CHICAGO, Aug 9 (Reuters) - A ruling in the case of failed
futures brokerage Sentinel Management Group could make it more
difficult for customers to recoup money lost in the much larger
collapse of MF Global, according to Sentinel's bankruptcy
A federal appeals court on Thursday upheld a ruling that
puts Bank of New York Mellon ahead of former customers of
Sentinel in the line of those seeking the return of money lost
in the 2007 failure of the suburban Chicago-based futures
The appeals court affirmed an earlier district court ruling
that the bank had a "secured position" on a $312 million loan it
gave to Sentinel, which turned out to have been secured by
Futures brokers are required to keep customers' funds in
dedicated accounts to protect them from being used for anything
other than client business.
However, Thursday's ruling suggests that brokerages can use
customer funds to pay off other creditors, Sentinel trustee Fred
Grede told Reuters.
"I don't think that's what the Commodity Futures Trading
Commission had in mind" with its requirement that brokers keep
customer money separate from their own, he said.
"It does not bode well for the protection of customer
Worse, Grede said, is that the ruling suggests that a
brokerage that allows customer money to be mixed with its own is
not necessarily committing fraud.
That may raise the bar for proving that MF Global Holdings
Ltd, under then-CEO Jon Corzine, misused customer funds as it
scrambled to meet margin calls to back bets on European debt in
the brokerage's final days. A $1.6 billion customer shortfall
Corzine has said he did not know about the transfer of any
"I'm sure Mr. Corzine's attorneys will get ahold of this
ruling and use it for all it's worth," Grede said.
A lawyer for Corzine, who has not been charged with any
crimes, did not immediately respond to a request for comment.
CORZINE MAY STILL FACE SCRUTINY
CME Group Executive Chairman Terrence Duffy, whose firm was
MF Global's frontline regulator, has said MF Global made
unlawful transfers of customer money to plug its own liquidity
James Koutoulas, head of the Commodity Customer Coalition,
which has been an advocate for MF Global clients, said Corzine
could still face scrutiny for the transfers.
The Sentinel ruling is "not an end-all-be-all acquittal for
Corzine," he said.
Sentinel allegedly pledged hundreds of millions of dollars
in customer assets to secure an overnight loan at Bank of New
York Mellon, leaving the bank in a secured position but
Sentinel's customers out millions.
Customer funds were allegedly moved from the protected
accounts to other accounts so they could be used as collateral
for loans to Sentinel's own trading operations.
The appeals court said that "perhaps the bank should have
known that Sentinel violated segregation requirements" but
agreed with the district court's earlier ruling that "such a
lack of care does not rise to the level of the egregious
misconduct" needed to reprioritize a claim.
"That Sentinel failed to keep client funds properly
segregated is not, on its own, sufficient to rule as a matter of
law that Sentinel acted 'with actual intent to hinder, delay, or
defraud' its customers," U.S. Circuit Judge John D. Tinder wrote
in the ruling.
The decision was a blow for Grede, who had sought to strip
Bank of New York Mellon of its secured position.
Sentinel, whose customers are missing about $600 million,
largely managed money for other futures brokers, delivering
outsized returns that, Grede says, were juiced up by improperly
using customer money to secure loans that went to fund risky
The scheme unraveled when the credit crisis hit in the
summer of 2007.
(Reporting by Tom Polansek and Ann Saphir; Additional reporting
by Jonathan Stempel)
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