BNY Mellon Claims It Didn’t Know of Sentinel Fraud

Bank of New York Mellon Corp. didn’t know cash management firm Sentinel Management Group Inc. was using investors’ assets as collateral for a $312 million credit line, an attorney for the bank told a federal judge in closing arguments today.

Sentinel liquidation trustee Frederick Grede claims the bank extended the company credit knowing it lacked enough capital to cover the debt, helping its principals finance a heavily leveraged trading portfolio. Grede, claiming the bank enabled Sentinel to deceive its clients, seeks the recovery of about $600 million for Sentinel’s creditors.

“The bank, like so many others, didn’t know that Sentinel was engaged in fraud,” Hector Gonzalez, an attorney for Bank of New York Mellon told U.S. District Judge James B. Zagel. Sentinel’s actions “didn’t amount to a red flag,” he said.

Sentinel, based in Northbrook, Illinois, filed for bankruptcy in 2007, four days after it froze client accounts citing credit market instability. Customer claims have totaled about $1.2 billion. U.S. Bankruptcy Judge John H. Squires in December 2008 approved a liquidation plan under which investors could be repaid 35 cents on the dollar.

The trustee claims BNY Mellon was only concerned about its own loan.

‘Clearly Lied’

“They let Sentinel keep going and hoped they would dig themselves out,” trustee lawyer Chris Gair told Zagel. “They clearly had a motive and clearly lied about what they did.”

Zagel told the attorneys he hoped to reach a verdict “before the summer is out.” The trial started in April in federal court in Chicago, though closing arguments were held today in Washington, where Zagel is serving as a visiting judge.

BNY Mellon is seeking enforce its collateralized claim for the $312 million in outstanding credit extended to the firm when it failed, plus accrued interest and attorney fees. Grede wants Zagel to subordinate that lien to the claims of other Sentinel creditors.

The New York-based lender said in a court filing in March there is no evidence that the bank knew Sentinel was in violation of the federal commodity exchange act or that insiders were “misappropriating customer assets for their own benefit.”

The case is Grede v. The Bank of New York, 08cv2582, in the Northern District of Illinois (Chicago).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE