Intl FCStone wins Sentinel bankruptcy appeal and saves $15.6 million

Seven years subsequent to the demise of Sentinel Management Group, Illinois District Court grants INTL FCStone successful appeal against decision made in January last year

US-based execution and electronic trading advisory services firm FCStone (NASDAQ:INTL) has today announced that its appeal of a decision made in January 2013 by the US District Court for the Northern District of Illinois has been successful relating to case having arisen due to the 2007 bankruptcy of Sentinel Management Group.

In this particular case, the US Court of Appeals for the Seventh Circuit yesterday handed down its reversal of the trial court’s decision, resulting in INTL FCStone not being liable for $15.6 million in customer funds.

According to FCStone, the appeal court’s reversal will have no financial impact on its parent company, INTL FCStone, which had considered the possibility of losing the appeal to be remote and, accordingly, made no provision in its financial statements for any further loss in this matter. The appeal cash deposit made by FCStone with the court will be refunded.

The trial court’s decision, if it had been allowed to stand, would have resulted in a net pre-tax loss to FCStone of between $4 million and $6 million, and could have undermined the integrity of the futures industry’s system of segregated customer accounts and the CFTC regulations designed to protect those accounts. The appeal court’s reversal of the decision vindicates the commitment of FCStone and the futures industry to protecting customer segregated funds.

The case arises from the 2007 bankruptcy of Sentinel Management Group, Inc. (“Sentinel”), an SEC-registered investment adviser and CFTC-regulated futures commission merchant. Sentinel, in accordance with CFTC regulations, invested customer funds on behalf of FCStone and many other futures commission merchants. Sentinel also invested funds deposited by hedge funds and other securities investors. In August 2007, Sentinel declared bankruptcy. Shortly thereafter, a Chicago federal district court ordered Sentinel to return all remaining customer funds which had been deposited by the futures commission merchants, including FCStone, and Sentinel did so. At that time, FCStone itself covered any account shortfall in order to ensure that its customers suffered no harm due to the insolvency of Sentinel.

FCStone confirmed in its public notice today that approximately a year later, the Sentinel bankruptcy trustee filed virtually identical lawsuits against FCStone and approximately a dozen other futures commission merchants, seeking a return of the August 2007 distribution of customer funds. The trustee has never alleged any wrongdoing on the part of FCStone or the other futures commission merchants. Rather, the trustee simply claimed that the futures commission merchants, including FCStone, received a greater percentage of their account balances than the other Sentinel customers.

The trustee argued that FCStone and the other futures commission merchants should receive, from the bankruptcy estate, the same percentage as the other Sentinel customers, and no more. On January 4, 2013, in a “test case” decision, the federal district court ruled that FCStone should return its original distribution of $15.6 million and receive a revised distribution based on an equal distribution to all of Sentinel’s customers, which would have resulted in a net pre-tax loss to FCStone of between $4 million and $6 million. It was this decision that FCStone successfully appealed.

Sean O’Connor, CEO of INTL FCStone today made a corporate statement to the effect that “We are pleased that the appeal court’s ruling vindicates our position. This is an important decision for FCStone and for the futures industry as a whole. 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.”

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