January 13, 2016

Jenner & Block won an important victory in the Seventh Circuit Court of Appeals for client Frederick Grede, the bankruptcy trustee of Sentinel Management Group.  The firm has been acting as Mr. Grede’s counsel since 2007 with respect to all matters relating to an $1 billion+ investment advisor fraud case. 

Sentinel unlawfully pledged hundreds of millions of dollars in customer assets to secure an overnight loan at Bank of New York Mellon.  On behalf of the trustee, the firm brought a variety of claims against BNY Mellon, including fraudulent transfer claims, arguing that Sentinel acted with actual intent to hinder, delay or defraud its customers when it took money from segregated accounts and pledged it as collateral to BNY Mellon for its own loans.  The team argued that because BNY Mellon knew what Sentinel was doing, the bank ‘s liens on the collateral should be avoided.

On January 8, 2016, the Seventh Circuit sided largely with Mr. Grede when it reversed a lower court’s ruling in the bank’s favor, holding that the bank’s liens in Sentinel’s assets should be avoided as fraudulent transfers.  The Seventh Circuit held in an earlier decision issued in 2013 that Sentinel acted with an intent to hinder, delay and defraud its creditors when it pledged customer property to secure the bank’s $312 million loan.  This latest ruling holds that the bank did not accept the liens in good faith and therefore cannot retain those liens because it knew or should have known that Sentinel did not have the right to pledge the customer property in favor of the bank.  As a result of this ruling, the bank’s claim will now be treated as an unsecured claim and the $312 million against which the bank asserted a lien will be available for distribution to the defrauded customer creditors. 

The Seventh Circuit’s ruling is the latest in the long-running dispute.  In 2010, District Court Judge Zagel ruled against the Trustee. In August 2012, the Seventh Circuit initially affirmed, but after the firm filed a motion for rehearing and rehearing en banc, the original panel vacated its decision in December 2012.  In 2013, the Seventh Circuit reversed itself and concluded that the Trustee had established his prima facie fraudulent transfer case.  The Seventh Circuit remanded for consideration of the bank’s affirmative defenses to the fraudulent transfer claim and for consideration of the Trustee’s equitable subordination claim.  In 2014, the trial court again ruled against Mr. Grede.  In 2015, Partner Catherine L. Steege, who had argued the case in its first appeal, argued the case again before the Seventh Circuit.

Ms. Steege is quoted in several media outlets reporting on the latest ruling.  In an article in Law360, she observes that the decision “paves the way for the trustee to make a very substantial distribution to Sentinel’s customers harmed by Sentinel’s fraud, which the Court of Appeals determined the Bank of New York should have investigated.  The ruling also should help to restore confidence that when frauds are committed against customers who have invested with financial firms that the courts will act to rectify the misconduct.”

In addition to Ms. Steege, the team representing Mr. Grede in this latest litigation includes Partners Angela M. Allen, Vincent E. Lazar, Barry Levenstam and J. Kevin McCall.  Mr. McCall and former partners Robert J. Blazejowski, Chris C. Gair, Jeffrey S. Eberhard and Michael L. Cebula and former associates Kevin Case and Michael H. Margolis represented Mr. Grede at trial.