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Grede v. UBS Securities, LLC

United States District Court, N.D. Illinois, Eastern Division

March 20, 2018

FREDERICK J. GREDE, not individually, but as Liquidation Trustee and Representative of the Estate of Sentinel Management Group, Plaintiff,
v.
UBS SECURITIES, LLC Defendant.

          MEMORANDUM OPINION AND ORDER

          REBECCA R. PALLMEYER UNITED STATES DISTRICT JUDGE

         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. All told, Sentinel cost its investors more than $600 million. See United States v. Bloom, 846 F.3d 243, 245-46 (7th Cir. 2017) (affirming Sentinel CEO Eric Bloom's convictions on nineteen counts of wire fraud and investment advisor fraud). Dozens of lawsuits were filed in the wake of Sentinel's failure. Many are ongoing to this day.

         Defendant UBS Securities, LLC is a former customer of Sentinel. In March 2007, Sentinel transferred $108 million to UBS, which included $14.4 million characterized as “cumulative interest.” (UBS Securities, LLC's Memorandum in Support of its Motion for Summary Judgment [97] (“UBS's Opening Br.”), 1.) The Plaintiff in this case, Frederick J. Grede, is the Liquidation Trustee for the Sentinel Liquidation Trust. The Trustee claims that Sentinel acted with actual “intent to hinder, delay, and defraud” its other creditors when making the pre-petition transfer to UBS, and argues that the cumulative interest payment represents “false profits.” (Complaint [1] in No. 09-BR-521, 18-19) (citing 11 U.S.C. § 548(a)(1)(A)). Accordingly, the Trustee seeks to avoid the transfer and return the $14.4 million to the Liquidation Trust. UBS has moved for summary judgment, arguing that the Trustee has alleged only a “general scheme to defraud, ” and not fraudulent intent with respect to the specific transfer at issue. (UBS's Opening Br. 2.) UBS asserts 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. (Id.)

         For the reasons stated below, the Defendant's motion for summary judgment [96] is granted.

         FACTUAL BACKGROUND

         1. Overview of Sentinel's Business and Bankruptcy

         Sentinel Management Group, Inc. was an Illinois corporation that provided cash-management services for institutional investors, hedge funds, and individuals. (UBS Securities LLC's Local Rule 56.1 Statement of Uncontested Material Facts [98] (“UBS SoF”), ¶ 3.) Its primary business consisted of making safe, short-term investments of the excess cash held by other investment firms called futures commission merchants (“FCMs”)-brokers that execute trades in the futures and options markets and that are regulated by the Commodity Futures Trading Commission (“CFTC”). (Id.) Although Sentinel did not itself execute futures or options trades, it too was registered as an FCM with the CFTC as a prerequisite for managing the funds of typical FCMs. (Id.); see also Bloom, 846 F.3d at 246 (describing Sentinel's business model as “unique” and operating “like a mutual fund, pa[ying] a return based on profits and losses.”) Importantly, this meant that Sentinel was governed by the same securities law and regulations as its clients. (UBS's SoF ¶ 4.) These regulations required Sentinel to maintain its clients' funds in segregated accounts, and limited Sentinel's use of those funds to “investments [in] certain high-quality government and corporate securities” such as U.S. Treasury bills. (Id. at ¶¶ 9-10) (citing 7 U.S.C. § 6d(b) and 17 C.F.R. § 1.25).

         Sentinel offered a variety of investment programs to account for different investment objectives and to comply with various regulations, but ultimately pooled all of its clients' assets into one of three distinct groups. (UBS's SoF ¶ 10) Sentinel called these groups SEG 1, SEG 2, and SEG 3. (Id.) When advertising its investment options to potential customers, Sentinel referred to the SEG 1 group as the “125 Portfolio” (named after CFTC Rule 1.25) and the SEG 3 group as the “Prime Portfolio.” Bloom, 846 F.3d at 247. SEG 1 was more conservative and intended for FCMs investing their own customers' funds, while SEG 3 offered a higher rate of return at slightly greater risk and was open to Sentinel's non-FCM clients: hedge funds, individuals, and FCMs investing their proprietary, non-customer funds.[1] Id. Clients who invested money into one or more SEGs were promised “an undivided, pro-rata beneficial interest in the pool of securities” purchased using the funds within each SEG. (UBS's SoF ¶ 12.) This meant that Sentinel's investors did not own specific securities outright, but saw their funds “exchanged for securities and interest-bearing cash through a process that Sentinel called ‘allocation'” and instead held indirect shares of their respective SEG based on their level of investment. Grede v. FCStone, LLC, 867 F.3d 767, 771 (7th Cir. 2017) (“FCStone II”).

