the Eligible Client will be removed from the distribution and the allocated

distribution amount will be added to the Net Distribution Fund and become part of the

recalculation described above in paragraph 7.

9.

Distribution Timing. The Fund Administrator will use his best efforts to start the

distribution within one hundred fifty (150) days of the Plan’s approval.

10.

Payment to Eligible Clients. The Fund Administrator will compile the payee

information and prepare a payment file in a format approved by Commission staff for submission

to the Commission. Pursuant to Rule 1101(b)(6) of the Rules, the staff will obtain an order from

the Commission to disburse the Distribution Fund.

4

All payments will be distributed with the United States Dollar (USD) as the form of

currency. For any payment that is not cashed/negotiated and where subsequently full or partial

payment must be returned to the Distribution Fund this will also be required in the form of USD

currency.

The Fund Administrator will maintain information about uncashed checks, any returned

items due to non-delivery, insufficient addresses, and/or other deficiencies. The Fund

Administrator is responsible for researching and reconciling errors and reissuing payments when

possible. The Fund Administrator also is responsible for accounting for all payments. Checks

will state on their face that they are valid for one (1) year. The amount of all uncashed checks

will continue to be held in the Distribution Fund.

11.

Accountings. Upon final distributions to Eligible Clients pursuant to the

procedures described above, and the payment of all taxes, fees, and expenses, the Fund

Administrator will submit a final accounting, pursuant to Rule 1105(f) of the Rules, for approval

by the Commission on a standardized form provided by the Commission staff prior to the

discharge of the Fund Administrator. No quarterly accountings will be submitted.

12.

Amendments and Procedural Deadline Extensions. The Fund Administrator shall

take reasonable and appropriate steps to distribute funds from the Net Distribution Fund

according to this Plan. Immaterial changes may be made by the Fund Administrator in

consultation with the Commission staff. If there are any changes to the Plan that are determined

to be material, Commission approval is required prior to implementation by amending the Plan.

The Fund Administrator, for good cause shown, may extend any of the procedural deadlines set

forth in this Plan.

13.

Procedures to Request Plan Notice. A person that does not receive a Plan Notice

and believes that he or she should have received a Plan Notice after becoming aware of the Plan

(e.g., through other Eligible Clients or on http://www.sec.gov/litigation/fairfundlist.htm) must

submit documentation to the Fund Administrator to establish that the individual is in fact eligible

to receive a Plan Notice within seventy-five (75) days after the last Plan Notices are sent to

potentially Eligible Clients by the Fund Administrator. The Fund Administrator will send the

individual a Plan Notice within twenty-one (21) days of receiving the individual’s

documentation, if the Fund Administrator determines that the individual should have received a

Plan Notice.

14.

Procedures for Disputes made by Eligible Clients. Disputes will be limited to

calculations of disbursement amounts to Eligible Clients. Within thirty (30) days of the date that

an Eligible Client’s disbursement is made, the Fund Administrator must receive a written

communication detailing the dispute along with any supporting documentation. The Fund

Administrator will investigate the dispute, and such investigation will include a review of the

written dispute as well as any supporting documentation. Within thirty (30) days of receipt of

the written dispute, the Fund Administrator will notify the Eligible Client of its resolution of the

dispute, which shall be final.

5

15.

Residual and Disposition of Undistributed Funds. A residual within the

Distribution Fund refers to any amounts remaining after distribution of the Net Distribution Fund

to Eligible Clients has occurred. The residual may include funds reserved for future taxes and

related expenses, administrative expenses, distributions from checks that have not been cashed,

from checks that were not delivered or from funds returned to the Commission, and tax refunds

for overpayment or for waiver of IRS penalties. All residual funds remaining after all expenses

of administration and taxes have been satisfied will be transferred to the U.S. Treasury after the

final accounting is approved by the Commission.

16.

Termination of the Distribution Fund. The Distribution Fund will be eligible for

termination and the Fund Administrator will be eligible for discharge after all of the following

have occurred: a) a final accounting, in a standard accounting format provided by Commission

staff, has been submitted by the Fund Administrator, and has been approved by the Commission;

b) all taxes, final fees and expenses of the Tax Administrator, and BFS fees have been paid by

the Distribution Fund; and c) any amount remaining in the Distribution Fund has been received

by the Commission. When the Commission has approved the final accounting, the Commission

staff will seek an order from the Commission to approve the termination of the Distribution

Fund, the discharge of the Fund Administrator and the transfer of any amount remaining in the

Distribution Fund to the U.S. Treasury.

17.

Notice of Proposed Plan of Distribution and Opportunity for Comment. The

Notice of Proposed Plan of Distribution and Opportunity for Comment (the “Notice”) shall be

published in the SEC Docket and on the Commission’s website at

http://www.sec.gov/litigation/fairfundlist.htm. Any person wishing to comment on this Plan

must do so in writing by submitting their comments to the Commission within thirty (30) days of

the date of the Notice (a) to the Office of the Secretary, United States Securities and Exchange

Commission, 100 F Street, NE, Washington, DC 20549-1090; (b) by using the Commission’s

Internet comment form (www.sec.gov/litigation/admin.shtml); or (c) by sending an e-mail to

rule-comments@sec.gov. Comments submitted by e-mail or via the Commission’s website

should include “Administrative Proceeding File Number 3-14993” in the subject line.

Comments received will be publicly available. Person should only submit comments that they

wish to make publicly available.

6