The Bank Didn’t INTEND to Defraud you, Honest! UPDATED

One of the goals here at Wake Up! News is to do analysis on stories that are less-covered by the mainstream media but, should be thoroughly investigated and explained to the average American or world citizen, depending on the case.  This is the first of such of these stories.

I submit to the reader, the failed appeal in a case against Sentinel Management Group, an investment firm that went belly-up when they made some bad investments.  Oh, did I mention they made those bad investments with their account holders’ monies without consent?  Ah, now it gets interesting…

First, take a look at the Reuters article about the situation: http://www.reuters.com/article/2012/08/10/us-sentinel-appeals-decision-idUSBRE87900T20120810

Now, here is a link  to the actual 8-page appeal court ruling from the Illinois District Court: http://dl.dropbox.com/u/32961642/SentinelRuling.pdf

I took the time to read the ruling and the claims made therein, so, you, the reader, don’t have to.

The Story:

Sentinel was an investment group specializing in Futures and Commodities.  For those who don’t know what this means, futures are essentially bets as to how good or bad the market will be doing in a month, a year, 5 years, etc.  Essentially, it is betting on how good or bad the stock will be in a given period of time.

Now, there are VERY strict rules when it comes to investments such as these, including a requirement to keep certain customer funds separate from any investments that the firm makes on its own behalf.  Simply put, there are certain accounts Sentinel was not supposed to use for investments that would benefit itself.

To get the point of the story across, I’d like to cover how Sentinel did business as usual.

First, Sentinel essentially had 3 pools.  One was a pool holding and/or representing accounts that were eligible to have a lien applied to them. (A lien is notice of having a loan promised on the account, just as a mortgaged house has a lien on it until the bank is paid)  Technically, all of the accounts under Sentinel had representation in this pool, except for ones that specifically had special contract agreements barring them from having a lien applied.  We will consider this group of ineligible accounts, pool number two.

The third pool was essentially an overnight loan account linked to Bank of New York Mellon.  Essentially, BNY Mellon would grant a loan to this account based upon how many accounts could have a lien applied to them.  Basically, the accounts were seen as collateral and the bank gave a day to day loan based upon them.  This loan account was used to cover payments to account holders prior to the confirmation of the sale of their stocks or to cover bad transactions.

Sentinel’s own investments were kept separate from all three of these.

When a customer decided to close out their account or to withdraw money from their portfolio, it would work like this.  Sentinel would place the order selling the shares, then they would pay the customer.  Any cash paid out from shares that were in process or hadn’t sold yet, was borrowed from the BNY Mellon loan account to cover until the sales went through.  The customer got their money up front and when the sales cleared Sentinel paid back the money from the loan account.

This system was perfectly legal and actually made perfect sense.  After all, trades don’t always sell right away and the customer has every right to withdraw their cash when they saw fit.  The loan was never over-drawn or over-due because it was always paid back upon the completed sale of the stocks or when a failed transaction was paid back by the customer.  It was neat, clean, simple and quite effective.  In fact, other investment firms still continue to do business this way, and, it isn’t a bad thing at all.

This system was used both with lien-eligible and non-lien-eligible accounts.  The lien-eligible accounts were used as collateral but, rarely had liens applied to them because the bank loan was always paid back.  Everyone was happy, that is, until the change came.

Sentinel began to make some poor investment choices for its own investments.  It couldn’t quite cover the costs of these new and risky “opportunities” so, they began to use their BNY Mellon Loan account just to cover the little bit extra of these transactions.  The problem was, the loan account wasn’t designed for this and soon, the loan account could no longer cover the regular customer accounts requesting withdrawl.

So, Sentinel asked BNY Mellon for more money.  Sentinel had plenty of accounts liens could be put on so, why not?  Sure, the loan amount was getting bigger every day but, there was enough collateral to cover things.

Sentinel’s investments continued to cost more and more money.  They were losing on these investments, big time.  Now BNY Mellon began to question whether there would be enough to pay off the loan or not.  It looked like there wouldn’t be enough lien accounts to cover the ever ballooning loans Sentinel was taking on.  So, Sentinel did what any honest, self-respecting banking corporation would do in the kind of situation they were in, they began to shift accounts that were NOT eligible for liens over to the pool of accounts that could have liens applied to them.