         In addition to making trades for its clients, Sentinel also traded on its own “House” account for the benefit of corporate insiders, which included the chairman, Philip Bloom; the CEO, Eric Bloom (Philip's son); and the vice president of trading, Charles Mosley. (Trustee's Statement of Additional Material Facts in Opposition to UBS's SoF [112] (“Trustee's SoAF”), ¶ 4.) Sentinel's House account was not constrained by the laws and regulations that governed the grade and risk of investments within the customer SEGs. Bloom, 846 F.3d at 247. Federal law, federal regulations, and Sentinel's client agreements did, however, require all client funds to be segregated from each other as well from Sentinel's House funds. (UBS's SoF ¶ 9) (citing 7 U.S.C. §§ 6d(a) and 6d(b); 17 C.F.R. §§ 1.3(gg), 1.20, 1.25, and 1.26(a)).

         As has been well documented in more than a dozen published and unpublished opinions dating back to 2009, Sentinel failed to abide by these rules.[2] In 1997, Sentinel opened up a line of credit-called the “overnight loan”-with the Bank of New York for the purpose of providing liquidity for customer redemptions and failed trades. In re Sentinel Management Group, Inc., 728 F.3d 660, 663-64 (7th Cir. 2013) (“BONY I”); (Trustee's SoAF ¶ 11). Although Sentinel at certain points held well over $1 billion in customer assets, it kept very little cash on hand-never more than $3 million. BONY I, 728 F.3d at 663; (Trustee's SoAF ¶ 12). This overnight loan from the Bank of New York allowed Sentinel to pay its redeeming clients in cash immediately, rather than after waiting for specific securities to sell. BONY I, 728 F.3d at 664; (see also Expert Report of Frances M. McCloskey (“McCloskey Rep.”), ¶¶ 64-67, Ex. 2 to UBS Securities, LLC's Response to Trustee's SoAF [121-2] (“UBS's Resp. to Trustee's SoAF”).) As acknowledged by the Seventh Circuit, the original overnight loan arrangement “did not violate segregation requirements[:] When a customer cashed out, the amount needed in segregation dropped by the amount lent by the Bank via the line of credit.” BONY I, 728 F.3d at 664.

         Sentinel maintained two types of accounts with the Bank of New York to facilitate this arrangement: segregated accounts and non-segregated accounts. Nine segregated accounts held different asset classes-cash, government securities, and DTC (corporate) securities[3]-for each of SEGs 1, 2, and 3. (Trustee's SoAF ¶ 8.) The four non-segregated accounts included Sentinel's House cash account, as well as several clearing accounts through which Sentinel bought, sold, and transferred securities. (Id. at ¶ 9.) Sentinel also maintained six additional segregated accounts for holding clients' cash at JP Morgan, which will be discussed further below. (Id. at ¶ 10.)

         Sentinel's primary clearing accounts at the Bank of New York were called the “SEN account” and the “SLM account.” (Id. at ¶ 9.) These two accounts operated together to clear transactions and to secure the overnight loan from the Bank. (McCloskey Rep. ¶¶ 64-67.) The SEN account was the clearing account and only held securities or cash during the day. Every evening, Sentinel would zero out the SEN account and transfer securities to the night-time SLM account to secure the overnight loan. At some point, however, Sentinel began securing the overnight loan using the assets in all of the non-segregated accounts, not just the overnight SLM account.[4] BONY I, 728 F.3d at 663.

         Sentinel's actual use of the overnight loan and its customers' funds bore little resemblance to their purported uses. Bloom, 846 F.3d at 248. Instead of merely facilitating day-to-day liquidity, Sentinel used the overnight loan to purchase “risky securities that did not comply with customers' investment portfolio guidelines.” Grede v. FCStone, LLC, 746 F.3d 244, 248 (7th Cir. 2014) (“FCStone I”). Most importantly, beginning in 2001 and increasingly by 2004, Sentinel's management started using the proceeds of the overnight loan “to fund its own proprietary repurchase arrangements.” BONY I, 728 F.3d at 664. Repurchase arrangements, or “repos, ” are transactions in which one party sells a security to another party with an agreement to repurchase the security later, with interest-effectively, another loan with the security acting as collateral.[5] Bloom, 846 F.3d at 248-49 (“The goal was to earn enough income from the additional investments to beat the cost of borrowing. This came with risks.”) Sentinel's habit of funding repos with the Bank of New York's loan resulted in highly leveraged portfolio. Id. If (and when) the stock market eventually turned, Sentinel would face losses from both the depreciation of its assets and the cost of borrowing. As described by the Seventh Circuit Court of Appeals in a related case:

Sentinel routinely used hundreds of millions of dollars in securities it had allocated to customers as collateral to support Sentinel's own borrowing to pursue its leveraged trading strategy for its own benefit. It moved those securities out of segregation and into a lienable account at the Bank of New York, its main lender, putting customer property at risk for Sentinel's benefit. As Sentinel's leveraged trading increased, its outstanding debt ballooned, and it drew more and more on its customers' assets to support its borrowing habit.

