Guest Post: The Sentinel Case - Another Nail In The Coffin Of 'Market Confidence'

Tyler Durden's picture

Submitted by Pater Tenebrarum of Acting-Man blog,

Good Faith Purchase of Stolen Goods

Traditional legal principles are seemingly pretty clear and straightforward on how a good faith acquisition of stolen goods is to be treated: the buyer, even though he is not criminally liable, can not acquire title to stolen property. Title remains with the original owner and the buyer who has acquired such property in good faith only has recourse to the party that sold the goods to him.

While this principle is not applied in all jurisdictions – in some places the good faith purchaser has been favored (for instance in Sweden until 2003, when the law was changed) – it has been an integral part of the Western legal tradition since antiquity. Therefore, even though we are not lawyers, we can state with some confidence that it is recognized by most Western courts.

In J.E. Penner's 2001 edition of Mozley and Whiteley's Law Dictionary, 12th Ed., Butterworths, London, we find the following quote on page 280:


“If a chattel is stolen, the thief acquires no title, and in accordance with the maxim nemo dat quod non habet (one cannot give what one does not have), cannot give good title to a buyer from him, even if the buyer is innocent of knowledge that the property was stolen”



The principle of 'nemo dat quod non habet' indeed stems from Roman law, so this particular feature of property rights represents what we like to refer to as a 'traditional legal principle' – a feature of the law that has been with us for a very long time and has been contested or altered only rarely.

However, certain exceptions to the rule do exist and they vary from country to country. Bona fide purchase rules are recognized in many countries in parallel with the 'nemo dat' principle, often in conjunction with a statute of limitation.

There is usually also a differentiation between stolen and 'misappropriated' goods. The difference between stolen and misappropriated goods is the following: if A is the original owner and B is a thief who sells the goods to C after having committed theft, then B never had title to the goods and they are considered stolen.

However, a case is imaginable in which B did in fact have title or the legal right to dispose of the goods concerned, for instance by dint of being a trustee for A.

In this case, the goods are considered 'misappropriated' if B sells them to C against A's wishes.

In Germany, a good faith buyer of mishandled goods does acquire title to the property, but if the original owner claims them back within ten years, the good faith buyer's title is forfeited. In France a similar rule applies, except the statute of limitation is shorter – it is only three years. Also, the original owner has to pay a redemption fee to the bona fide purchaser, if the goods were purchased at an auction, on an open market, or a similar setting.

In Anglo-Saxon law, the 'nemo dat' principle is applied very strictly. In the UK, a slight exception is made with regards to goods bought at 'market overt', this is to say a market where the sale of such goods is conducted openly (this is similar to the French rule on goods bought at auction or similar settings).

In the US, similar to the UK, the original owner of a stolen good is always considered to have better title. There are vigorous debates over the economic incentives created by favoring original owners over good faith buyers, but the fact remains that Anglo-Saxon law is strongly favoring the property rights of the original owner of a stolen good.


The Sentinel Case

The failed futures brokerage Sentinel Management Group lost the money of its clients in when it went into bankruptcy in 2007. According to the SEC, the firm misappropriated the funds belonging to its clients.

Since then, creditors of the company have been fighting over who has title to certain assets. On the one side are the customers of Sentinel, whose funds and accounts were supposed to have been segregated from the company's assets. On the other side there is New York Mellon Bank, which lent Sentinel $312 million that were secured with collateral mainly consisting of said – allegedly 'segregated' – customer funds.

Reuters informs us now that the unexpected outcome of the Sentinel case means bad tidings for the clients of MF Global, who find themselves in a very similar bind. Below are a few excerpts from the Reuters article – apparently the 'nemo dat' principle does not apply to banks:


“A federal appeals court on Thursday upheld a ruling that puts Bank of New York Mellon ahead of former customers of Sentinel in the line of those seeking the return of


money lost in the 2007 failure of the suburban Chicago-based futures broker.


The appeals court affirmed an earlier district court ruling that the bank had a "secured position" on a $312 million loan it gave to Sentinel, which turned out to have been secured by customer money.


Futures brokers are required to keep customers' funds in dedicated accounts to protect them from being used for anything other than client business. However, Thursday's ruling suggests that brokerages can use customer funds to pay off other creditors, Sentinel trustee Fred Grede told Reuters.


