UPDATE 1-FCStone fights $15.6 mln ruling in Sentinel bankruptcy

Fri Jan 18, 2013 3:38pm EST

CHICAGO Jan 18 (Reuters) - INTL FCStone said on Friday it will appeal a federal court ruling ordering it to return $15.6 million to the trustee overseeing the bankruptcy of Sentinel Management Group.

FCStone, a New York-based commodities brokerage with many farmers for clients, had to return the funds to the trustee because a distribution to former Sentinel clients was unfair, U.S. District Judge James Zagel ruled.

Zagel on Thursday ordered FCStone to post an $8 million cash deposit with the U.S. Circuit Court for the Northern District of Illinois pending a judgment in the appeal.

Sentinel managed investments for clients, including FCStone, until it collapsed in 2007, when prosecutors say that executives moved customer money out of protected accounts to be used as collateral for loans to Sentinel's own trading operations.

Two former Sentinel executives were charged in 2012 with defrauding customers out of more than $500 million before the futures brokerage failed.

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

FCStone received about 70 percent of the money it had invested with Sentinel, while other clients only got about 35 percent of their money, according to the trustee.

If it loses the appeal, FCStone estimates its pre-tax loss at $4 million and $6 million.

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.

The case is Sentinel Management Group, Inc. v. FCStone LLC, U.S. Circuit Court for the Northern District of Illinois, No. 09-C-00136