Bank of New York Mellon Corp. should be ordered give back a disputed $337 million claim payment it received three years ago, the liquidation trustee for Sentinel Management Group Inc. said in a U.S. Bankruptcy Court filing.
Frederick Grede, trustee for the collapsed suburban Chicago cash-management firm, asked in a court filing yesterday for U.S. Bankruptcy Judge Jacqueline P. Cox in Chicago to set a hearing on the request for Dec. 19.
The lender received its payout contingent upon the outcome of litigation over whether it knew Sentinel insiders were using customer money as collateral for $312 million in credit extended by the bank to Sentinel.
BNY Mellon won a 2010 federal court trial over its right to collect on its collateral lien, triggering its right to payment under a liquidation plan. The U.S. Court of Appeals in Chicago reversed that outcome in August, returning the issue to the trial court.
“The plan expressly provided that in such circumstance BONY would return all amounts it had previously been paid,” according to Grede’s filing. The bank has refused to do so, he said.
Kevin Heine, a spokesman for the New York-based lender, declined to comment on the trustee’s request.
Sentinel, based in Northbrook, Illinois, filed for bankruptcy protection in August 2007, four days after it froze client accounts because, it said, of credit market instability. The U.S. Securities and Exchange Commission sued the company three days later, accusing it of commingling client finds and improperly using them as collateral. That case is pending in federal court in Chicago.
Sentinel Chief Executive Officer Eric A. Bloom and the firm’s portfolio manager, Charles K. Mosley, were indicted last year on charges they misled clients about how their money was being handled. Prosecutors said the men defrauded at least 70 customers of more than $500 million.
Mosley pleaded guilty to two counts of investment-adviser fraud in October. He faces as long as 10 years in prison and has not been sentenced.
Bloom, who faces 20 criminal counts including 18 for wire fraud, each carrying a maximum sentence of 20 years imprisonment, pleaded not guilty in June 2012. His case is scheduled for trial on Feb. 24.
The appeals court ruling returned the case to U.S. District Judge James Zagel, who must reconsider whether to subordinate BNY Mellon’s claim to those of other creditors and determine what the bank’s employees knew of about Sentinel before its collapse.
The sum sought by Grede is comprised of $312 million in principal paid to the bank, plus about $25 million in interest. The trustee is reserving his right to seek interest on the money while it was held by the bank, according to the court filing.
The case is Grede v. Bank of New York, 08-cv-02582, U.S. District Court, Northern District of Illinois (Chicago). The SEC case is U.S. Securities and Exchange Commission v. Sentinel Management Group Inc., 07-cv-04684, U.S. District Court, Northern District of Illinois (Chicago). The criminal case is U.S. v. Bloom, 12-cr-00409, U.S. District Court, Northern District of Illinois, Eastern Division (Chicago).
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