"I don't think that's what the Commodity Futures Trading Commission had in mind" with its requirement that brokers keep customer money separate from their own, he said. "It does not bode well for the protection of customer funds."


Worse, Grede said, is that the ruling suggests that a brokerage that allows customer money to be mixed with its own is not necessarily committing fraud.


That may raise the bar for proving that MF Global Holdings Ltd, under then-CEO Jon Corzine, misused customer funds as it scrambled to meet margin calls to back bets on European debt in the brokerage's final days. A $1.6 billion customer shortfall remains.




"I'm sure Mr. Corzine's attorneys will get ahold of this ruling and use it for all it's worth," Grede said.




The appeals court said that "perhaps the bank should have known that Sentinel violated segregation requirements" but agreed with the district court's earlier ruling that "such a lack of care does not rise to the level of the egregious misconduct" needed to reprioritize a claim.


"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," U.S. Circuit Judge John D. Tinder wrote in the ruling.”


(emphasis added)

Obviously we are not acquainted with all the details of the case, but there are a few obvious inferences we can draw from the above.


1.    What has already come to light in the context of the MF Global case has been confirmed by this case: the so-called 'segregation' of customer funds always was and remains a legal fiction. Segregation of customer funds simply does not exist. Brokers can do with their clients funds whatever they like, just as long as it is not 'intentional fraud'.

2.     If customer funds are misappropriated and used as collateral for loans intended for the brokerage's own business dealings, then the 'nemo dat' principle can be safely ignored by the court. Banks that received what were essentially misappropriated goods as collateral do not have to return them to their original owners as long as they are deemed to have acted in good faith. A bank is not forced to exercise care to the extent of ensuring that funds offered as collateral belong to the broker and are not part of the 'segregated' accounts of customers.

3.    If customers of futures brokers actually want to protect their 'segregated' funds, they apparently must hire private detectives to run a constant surveillance mission on the brokers holding their funds. The door is now wide open to fraud – with clients evidently forfeiting title to their 'segregated' funds as soon as they are used as collateral for a bank loan, there is nothing to stop anyone from stealing such funds.

4.    The fact that the court ruled “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" is simply breathtaking. According to the SEC, Sentinel quite deliberately defrauded its customers.


Here is an excerpt from a Barron's article that appeared at the time Sentinel was wound up:


“According to people with knowledge of the matter, the SEC and NFA found Sentinel's records a mess. Regulators couldn't seem to get a straight answer to their most basic questions. The job became all the more difficult when Sentinel summarily fired its chief trader and portfolio manager, Charles Mosley, later that week for alleged "misconduct" and then filed for Chapter 11 bankruptcy.


On Aug. 20, the SEC filed a civil action against Sentinel in Federal District Court in Chicago, charging it with fraud, misappropriation and misuse of client money. The agency asserted that Sentinel's daily accounts were "misleading" and that some $600 million of customer money was missing. Moreover, according to the SEC complaint, "at least $460 million" in customer securities had been transferred to a "house account," many of them serving improperly as collateral for loans extended to Sentinel Management Group.

Thus, the SEC dolefully concluded, using the credit crunch to justify the freeze was "false and misleading." It was tantamount to setting a fire to mask a burglary.


But the real blood will be spilled by the hedge funds, commodity traders and wealthy individuals who had about $800 million in Sentinel's Seg-III account. This account, regulators say, was looted to boost Sentinel's house account. The money was pledged as collateral for loans to Sentinel. Driscoll says that Seg-III holders will be lucky to get even half their money. As of two weeks ago, investigators had found only $92 million of the $800 million.

Where are the missing funds? That's what regulators and Sentinel's recently appointed bankruptcy trustee are trying to determine. Sentinel's 42-year-old CEO, Eric Bloom, citing his lawyer's advice, wouldn't discuss the case with a Barron's reporter who went to his home.”


(emphasis added)

Where indeed are the missing funds? Apparently they have 'vaporized', MF Global style. How could the court possibly conclude that Sentinel was not acting in bad faith and did not intend to defraud its customers? If $460 million in customer funds were 'transferred to a house account' where they were 'serving improperly as collateral for loans extended to Sentinel Management Group', that clearly means they were stolen, respectively 'misappropriated'.

Whether or not Bank New York Mellon had a duty to ascertain the legal status of the pledged collateral, whatever happened to 'nemo dat'? How can stolen goods suddenly be appropriated by the bank that received them in the course of a fraudulent scheme?

