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June 7, 1968

In the Matter of IRA HAUPT & CO., a Limited Partnership, Bankrupt

The opinion of the court was delivered by: TYLER

TYLER, District Judge.

 This memorandum deals with a petition for review of orders of Referee Edward Ryan entered in these bankruptcy proceedings on February 9 and March 14, 1968. In general, the limited partners ("petitioners") of Ira Haupt & Co. ("Haupt") attack these orders upon the ground that they do not agree that a pre-bankruptcy accounting rendered by liquidator James P. Mahony satisfied the requirements of section 2a(21) of the Bankruptcy Act, 11 U.S.C. § 11(a)(21), as the Referee found.

 Because many aspects of this bankruptcy matter have been amply set forth in numerous reported cases in this Circuit, it is neither necessary nor desirable to extensively recite the background facts. As is well known, on November 19, 1963, Haupt, which had been engaged for some years in the general brokerage and commission business in New York City, became a principal victim of what has come to be known as the "salad oil scandal". On November 20, 1963, Haupt was suspended by the New York Stock Exchange. On that day or a day or two thereafter, it was estimated that the extent of Haupt's capital deficiency was approximately $20,000,000.00. In an effort to protect Haupt's approximately 20,000 customer-creditors and to preserve public confidence in the securities industry, the New York Stock Exchange and Haupt's creditor banks entered into the now well-known "Agreement of November 25, 1963". Among other things, that agreement called for orderly liquidation of Haupt and provided for the appointment of a liquidator with broad powers of attorney from the general partners of Haupt. Mr. James P. Mahony, formerly Chief Examiner of the New York Stock Exchange, was designated as liquidator.

 Mahony served as liquidator from November 25, 1963 until March 19, 1964 when he was replaced by Mr. Edward Feldman. The latter acted as liquidator for three business days only.

 Some idea of the magnitude and difficulty of the task performed by Mr. Mahony as liquidator can be conveyed by the findings of Referee Ryan in his memorandum and order of February 9, 1968, which in turn are based upon an affidavit and accounting verified by Mahony on October 10, 1966. Mahony worked with an advisory committee of twelve experts and his own legal counsel, some 600 former Haupt employees and employees on loan from the New York Stock Exchange and various member firms to perform his task as liquidator. During Mahony's tenure, over $116,000,000.00 worth of creditors' claims against Haupt were satisfied. Mahony disbursed $7,471,478.56 out of funds supplied by the Exchange to purchase claims of Haupt's customers.

 He also expended considerable time and efforts in salvaging customers' accounts. Between 8,000 and 9,000 of the customers' accounts at Haupt were margin accounts. The bank loans secured by margin account securities and totaling about $70,000,000.00 were parceled among 48 different banks. In an effort to free the securities in these margin accounts for the customers, Mahony made arrangements to pay down the loans. Specifically, he paid or transferred out all but 200 of the 20,700 customers' accounts. He also collected net debit balances owing to Haupt in excess of $90,000,000.00 from customers. When the liquidation began in late November 1963, Haupt held securities for customers valued at about $490,000,000.00. The process of freeing the customers' securities involved tens of thousands of manhours. For example, over 14,000 checks were written, and thousands of customers were solicited for instructions respecting the delivery of their securities and for advice concerning their commodities accounts.

 Mahony also disposed of 15 branch offices of Haupt. He has stated before the Referee that approximately 11,000 inquiries concerning customers accounts were handled during his term.

 It will be only necessary to set forth a brief chronology of the proceedings in bankruptcy in order to place the present application of the limited partners in some focus. After the petition for bankruptcy had been filed in this court, Referee Ryan, sua sponte, on January 13, 1965, issued an order under section 2a(21) of the Bankruptcy Act directing the New York Stock Exchange, the creditor banks of Haupt, and Messrs. Mahony and Feldman to account in respect to their taking possession of and liquidating the assets of Haupt within four months prior to the filing of the petition of bankruptcy. Several weeks later on February 26, 1965, Referee Ryan entered an order "vacating" the January 13th order without prejudice and directing that the duty of accounting pursuant to section 2a(21) was to be that of Mahony and Feldman.

 Thereafter, in response to the modifying order of February 26, 1965, Mahony proceeded to file a 37 page affidavit verified October 10, 1966 to which were attached voluminous exhibits and appendices. Moreover, on February 13, 1967, at the direction of Referee Ryan, Mahony furnished additional exhibits and documents as part of his account.

 On April 4, 1967, the trustee, Charles Seligson, applied to the Referee to fix a date for a hearing to determine whether Mahony had complied with the order of the court dated February 26, 1965 and whether Mr. Edward Feldman should be required to serve and file any written accounting respecting the three business days during which he served as liquidator. *fn1" This application was granted, and after a number of postponements and adjourned hearings, Referee Ryan filed an opinion and order of February 9, 1968 in which, inter alia, he apparently approved Mahony's accounting and denied the informal applications of the limited partners for authority to compensate their lawyers and accountants for investigations which they might care to make into the Mahony accounting.

 In his February 9th opinion, Referee Ryan directed that the parties settle an order to reflect the substance of his opinion. Because counsel for the trustee and counsel for the limited partners submitted orders and counter-orders which in his judgment did not comply with his opinion, Referee Ryan on March 14, 1968 entered, sua sponte, another memorandum in the nature of a final order consistent with his opinion of February 9th.

 Despite voluminous briefs and the welter of charges and counter charges, both oral and written, of the parties upon this application, I confess to considerable difficulty in ascertaining precisely what counsel for the limited partners is seeking to achieve on this petition for review. As best I can determine, it is essentially contended by the limited partners and their counsel that the Referee erred in the following respects:

 1. The Referee erroneously approved the accounting of Mahony on the sole ground that that accounting was satisfactory to the trustee.

 2. The material submitted by Mahony to the court is not the kind of accounting required by section ...

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