Bank of New York Mellon Corp has agreed to end eight years of litigation in which it sought unsuccessfully to recoup $312 million it lent a Chicago-area money manager that collapsed in 2007, and whose former chief is now in prison for fraud.
According to a Wednesday court filing, Bank of New York Mellon will be treated as an unsecured creditor with a $312 million claim in the bankruptcy of Sentinel Management Group Inc, formerly of Northbrook, Illinois.
The settlement with Sentinel bankruptcy trustee Frederick Grede requires court approval.
It followed the Jan. 8 rejection by the federal appeals court in Chicago of the bank's effort to be treated as a secured creditor with a higher priority claim.
Circuit Judge Richard Posner said an unsecured claim was appropriate because the bank had been aware of suspicious facts that should have led it to probe whether Sentinel and its chief Eric Bloom were involved in wrongdoing.
It is unclear how much the bank will eventually recover on its claim, but it previously took a $170 million pre-tax write-off, or $106 million after taxes, as a result of Posner's decision.
Vincent Lazar, a Jenner & Block partner representing Grede, said the settlement will allow the trustee to make "substantial" additional payouts to Sentinel customers who were defrauded.
A spokesman for Bank of New York Mellon declined to comment.
Prosecutors said Bloom used the bank's loan to help finance a "house" trading portfolio filled with risky and illiquid securities, and then concealed Sentinel's looming insolvency.
The firm went bankrupt in August 2007, and Bloom was charged with running what prosecutors called a $666 million fraud.
Bloom, now 51, was convicted in March 2014 on 19 fraud counts, and is serving a 14-year prison term. He is appealing his conviction. Bank of New York Mellon was not charged.
The case is In re: Sentinel Management Group Inc, U.S. Bankruptcy Court, Northern District of Illinois, No. 07-14987.
(Reporting by Jonathan Stempel in New York; Additional reporting by Tom Polansek in Chicago; Editing by Tom Brown)