Jan 8 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.
Friday's decision partially reversed rulings in 2014 from
U.S. District Judge James Zagel in Chicago, and returned the
case to the lower court for further proceedings.
"The trustee is extremely pleased," Grede's lawyer Catherine
Steege, who co-chairs Jenner & Block's bankruptcy litigation
practice, said in an email. "The ruling paves the way for the
trustee to make a very substantial distribution to Sentinel's
customers harmed by Sentinel's fraud, which the Court of Appeals
determined the Bank of New York should have investigated."
A spokesman for the bank had no immediate comment.
The case is Grede v. Bank of New York Mellon Corp et al, 7th
U.S. Circuit Court of Appeals, No. 15-1039.
(Reporting by Jonathan Stempel in New York; Editing by Lisa