CHICAGO, Aug 9 (Reuters) - A federal appeals court has
upheld a ruling that puts Bank of New York Mellon in line ahead
of former customers of Sentinel Management Group to be paid back
money lost in the 2007 collapse of the futures broker.
The appeals court affirmed an earlier district court ruling
that Bank of New York Mellon had a "secured position" on a $312
million loan it gave to Sentinel.
Sentinel allegedly pledged hundreds of millions of dollars
in customer assets to secure an overnight loan at the bank,
leaving the bank in a secured position but Sentinel's customers
Futures brokers are required to keep customers' funds in
dedicated accounts to protect them from being used for anything
other than client business. At Sentinel, 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
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.
A bank spokesman could not immediately be reached for
The decision is a blow for Frederick Grede, the trustee in
Sentinel's bankruptcy, who had sought to strip Bank of New York
Mellon of its secured position.
Sentinel 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 trades.
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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