Foley & Lardner LLP secured a significant victory on behalf of FCStone LLC and other firm clients when the Seventh Circuit Court of Appeals denied a Sentinel Investment Management Group (Sentinel) trustee’s attempt to claw back $14.5 million from FCStone LLC. This ends a 10-year bankruptcy dispute over nearly $300 million in customer segregated funds for FCStone LLC, additional Foley clients and other statutory trust beneficiaries.
This litigation, which dates back to 2007, arose from Sentinel’s bankruptcy and the Bankruptcy Court’s original order authorizing distribution of customer funds to statutory trust beneficiaries in the wake of the bankruptcy filing. On August 14, 2017, the Court of Appeals ruled that more than $300 million in customer funds were properly distributed to FCStone and other futures commission merchants pursuant to court authorization at the time of Sentinel’s bankruptcy. For this reason, and because these funds had been held in a statutory trust under the Commodity Exchange Act, the Court ruled that the funds cannot be clawed back. In so ruling, the Court decided that a judge’s subsequent comments or reservations as to the effects of his original order cannot supersede his prior binding orders, as the trustee sought, and would create unacceptable uncertainty in the futures markets.
The Seventh Circuit also found that FCStone LLC, other involved Foley clients and similarly situated trust beneficiaries were entitled to approximately $28 million in reserve funds held by the trustee because they were able to trace the assets to their original deposits. The Court concluded that the trustee will now be required to pay these funds to all involved beneficiary parties.
“This ruling is highly significant for the futures industry because it validates the industry’s management of customer funds using pooled customer accounts and undivided investment in jointly held securities,” said partner and lead litigator Stephen P. Bedell. “Additionally, it further validates the industry’s ability to properly account for customer funds using standard electronic bookkeeping methods.”
In addition to Bedell, partners William J. McKenna, David B. Goroff, Thomas P. Krebs, Geoffrey S. Goodman and senior counsel Robert S. Bressler assisted in the litigation. Foley has represented FCStone LLC and other involved entities since the litigation opened in 2007.