* Appeals court overturns decision against FCStone
* Broker says ruling supports futures market stability
* FCStone faced $4 mln-$6 mln loss under previous order
* FCStone is a former customer of Sentinel
By Tom Polansek
CHICAGO, March 20 (Reuters) - Commodities brokerage INTL FCStone Inc can keep a $15.6 million payout of customer funds related to the bankruptcy of Sentinel Management Group in 2007, a U.S. appeals court has ruled.
The decision, issued on Wednesday by three U.S. appeals court judges in Chicago, overturned a federal district court's previous order that New York-based FCStone return the money to the trustee overseeing Sentinel's bankruptcy.
The previous ruling said FCStone had received too large a payout compared with other former customers of Sentinel, an investment adviser and futures broker. However, the appeals court said fund transfers to FCStone before and after Sentinel's bankruptcy were proper.
The reversal was an "important decision for FCStone and for the futures industry as a whole," INTL FCStone Chief Executive Sean O'Connor said on Thursday. "The protection of futures market customer funds and the finality of bankruptcy court-ordered distributions are crucial for the continued stability of markets and our industry."
Sentinel managed investments for clients, including FCStone, until it collapsed seven years ago, 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.
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 collapsed in 2011 and 2012, respectively, after misusing customer money. The bankruptcies shook confidence in the futures industry.
At Sentinel, different categories of former customers received different levels of distributions of their money following the bankruptcy. FCStone was one of several brokers that received a higher percentage of their money back than did other customers.
In January 2013, a U.S. district judge ordered FCStone to return its $15.6 million payout to the bankruptcy trustee and to receive a revised amount based on an equal distribution to all former customers. The revision would have resulted in a pretax loss of $4 million to $6 million for FCStone.
An $8 million deposit FCStone made with the district court in the wake of the previous ruling will be refunded as a result of the appeal, the company said.
Frederick Grede, the bankruptcy trustee, said in a telephone interview on Thursday that he was reviewing his options after the appeals court ruling.
The case is Sentinel Management Group, Inc. v. FCStone LLC, U.S. Circuit Court for the Northern District of Illinois, No. 09-C-00136. (Editing by Matthew Lewis)