Legal questions aside, one thing is already certain: customers of futures brokerages can no longer have faith that their assets are in any way segregated or protected. Whatever residual hope there was left that things may still come right after the MF Global case is surely completely destroyed by the outcome of the Sentinel case.

This is yet another chink in the 'confidence armor' that has propped up the financial system to date. Let us not forget, the fractionally reserved banking system itself is also at variance with traditional legal principles: it routinely appropriates the funds belonging to its depositors for its own business purposes – quite legally as it were.

In reality, the banks can simply not pay all, or even a fraction, of the outstanding depositor claims that are allegedly payable 'on demand'. It is presumably only a very small step for people to realize that the 'vaporization' of customer funds in futures brokerage accounts could happen on a much greater, system-wide scale, if and when push truly comes to shove. This realization itself could well hasten the system's demise.

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SilverDoctors's picture

Tylers have been strangely silent on this MASSIVE precedent!

SWRichmond's picture

Agree.  High time for this one.  Ann Barnhardt has been all over this.

SilverDoctors's picture

I actually spoke with Ann Barnhardt last night on this, she went on an EPIC RANT! ‘What we’re seeing is the complete disintegration of the financial system before our very eyes! It’s Soviet!‘
‘You have got to get your money out of the financial system! Not just the futures markets, but the entire thing! Stocks, 401k, IRA. GET YOUR MONEY OUT OR ELSE IT IS ALL GOING TO BE STOLEN FROM YOU! IT’S ALL A PONZI!!!

forexskin's picture

this is the ringer:

If customer funds are misappropriated and used as collateral for loans intended for the brokerage's own business dealings, then the 'nemo dat' principle can be safely ignored by the court. Banks that received what were essentially misappropriated goods as collateral do not have to return them to their original owners as long as they are deemed to have acted in good faith.

= (customer) money laundering.

once the loan money is in hand, it can be used for anything, rules about fraudulent use of customer funds be damned. since the customer funds chain of title is broken once pledged as collatoral, that loan becomes free money. just a quick shuffle with the pledge of collatoral, some loan docs, and.... its gone.

why ever worry about return of customer funds again?

Concentrated power has always been the enemy of liberty.'s picture

Also, Fuck You Jon Corzine!!!


P.S. It's worth saying twice...

gmrpeabody's picture

Maybe the PTB just don't want futures trading....

Maybe they don't want price discovery....

Whatever the goal, they are going to kill the industry.

boogerbently's picture

 'Banks that received what were essentially misappropriated goods as collateral do not have to return them to their original owners as long as they are deemed to have acted in good faith'.

Isn't that the traditional definition of a "fence"?

It's the new "business model".

Govt. sanctioned theft. Basically, it's OUR FAULT for trusting them. LOL

NotApplicable's picture

I likes this line, "How could the court possibly conclude that Sentinel was not acting in bad faith and did not intend to defraud its customers?"

Because the judge wants to live to see the sun rise another day, and will be rewarded handsomely for his service to the mafia.

cougar_w's picture

why ever worry about return of customer funds again?

I get the sense they have figured this one out. And the SCOTUS will back up any ruling that concentrates power and money.

America became a fraud from one sea to the other. Stand by now for a lot of creative hijinx. Everything will become a "customer account held as collateral" even your shirt down at the dry cleaners.

boogerbently's picture

The "reciever" of the misappropriated funds is excused, but that isn't to say the party that "misappropriated" the funds is.

Although, they haven't done anything to punish THEM either.

forexskin's picture

we'll be waiting for a while before we see an indictment of one of 'the chosen'.

cougar_w's picture

The party in the first part is the evaporating party. They take all liability with them.

The model now is for institutions that are going away to ensure the financial survival of their principals by judiciously rehypothecating their client funds to cooperative third-parties. Then, they evaporate taking all the blame for any wrong-doing down the memory hole with them.

It is money laundering. On a vast scale.

I can easily see $1T moving away from clients in this manner over 18 months, if you include 401K accounts and deposits.

It is now all set to go away, every dime. The smart move is quickly into cash and tangible goods, the first out is the smartest, and the Devil will certainly claim the hindmost.

Cognitive Dissonance's picture

"Then, they evaporate taking all the blame for any wrong-doing down the memory hole with them."

