Following the bankruptcy of Sentinel Management Group, Inc. back in 2007, a Chicago federal district court ordered the firm to return all remaining customer funds which had been deposited by the futures commission merchants in segregated accounts.
At the time, FCStone covered all account shortfalls to prevent its customers from suffering a loss due to the insolvency of Sentinel.
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, claiming that FCStone, among other futures commission merchants, received a greater percentage of their account balances than the other Sentinel customers.
Back in January 2013, an Illinois federal judge asked the commodity futures brokerage, INTL FCStone Inc., to return about $15.6 million in proceeds which it had previously obtained from bankrupt investment company, Sentinel Management Group Inc., in 2007 through an asset sale to hedge fund manager, Citadel Investment Group LLC.
According to the court’s decision, FCStone had received a much higher payout than other customers of Sentinel which resulted in an uneven distribution of funds between affected customers and affecting the recovery of other clients.
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The bankruptcy of Sentinel was the result of committing customer assets to secure a loan from the Bank of New York, which is presently known as BNY Mellon. According to the court decision from January 2013, FCStone received funds which were not allowed by bankruptcy rules in force at the time.
Other customers at the time received close to one third of their funds, while FCStone was refunded closer to 70 percent of the customer funds which were invested with Sentinel. After FCStone appealed the court’s decision, today’s announcement puts the matter to rest.
Sentinel owed Bank of New York $312 million when it filed for bankruptcy on August 17, 2007.
In March this year, the US Court of Appeals ruled in favor of INTL FCStone Inc., reversing the trial court’s January 2013 decision against its subsidiary, FCStone, LLC, the Seventh Circuit’s ruling in favor of FCStone is now considered final since no appeal to the original court decision from March this year has been filed.
At the time, the company’s CEO, Sean O’Connor, said that the firm is “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.”
The appeal court’s reversal will have no financial impact on the Company, 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 $8 million appeal cash deposit made by FCStone with the court has been refunded.
Looking at the share price movement after the announcement the event does not appear to be a surprise to investors in INTL FCStone’s shares. Halfway through the New York trading session, the stock is trading 1% lower on the day.