Bank of NY Mellon is dealt setback in Sentinel bankruptcy

Fri Jan 8, 2016 7:43pm EST
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By Jonathan Stempel

(Reuters) - A federal appeals court on Friday set back Bank of New York Mellon Corp's effort to recoup $312 million it lent to Sentinel Management Group Inc, a money manager that collapsed in 2007 and whose former chief is now in prison for fraud.

The 7th U.S. Circuit Court of Appeals in Chicago said a lower court judge reviewing bankruptcy trustee Frederick Grede's lawsuit erred in clearing the bank of wrongdoing in its dealings with Sentinel and its chief executive officer, Eric Bloom.

Writing for the appeals court, Circuit Judge Richard Posner said the bank should be treated as an unsecured Sentinel creditor, not a secured creditor, because it was aware of suspicious facts that should have led it to investigate whether Northbrook, Illinois-based Sentinel was up to no good.

Posner also rejected Grede's argument that the bank's claim should be pushed further behind other claims, saying the trustee did not show that the bank acted deliberately to avoid confirming its belief there was a high probability of fraud.

The trustee objected to the bank's acceptance of Bloom's assurances that he had permission from customers to use their money as collateral for his loan.

Federal prosecutors said Bloom used the loan to help finance a "house" trading portfolio filled with risky and illiquid securities, and then concealed Sentinel's looming insolvency.

The firm went bankrupt in August 2007, and prosecutors later charged Bloom for running what they called a $666 million fraud.

Bloom was convicted in March 2014 on 19 fraud counts, and is serving a 14-year prison term. He is appealing the conviction.   Continued...

The Bank of New York Mellon Corp. building at 1 Wall St. is seen in New York's financial district March 11, 2015. REUTERS/Brendan McDermid