You know......they were JUST here a minute ago. Where could they have gone?

Looks like it's time to appoint a search committee. Jamie, could you make some suggestions for committee membership?

gmrpeabody's picture

This scale of a job calls for the U.S. Attorney General Eric Holder... err..., oh, wait!

cougar_w's picture

I heard her rant in like fashion elsewhere. She's really adamant.

I am afraid she is correct.

These are the moves on an end-game. The last moves on an end-game go unchallenged. When this game ends, whoever has the goods keeps them. Ann said it; possession is 9/10ths of law. Them as has, keeps.

My wife insists on keeping our money in banks. My paycheck is automatically deposited in a bank. So far I've not resisted much. She thinks our 401K has value, I tell her it will evaporate some day, or we'll be left holding IOUs for the balance. I used to feel embarrassed having such ill-ease, but not so much any more.

The hand writing is on the wall, and this is going down hard. There will be no recourse.

When they take it all there will be no recovery. There will be a shocked national silence followed by a long loud wail of anguished disbelief.

boogerbently's picture

You're right....except for the IOU part.

Cognitive Dissonance's picture

I am fairly certain "they" will hand out IOU's.........if only to get buy-in for the next fiat Ponzi iteration.

All aboard the crazy train.

cougar_w's picture

Banks are paying 0.2% on deposits. I know my wife would lobby hard to take any government-backed IOU that returned over 2%. Even if inflation were running 3%.

It's very difficult to argue against these trends. In the end I suspect it will not matter either way. All the money is set to evaporate into the hidden places of the world.

Cognitive Dissonance's picture

I'm extremely lucky. Mrs. Cog was urging me this morning to take some more money OUT of the bank.


I love Mrs. Cog. :>)

NotApplicable's picture

Nah, there will always be IOUs. That way, theft can ALWAYS be denied.

"No, really, I'll pay you back, promise!"

You just won't be able to do anything with them.

Cognitive Dissonance's picture

TBTF Banker to Muppet client - "I'd rather owe it to you than cheat you out of it."

cougar_w's picture

God help us, for we are undone.

sadmamapatriot's picture

You are going to have to man up and lay down the law with your wife there, buck. It is your responsibility to take care of your family and saying "but wifey didn't want to" is not going to cut it. I got out, I mean all out, as soon as MF Global went down.


StychoKiller's picture

Perhaps yer wife should read this article and the comments it generated...

Cognitive Dissonance's picture

"4. The fact that the court ruled “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" is simply breathtaking. According to the SEC, Sentinel quite deliberately defrauded its customers."

Did we really expect the courts/legal system to turn back the fraud?


False hope binds chains us to impossible and unbearable situations. We are all now part of a massive Stockholm Syndrome experiment.

Paging Patty Hearst, please pick up the nearest white phone.

cougar_w's picture

Double-plus on that. The massive scale of the ongoing capture of our free will is simply stunning.

boogerbently's picture

Sentinel was charged in 2007. When was this decision rendered?

Cognitive Dissonance's picture

The other day.

The slow wheels of justice take a long time to grind your bones into their bread.

Cognitive Dissonance's picture

Thank you fuu. I was wondering where I could find that.

Need to wall paper the bathroom for Mrs. Cog.

boogerbently's picture

This will NOT help get money "off the sidelines."

Gringo Viejo's picture

Yes Ann has, kudos to her. And an additional shoutout to Gerald Celente who has aptly noted that in today's criminal environment.."if your money's not in your pocket, it's not YOUR mony."

NotApplicable's picture

Thing is, that's always been true. We just get reminded of how true from time to time.

GoldenTool's picture

That's exactly it.  It isn't our money.  It belongs to someone else.  You have no control...


"All your base are belong to us."

MrSteve's picture

the usual diversionary handout is a zero coupon bond, redeemable somewhere over the rainbow, say thirty years from now- but your money is "all" there. Just wonderful, isn't it?

