By Jessica Dye
Dec 3 (Reuters) - A federal appeals court in the United
States has withdrawn a ruling that put Bank of New York Mellon
Corp ahead of former customers of Sentinel Management Group
seeking to recoup money lost in the futures broker's 2007
collapse.
In a two-line ruling that gave no further explanation, the
U.S. Court of Appeals for the Seventh Circuit withdrew an August
9 opinion. "This appeal remains under consideration by the
panel," the three-judge panel wrote in a ruling dated Nov. 30.
The decision overturns an August opinion from the same court
affirming an earlier district court ruling that Bank of New York
Mellon had a "secured position" on a $312 million loan it gave
to Sentinel.
Frederick Grede, the trustee in Sentinel's bankruptcy,
alleged that the broker 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
with losses of millions.
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
trading operations.
The appeals court said in August 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 decision was a blow for Grede, 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 boosted by
improperly using customer money to secure loans that funded
risky trades.
The scheme unravelled when the credit crisis hit began the
summer of 2007.
A spokesman for BNY Mellon declined to comment. A lawyer for
Grede could not be immediately reached for comment late on
Monday.
The case is Frederick Grede v. Bank of New York Mellon
Corp., in the U.S. Court of Appeals for the Seventh Circuit, no.
10-3787.
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