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BNY Mellon Ordered to Give Up $337 Million From Sentinel

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Jan. 23 (Bloomberg) -- Bank of New York Mellon Corp. must return almost $337 million it received from the trustee liquidating bankrupt Sentinel Management Group Inc., after the bank lost an appeal over control of the money.

U.S. Bankruptcy Judge Jacqueline P. Cox in Chicago approved the request of Frederick Grede, trustee for the collapsed cash-management firm, to have the money returned to the estate, according to a ruling issued yesterday and posted on the court’s electronic docket today.

Requiring BNY Mellon to relinquish the money is “in the best interests of the estate, the liquidation trust, the creditors and other parties in interest,” the judge ruled.

Sentinel, based in Northbrook, Illinois, filed for bankruptcy protection in August 2007, four days after it froze client accounts, citing 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.

BNY Mellon was paid subject to 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.

The New York-based bank 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.

Segregated Account

The bank has 10 business days to return the money, which will be held in a segregated account pending final resolution of its disputed claim at another trial, court papers show.

“The decision simply concerns the question of where the funds reside until the district court issues its decision on the merits of the trustee’s claims,” Kevin Heine, a spokesman for the New York-based bank, said in a phone interview.

The money is “returning to the status quo, it’s not yet available for distribution,” because the legitimacy of the bank’s claims still has to be decided by the district court, “but it’s under my control,” Grede said in a phone interview.

The bankruptcy is In re Sentinel Management Group Inc., 07-bk-14987, U.S. Bankruptcy Court, Northern District of Illinois (Chicago). The trustee’s 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).

To contact the reporters on this story: Andrew Harris in federal court in Chicago at aharris16@bloomberg.net; Michael Bathon in Wilmington at mbathon@bloomberg.net

To contact the editors responsible for this story: Andrew Dunn at adunn8@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

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