FCStone must return $15.6 mln to Sentinel bankruptcy trustee

Mon Jan 7, 2013 7:08pm EST

* Trustee sought balanced distribution to ex-clients

* FCStone received larger percentage than other customers

* Brokerage says it may appeal decision

By Tom Polansek

CHICAGO, Jan 7 (Reuters) - INTL FCStone must return $15.6 million to the trustee overseeing the bankruptcy of Sentinel Management Group because other former clients were not equitably repaid money they had invested in the failed futures brokerage, a federal judge in Chicago has ruled.

FCStone, a New York-based commodities brokerage with many farmers as clients, has received about 70 percent of the money it had invested with Sentinel, while other former customers have received back roughly 35 percent, said the trustee, Frederick Grede, in an interview.

Grede had asked U.S. District Judge James Zagel to allow creditors to receive more balanced payouts.

"If there is one prevailing principle that underpins American bankruptcy laws, it is that 'equality is equity,'" Zagel wrote in a ruling in favor of Grede issued on Friday.

Sentinel collapsed in 2007 after it allegedly moved customer funds from protected accounts to other accounts so they could be used as collateral for loans to Sentinel's own trading operations.

Futures brokers are required to keep customers' funds in dedicated accounts to protect them from being used for anything other than client business.

Since Sentinel failed, brokerages MF Global and Peregrine Financial Group went bankrupt in 2011 and 2012, respectively, after misusing customer money. The bankruptcies have shaken confidence in the futures industry.

At Sentinel, different categories of former customers have received different levels of distributions of their money. FCStone is one of several futures commission merchants that received a higher percentage of their money back than did other customers.

FCStone was the "first test case" the trustee had pursued to claw back some former clients' money, Grede said.

Prior to Zagel's decision, former Sentinel customers were missing $500 million to $550 million, Grede said. The ruling against FCStone "will put a dent into that shortfall," he said.

FCStone may appeal the decision.

"FCStone is disappointed and is surprised and is considering its options," said Stephen Bedell, a lawyer for the company.

Bedell said the distribution of money to FCStone in 2007 was supported by industry regulators and that Zagel's ruling was wrong because it takes former Sentinel customers' own money away from them.

If Zagel's ruling is upheld, FCStone will pay the judgment out of its own pocket and will not assess customers for any part of the loss, Bedell said. FCStone would still be entitled to its proportionate share of the money paid to former Sentinel customers.

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