United States: Sentinel Decision Prioritizes Protection Of Securities And Futures Markets

On March 19, 2014, the U.S. Court of Appeals for the Seventh Circuit decided Grede v. FCStone, LLC, Nos. 13-1232, 13-1278 (7th Cir. Mar. 19, 2014), an opinion that reinforces the importance of the portability of investment accounts carrying commodity customer funds. The Seventh Circuit held that commodity futures customer funds must be protected in an insolvency situation, and that the release of customer funds to meet margin obligations should be upheld at all costs. The Court's decision recognizes the choice made by Congress to prioritize the stability of the financial markets ahead of other creditors when an investment firm becomes insolvent, and has significant implications for companies in the securities and futures industry.

Foley & Lardner LLP ("Foley") tried the FCStone case in the district court and successfully handled the appeal in the Seventh Circuit. Foley represents FCStone, LLC and numerous other defendants in Sentinel-related cases, and acts as lead counsel of a joint defense group comprised of several former futures commission merchant ("FCM") customers of Sentinel Management Group ("Sentinel"). On August 17, 2007, Sentinel, an investment management firm with a portfolio of $1.5 billion, filed for bankruptcy. Shortly before and after filing, Sentinel transferred hundreds of millions of dollars to the customer segregated accounts of its futures customers. These pre- and post-petition transfers became the source of dispute between the bankruptcy Trustee and the customers, and hinged on whether the Trustee had the authority to avoid and claw back the transfers under the Bankruptcy Code.

Sentinel's customers included institutional investors such as FCMs, whose investments of customer funds are required by the Commodity Exchange Act and CFTC regulations to be held in trust and segregated from other funds. FCMs like FCStone, LLC were in Sentinel's SEG 1 group, and deposited cash in exchange for a pro rata share of the value of securities in their groups' portfolios. Just before filing for bankruptcy protection, Sentinel partially settled its accounts with each of the SEG 1 customers in the amount of $22.5 million. Three days after filing the petition, Sentinel and numerous FCM customers (many represented by Foley) appeared in bankruptcy court and successfully sought authorization for Sentinel to distribute another $297 million to the SEG 1 customers. The bankruptcy court issued an order stating that the bank was "authorized" to distribute the funds. The funds were distributed the next day.

A year later, the Trustee filed a motion with the bankruptcy court to clarify or modify its previous order. The court declined to modify the order, but stated the order did not determine whether the post-petition transferred monies were property of the bankruptcy estate, and that it was not its intention to "authorize" the post-petition transfers.

In September 2008, the Trustee filed separate adversary proceedings against each of the SEG 1 Defendants, seeking clawback of approximately $297 million in post-petition transfers and $22.5 million in pre-petition transfers. The case against FCStone, LLC was chosen as a test case while all of the other cases were effectively stayed, and a district court bench trial was held in October 2012. The district court ruled in favor of the Trustee and ordered FCStone, LLC to return all pre- and post-petition transfers because the court believed the commingled customer funds were property of the bankruptcy estate, and the August 2007 transfer of those funds had not been properly authorized under the bankruptcy code. The district court also rejected FCStone, LLC's argument that the pre-petition transfers were protected by Section 546(e) of the Bankruptcy Code.

FCStone, LLC appealed the district court's judgment. After briefing and oral argument, the Seventh Circuit, in an opinion written by Judge Hamilton, reversed the lower court because the district court's opinion faced "insurmountable legal obstacles."

In reversing, the Seventh Circuit held that the bankruptcy court clearly authorized the $297 million post-petition transfer, determining that finality and clarity were especially important in situations such as here where stability of the financial markets is at stake. The Seventh Circuit noted that FCStone, LLC and Sentinel's other FCM customers needed the August 2007 transfers within hours of the bankruptcy court authorizing the transfer in order to satisfy customer margin obligations; had Sentinel's FCM customers not received the post-petition transfer, they might have been liable to meet those obligations and a number of the FCMs might have been placed in financial peril. Therefore, the Seventh Circuit held that the FCMs—and the connected futures market itself—relied on the essential bankruptcy court order authorizing transfer of the funds, and the bankruptcy court abused its discretion in trying to eradicate its authorization order after the fact and after the parties and the market relied on it to satisfy customer margin obligations.

This case underscores the importance of investors in insolvent firms to involve outside counsel at the onset of bankruptcy. As is clear from the opinion, it is vitally important for parties seeking authorization orders to use operative and understandable language both when applying to the bankruptcy court for such an order and in drafting the authorization order. As the Seventh Circuit ruled in FCStone, once an order is entered authorizing transfer of funds, and especially when a party relies on that order to carry out an important public policy such as satisfying customer margin obligations, funds transferred pursuant to such an order may not be clawed back.

The Court also found that Sentinel's pre-petition transfer to its FCM customers was the exact kind of transfer protected by Section 546(e) of the Bankruptcy Code. As the Court noted, Congress enacted Section 546(e) "to prevent a large bankruptcy from triggering a wave of bankruptcies among securities businesses" by allowing parties to rely on the finality of securities transactions. By preventing such a rippling effect, the safe harbor was meant to "protect[] the market from systemic risk and allow[] parties in the securities industry to enter into transactions with greater confidence." While noting that the protection in Section 546(e) may not seem equitable to Sentinel's other customers who did not receive a pre-petition transfer, the Court explained that "Congress chose finality over equity for most pre-petition transfers in the securities industry" in order to protect certainty and liquidity in the marketplace. Transfers of customer funds such as those made to Sentinel's FCM customers are clearly transfers that Congress intended to protect under Section 546(e) in order to guard against instability in the financial markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions