Under-segregation of customer assets constitutes a regulatory violation, but it is not proof of insolvency.
Plaintiff Frederick J. Grede became Liquidation Trustee of Sentinel Management Group, Inc., when it was thrown into bankruptcy in August 2007. Sentinel’s basic business model, as described by the Court, was “making safe, short-term investments of excess cash held by other investment firms called futures commission merchants (“FCMs”).” Things went awry when “Sentinel commingled its client assets with Sentinel’s assets in an unlawful manner and exposed its clients to a substantial risk of loss of which they were unaware.”
UBS Securities became suspicious, the Court writes, when Sentinel began projecting unusually high returns. It demanded return of its investments, which totaled $108 million (including $14 million in interest). That transfer occurred on March 30, 2007. According to the Trustee, that $14 million was “false profits,” inflated by Sentinel’s segregation misconduct, and subject to recovery by the Bankrupt’s estate, under Section 548 of the Bankruptcy Code. He instituted suit in June 2009, sought summary judgment in 2011, and, in March 2018, the Court denied relief.
This decision considers Plaintiff Grede’s motion for reconsideration of the Court’s earlier decision that Sentinel did not pay that money over to UBS, with an intent to hinder, delay or defraud its investors, but, rather, made the payment, “because Sentinel was required by law to do so.” The Trustee failed to raise a genuine dispute regarding Sentinel’s culpable intent. A major support for the current motion regards information in deposition transcripts of two NFA officials. UBS asks the Court to strike those depositions from the record.
UBS points out that the Trustee might easily have taken the NFA depositions before the Court decided the summary judgment motions in 2018. Indeed, the Trustee filed its motion for reconsideration before the depositions were actually had. The Court regards the Trustee’s reliance upon the two depositions as “an afterthought, not a basis for reconsideration....” The Court cites as further indication of the Trustee’s “procedural failures” his scheduling the two depositions in a related, but different case and doing so without notice to UBS.
After granting the motion to strike, the Court reviews the remaining arguments posed by the Trustee. Expert testimony on both sides supports, rather than contradicts, the Court’s conclusions. The Trustee conflates testimony about “undersegregation” on Sentinel’s part with proof of “insolvency.” Referring to one expert’s conclusions, the Court makes the critical point that Sentinel’s “pledging client assets as collateral -- not moving them out of segregation -- [was what] placed Sentinel’s clients at risk.” Establishing “manifest error” is the Plaintiff’s burden and he does not come close. “The Trustee,” the Court sums up, “has not provided direct or circumstantial evidence of fraudulent intent on the part of Sentinel in making the March 30 transfer, nor has he otherwise established that the entire $14.4 million in cumulative interest paid to UBS constituted “false profits.”
(ed: *Motions for reconsideration often precede a notice of appeal. We checked the PACER docket for any update on this case and found that it was closed right after this Memorandum decision issued. **Mr. Grede has been a particularly active Liquidation Trustee. We’ve covered decisions in which he sued other entities for recoveries. Four of these decisions involved Bank of New York, relating to allegedly commingled collateral held by BONY when Sentinel defaulted on millions in loans.)
(SOLA Ref. No. 2020-17-03)
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