Dec 3 (Reuters) - A federal appeals court in the United States has withdrawn a ruling that put Bank of New York Mellon Corp ahead of former customers of Sentinel Management Group seeking to recoup money lost in the futures broker's 2007 collapse.
In a two-line ruling that gave no further explanation, the U.S. Court of Appeals for the Seventh Circuit withdrew an August 9 opinion. "This appeal remains under consideration by the panel," the three-judge panel wrote in a ruling dated Nov. 30.
The decision overturns an August opinion from the same court affirming an earlier district court ruling that Bank of New York Mellon had a "secured position" on a $312 million loan it gave to Sentinel.
Frederick Grede, the trustee in Sentinel's bankruptcy, alleged that the broker pledged hundreds of millions of dollars in customer assets to secure an overnight loan at the bank, leaving the bank in a secured position but Sentinel's customers with losses of millions.
Futures brokers are required to keep customers' funds in dedicated accounts to protect them from being used for anything other than client business. At Sentinel, customer funds were allegedly moved from the protected accounts to other accounts so they could be used as collateral for loans to Sentinel's own trading operations.
The appeals court said in August that "perhaps the bank should have known that Sentinel violated segregation requirements" but agreed with the district court's earlier ruling that "such a lack of care does not rise to the level of the egregious misconduct" needed to reprioritize a claim.
That decision was a blow for Grede, who had sought to strip Bank of New York Mellon of its secured position.
Sentinel largely managed money for other futures brokers, delivering outsized returns that Grede says were boosted by improperly using customer money to secure loans that funded risky trades.
The scheme unravelled when the credit crisis hit began the summer of 2007.
A spokesman for BNY Mellon declined to comment. A lawyer for Grede could not be immediately reached for comment late on Monday.
The case is Frederick Grede v. Bank of New York Mellon Corp., in the U.S. Court of Appeals for the Seventh Circuit, no. 10-3787.