CheapBastard's picture

'nemo dat' is only for the Little People.

nofluer's picture

"Precedent"? Ummm... seems to me to be a logical outgrowth of the Clinton et al repeal of the remainder of Glass-Steagall You know... the part that said that customer money and firm money were to be kept SEPARATE? The part that said that the firm could NOT co-mingle funds, and could NOT play with said customer money?

buzzsaw99's picture

Jon Corzine (can't touch this)

My, my, my thieving hits me so hard
Makes me say "Oh my Lord"
Thank you for blessing me
With a mind to steal and get out of jail free card
It feels good, when you know you're down
A super dope homeboy from the Squidtown
And I'm known as such
And this is a beat the rap, uh, you can't touch

I told you homeboy (You can't touch this)
Yeah, that's how we living and you know (You can't touch this)
Look at my eyes, man (You can't touch this)
Yo, let me bust the funky lyrics (You can't touch this)

slewie the pi-rat's picture

nice buZ_Z_saw!

why isn't tyler on this someone asked?

he posted the fuking article didn't he!  L0L!!!

reigning republicunt vulture "capitalist" paulSinger may be involved and he's keeping tyler on a pretty tight leash for the neoCon causa bukllshitski?  so theTeaParty "gets fooled again" by theNew_Boss?

tyler, like the "markets" has been screwed down tight by the mofo banksters?

once they get their hooks into ya it's fun isn't it tyler?  gonna buy yerself a nice bently like oj?  like sac's? 

nothing new here, rilly:  boilerplate lawyers "socializing" losses while pretending to care abt "rights,  freedoms, preperty-property, 'persons' and the rule of law"

here cum da judge, tyler:  Arlo Guthrie Percy's Song - YouTube

Concentrated power has always been the enemy of liberty.'s picture

Fuck You Jon Corzine!


P.S. It's worth saying twice...

FeralSerf's picture

Tragically, it is Jon Corzine that has said "Fuck you!" to all of us and has gotten away with it so far.

LMAOLORI's picture



"FeralSerf Tragically, it is Jon Corzine that has said "Fuck you!" to all of us and has gotten away with it so far."

Those darn Fat Cat Bankers



CONVICTED: Bush 1300+, Clinton 1000+, Obama 0.0 (+/-)

Is Freeh looking out for MF Global customers?

While Giddens has since returned about 80 percent of that cash, he said customers still face a $1.6 billion shortfall because MF Global improperly commingled customer and MF Global's money.

Letter From Satan: Dear Brother Corzine

Legality of MF Global Asset Transfer to JP Morgan Questioned


Commodity Customer Coalition founder James Koutoulas is requesting that MF Global bankruptcy Judge Martin Glenn investigate three potential legal issues that are said to have occurred in transferring of MF Global assets.  The key issues include the fact that JP Morgan was able to purchase MF Global bonds at a discount without any open bidding process and the assets were apparently sold without disclosure to or approval from the U.S. bankruptcy court or trustees.  The third issue centers on JP Morgan seeking special favors from the Federal Reserve to receive priority treatment over investor segregated fund accounts.

The first such non-transparent movement of assets occurred when JP Morgan is said to have purchased MF Global’s Sovereign Debt at a significant discount without an open bidding process, paying $0.89 and later selling that debt to investor George Soros for $0.95.  No one is going to complain about JP Morgan generating profit.  However, purchasing assets of a bankrupt firm without an open bidding process or disclosure to the bankruptcy court and trustees is where JP Morgan may be in trouble, according to Mr. Koutoulas.  This sale could be subject to clawback provisions, legal experts speculate.  (On December 9, 2011 The Wall Street Journal reported the fact that bonds were moved to KPMG London office, which was the bankruptcy administrator, but at the time the article did not discuss sale details or approval through the bankruptcy process.  See “Corzine’s Loss May Be Soros’s Gain” by Gregory Zuckerman and Dana Cimilluca.)


Joebloinvestor's picture

What a fucking mess.

Theft is theft unless it involves a brokerage or bank I guess.

NotApplicable's picture

I believe the term you're looking for is "agent of the state."

Seize Mars's picture

Bribes, coercion

ptoemmes's picture

A hoped for silver lining in all of this - sort of implied in the top post - is that "depositors" may realize that their "protected deposits" are - well - not.  

Withdraw them, shut down this predatory industry.  

Maybe the market can work once in a while.  

On the other hand they could all be muppets...

lightning's picture

Unfortunately, they are muppets.  As Ann B noted in her rant, people tell her, "Well, my accounts are safe because they are FDIC insured."  Muppets don't get it.

calgal's picture

Epic Must see rant by Ann Barnhardt:

(referring to the markets) "if you can't understand what Get The Hell Out! means, there's nothing more I can do for you..."