Nasdaq Marketmaker Settlement $$ Querie

[John G]

The two year old class action lawsuit against Nasdaq marketmakers/brokers has apparently been settled and checks were delivered this past week. Nice year ending surprise for those that signed and returned the forms. Apparently just a couple of trades got you a check for $25 and active traders could get $4,000+.

Question 1: Assume the check you receive is large and based upon trading activity in an IRA. The check indicates it was related to an IRA. Can these funds be deposited into the IRA as a kind of rollover? It would seem that the settlement represents a court view of your additional profit from the alleged pricing abuses. Therefore if the "abuse" had not occured, theoretically the IRA assets would be greater. I can remember a custodian accepting a misdirected dividend check (sent to residence and not the custodian... too long a story to explain) to be re-deposited to the IRA.

Question 2: What is the likely tax status of settlement checks? Many of the checks will be based upon standard brokerage accounts. The letter cites IRS Code 468B "whether a distribution to a claimant is included in the claimant's gross income is generally determined by reference to the claim in respect of which the distibution is made..." Wow, that must be clear to everyone!

Knowledge is great, but conjecture and analogies are also welcome.

[JAMES PATRICK]

I have received checks for IRA and taxable accounts.

For the IRA I spoke to the FC at Merrill and they have a special code to deposit it back into the account without becoming a contribution for 2000 or 2001.

Technically if you can identify the trade(s) you should amend your taxes.It can get complicated if you happened to have a loss that year(s) and the money doesn't make your Shedule D positive. However, for $25 and the other small checks that I have received it will go on line 21 Other Income --- litigation.

[Guest shronesz]

I have a situation that a frozen Target Benefit plan received these checks. Can the company cash them and use them to pay fees for the plan? Should they be allocated as earnings?

[JAMES PATRICK]

SUSAN,

I have no idea what a Target Benefit plan is, much less a frozen one.

However, the settlement of the NASDAQ litigation could be considered as a return of an overcharge when you bought or sold shares in various companies listed on the exchange.

This would have increased your gain on stocks sold at a profit and decreased losses on stocks sold at a loss.

If you still own any oy these stocks you could consider it as a partial refund of the purchase price.

Hope that helps somewhat!