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Sentinel trustee wants Bank of NY Mellon to return $337 million

A BNY Mellon sign is seen on their headquarters in New York's financial district, January 19, 2011. REUTERS/Brendan McDermid

By Sakthi Prasad

(Reuters) - Bank of New York Mellon should be ordered to return about $337 million to Sentinel Management Group Inc, a U.S. futures broker that went bankrupt in 2007, according to a court filing made by the bankruptcy trustee.

Sentinel's bankruptcy trustee, Frederick Grede, alleged that the futures broker pledged hundreds of millions of dollars in customer assets to secure an overnight loan from Bank of New York Mellon, leaving the bank in a secured position but Sentinel's customers with losses worth millions.

Sentinel largely managed money for other futures brokers, who are required to keep customers' funds in dedicated accounts to protect them from being used for anything other than client business.

However, at Sentinel, customer funds were allegedly moved from the protected accounts to other accounts so that they could be used as collateral for a loan from Bank of New York Mellon.

Sentinel had distributed the money back to the bank in November 2010 in accordance with a U.S. District Court ruling that had put the bank ahead of former customers of Sentinel, who were also seeking to recoup money lost in the futures broker's 2007 collapse.

In August, the U.S. Court of Appeals for the Seventh Circuit in Chicago reversed part of this ruling.

The trustee asked the court to order the bank to return about $312.2 million in principal plus about $24.5 million in interest that was previously distributed. The money would be kept in a reserve account until final resolution of all claims arising out of the bankruptcy.

Despite the appeals court ruling, Bank of New York Mellon refused to return the $337 million to the reserve account, according to the filing made on Monday.

Due to the appeals court ruling, the district court's original judgment has been vacated and there is no longer "a final appealable judgment", the trustee said in the filing.

He has asked the bankruptcy court in Northern District of Illinois to schedule a hearing on December 19.

Since Sentinel's collapse, the futures industry has been rattled by the bankruptcies of two more brokers: MF Global in 2011 and Peregrine Financial Group in 2012. The heads of both firms were alleged to have improperly used customer money.

Bank of New York Mellon could not immediately be reached for comment by Reuters outside of regular U.S. business hours.

The bankruptcy case is Sentinel Management Group Inc, Case No. 07-14987, U.S. Bankruptcy Court, Northern District Of Illinois (Eastern Division).

(Reporting by Sakthi Prasad in Bangalore; Editing by Supriya Kurane)