March 21, 2018, New York – The United States District Court for the Northern District of Illinois recently held that UBS Securities LLC is not required to return $14.4 million that it received when it exhausted its account with failed investment firm Sentinel Management Group Inc. several months before its collapse in 2007. The trustee Frederick J. Grede, who was tasked with winding down Sentinel, has been fighting over avoiding the $14.4 million since 2009.
By way of background, the short-term cash management firm Sentinel Management Group, Inc. collapsed and filed for bankruptcy in August 2007 at the outset of the financial crisis. Required by federal law to segregate its clients’ funds and invest in only the highest grade government securities, Sentinel instead pledged the securities in its clients’ accounts as collateral for loans from the Bank of New York—which Sentinel then used to buy even more securities on its own “House” account for the benefit of corporate insiders.
As credit markets tightened in the summer of 2007, Sentinel found itself unable to both repay the Bank’s loan and return its clients’ money on demand. The defendant UBS Securities, LLC was a former customer of Sentinel. In March 2007, Sentinel transferred $108 million to UBS, which included $14.4 million characterized as “cumulative interest.” The trustee claimed that Sentinel acted with actual “intent to hinder, delay, and defraud” its other creditors when making the pre-petition transfer to UBS, and argued that the cumulative interest payment represented “false profits.” Accordingly, the trustee sought to avoid the alleged transfers as an actual fraudulent transfer under 11 U.S.C. § 548(a)(1)(A). UBS has moved for summary judgment, arguing that the Trustee had alleged only a “general scheme to defraud,” and not fraudulent intent with respect to the specific transfer at issue. UBS asserted that the cumulative interest was “neither ‘false’ nor ‘profits,’” but rather the proceeds of Sentinel’s legitimate investment activity—which Sentinel properly paid to UBS in fulfillment of its legal and contractual obligations.
The court concluded that upon review of the evidence “no reasonable trier of fact could find that Sentinel acted with actual fraudulent intent when transferring the $14.4 million in cumulative interest to UBS”. The Court granted UBS’s motion for summary judgment.