BNY Mellon did question the sudden increase in available collateral but, kept on giving loans out anyway.  Soon however, even the accounts shifted over weren’t enough.  Sentinel shifted some more accounts from non-lien to lien status.  They even managed to flip a few accounts back over to non-lien status before finally deciding that they could never pay out all of their customer’s accounts.

Sentinel made an announcement that all withdrawals were to be stopped due to “market conditions”.  BNY Mellon caught this as a red flag and demanded payment on their loan.  Of course, said loan was secured in the lien accounts.  However, hundreds of thousands of dollars in these accounts had not been eligible to be in the lien pool in the first place!  Sentinel filed for bankruptcy but, it was too late.  Customer funds that should have remained segregated from other accounts, were now slated to be used to pay back the bank loan.

Obviously the case went to court.  However, while the court did find wrong-doing on the part of Sentinel, it did not find that Sentinel was guilty of Fraud.  This decision was appealed and the results of the appeal were released on August 8th, 2012.

The Ruling and What it Means to the Average Joe:
The appeal was denied.  Sentinel would not and will not face charges for defrauding their customers.  The logic of the argument can be summed up best in the following quote from the ruling:

“That Sentinel failed to keep client funds properly segregated is not, on its own, sufficient to rule as a matter of law that Sentinel acted “with actual intent to hinder, delay or defraud” its customers”

Now, granted, the appeal document also stated that the prosecution cited other court cases in their argument which didn’t apply to this particular instance of fraud charges.  The court also ruled that there was not enough evidence of intent to claim fraud using other case law that was found to be relevant.  These were significant failures on the parts of the prosecution/bankruptcy liquidation officer that can’t really be ignored.

However, the crux of the issue was resolved in the sentence cited above.  Simply put, just because the firm stole the money from their account holders by illegally putting liens on them does not, in of itself, prove that the institution had the INTENT to steal the money.  That’s right, the firm fully intended to pay these accounts back, or, at least, it couldn’t be proven that they DIDN’T intend to pay the accounts so, they are not guilty of fraud.  To put it yet another way, the firm stole these peoples’ monies but, didn’t really mean to steal them.

Now, to me it would seem that someone INTENDED to move these funds into a lien status to cover a loan, KNOWING it was illegal.  That is theft and it is also backing out on a claim to keep accounts segregated.  Essentially, it is a form of fraud but, because the intent to commit fraud couldn’t be proven, it wasn’t found to be fraud.

The case also proved that BNY Mellon had a secured loan in good faith and that Sentinel had to pay back that loan, even if it meant using customer funds.  Really, the case was about trying to prove Sentinel didn’t have a “secured” loan because of fraud to its customers.  Because no fraud could be found, BNY Mellon has to be paid back with the funds from Sentinel’s customers.  Really, BNY Mellon isn’t the bad guy in this case.  I’m not saying they have never been guilty of crimes as a bank, but, in this case, they had a secured loan, they decided it was time for Sentinel to pay said loan and Sentinel filed bankruptcy.  BNY Mellon had no way of knowing that customer accounts that shouldn’t have been used to cover the loan were being used.

This means that in the current MF Global scandal, which involves billions of dollars in customer funds, MF Global executives may get off on some of the charges based upon the legal precedent of this ruling.  Sentinel was only involved in hundreds of millions, but MF Global handled billions of dollars in transactions.

While it is clear the MF Global will face charges, the question is, will they be fraud charges?  If the prosecution cannot definitively prove “intent” behind defrauding and lying to its account holders, MF Global can walk itself out of millions of dollars of culpability and charges for its crimes!  That means millions of dollars of innocent account holders’ monies are gone!

At the end of the day, banks can do whatever they want and unless the intent to do wrong is proven, they can, and will get away with it!

UPDATE 8-16-12:

Surprise, surprise! Yahoo news  and The New York Times are reporting that it is likely that MF Global will face no criminal charges, not even gross negligence!

http://news.yahoo.com/no-one-charged-crime-mf-global-collapse-111056124–finance.html?_esi=1

http://dealbook.nytimes.com/2012/08/15/no-criminal-case-is-likely-in-loss-at-mf-global/?hp

Congratulations!  Thank you to the American justice system for its fair and balanced analysis of the situation.  $1 billion in customer funds go “missing”, no criminal charges and customers are still out their invested cash.  Sickening!

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