Ask the Professor: Did the 7th Circuit Properly Rule in Sentinel II?

The Journal of the Law of Investment & Risk Management Products: Futures & Derivatives Law Report (Volume 34, Issue 5)

10 Pages Posted: 24 Feb 2015

Date Written: May 1, 2014

Abstract

Customer assets held by a Futures Commission Merchant must be protected in a specially-designed "customer segregated" account at a custodial bank pursuant to the Commodity Exchange Act and various CFTC regulations. When the FCM fails, in the absence of a criminal act, the futures customers of the failed FCM should receive all of their assets back. This article analyzes a recent 7th Circuit decision involving Sentinel Management Group, a failed FCM which commingled futures customer assets with non-futures customer assets and incurred trading losses accordingly. The article examines all of the various issues raised before the 7th Circuit. The 7th Circuit had overturned Judge Zagel's district court decision and ruled that approximately $300 million, which had been returned back to the futures customers of Sentinel pursuant to another court order, were not subject to the claw-back provisions under the US Bankruptcy Code.

Keywords: Sentinel, Judge Zagel, FCMs, IA Custody Rules, Investment Advisers, SEC Rule 206(4)-2, Commodity Exchange Act, CFTC, Customer Segregation, Bankruptcy of FCMs, Claw-Backs, US Bankruptcy Code, CFTC Rule 1.20, Section 546 of USBC, Section 549 of USBC, Post-Petition Transfers in Bankruptcy

Suggested Citation

Filler, Ronald H., Ask the Professor: Did the 7th Circuit Properly Rule in Sentinel II? (May 1, 2014). The Journal of the Law of Investment & Risk Management Products: Futures & Derivatives Law Report (Volume 34, Issue 5), Available at SSRN: https://ssrn.com/abstract=2568806

Ronald H. Filler (Contact Author)

New York Law School ( email )

185 West Broadway
New York, NY 10013
United States
212-431-2812 (Phone)

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