FCStone II, 867 F.3d at 772; see also Bloom, 846 F.3d at 249-50. The Seventh Circuit called this practice “a flagrant violation of both SEC and CFTC requirements” which left both SEG 1 and SEG 3 “chronically underfunded.” FCStone I, 746 F.3d at 248. Sentinel's customers remained unaware of these machinations, as “securities that were serving as collateral for the BONY loan continued to appear on customer statements as if they were being held in segregated accounts for their benefit even though Sentinel was routinely removing them from those accounts.” Id.

         “By the summer of 2007, Sentinel no longer slouched toward bankruptcy; it careened.” Bloom, 846 F.3d at 249. The crisis in the subprime mortgage industry spread to the economy as whole, and Sentinel's repo counterparties reacted by pushing their now-worthless securities back onto Sentinel. In June and July 2007, two of Sentinel's largest repo counterparties returned more than $400 million worth of securities to Sentinel, which forced Sentinel to borrow more heavily from the Bank of New York to compensate-always using its customers' property as collateral. Id.; FCStone II, 867 F.3d at 772. As the summer went on, Sentinel found itself unable to keep up with its customers' redemption requests and BONY's demand for collateral to secure the loan. Id.. On August 17, 2007, Sentinel filed for Chapter 11 bankruptcy protection. Sentinel had by then lost more than $600 million of its clients' money, and owed BONY in particular $313 million it had secured with client property. Bloom, 846 F.3d at 245-49.

         2. Fraudulent Interest Calculations

         On top of the segregation violations, Sentinel's officers misbehaved in an additional way: by falsifying the interest earned on the investments in its customers' accounts. Sentinel's marketing materials stated that investors “would receive interest based on a pro rata share of the interest earned only on the securities appearing on their daily customer statements.” (Trustee's SoAF ¶ 28); see also Bloom, 846 F.3d at 248. Customers were also assured that there would be “no allocation of profits and losses across the different ‘Seg' accounts.” Bloom, 846 F.3d at 248. Sentinel did not keep its word. Instead:

Sentinel [ ] would calculate the interest earned by all securities, including those belonging to other Segments and the house pool. Sentinel would then guesstimate the yield its customers expected to receive on their group's securities portfolio, add a little extra so that the rate of return seemed highly competitive, and report the customer's pro rata share of that amount, minus fees, on the customer's statement.

FCStone I, 746 F.3d at 248 (emphasis in original). The Trustee alleges also that, in addition to falsifying the interest credited to each of the SEGs, “Sentinel's insiders kept for themselves a substantial portion of the interest yield accruing on Sentinel's overall securities portfolio.” (Trustee's SoAF ¶ 28; 1/15/10 Expert Report of James S. Feltman (“2010 BONY Feltman Rep.”), ¶¶ 64-68., Ex. 1.B. to Trustee's SoAF [112-1].)

         Sentinel's misleading method of reporting interest has been widely criticized in other lawsuits arising from Sentinel's bankruptcy, on the same bases that the Trustee now cites in opposition to UBS's motion for summary judgment. (See Trustee's SoAF ¶ 28; 2/8/13 Omnibus Expert Report of James S. Feltman (“2013 Omnibus Feltman Rep.”), ¶¶ 90-96, Ex. 1.A. to Trustee's SoAF [112-1].) One of the Trustee's expert witnesses, James Feltman, reviewed selected customer accounts from 2005 to 2007, and concluded that “Sentinel allocated interest income to customers by groups at a rate of return that they made up, and which they expected would approximate the amount earned by securities reportedly held in each customer's account.” (2013 Omnibus Feltman Rep. ¶ 96.)

         During the SEC's civil enforcement case against Sentinel and its officers, VP Charles Mosley conceded the same point. SEC v. Sentinel Management Group, Inc., No. 07-CV-4684, 2012 WL 1079961, at *16 (N.D. Ill. Mar. 30, 2012) (Kocoras, J.). “Mosley admitted that Sentinel would pool the interest generated by the various portfolios, including the House Portfolio, and distribute that interest across the investors' portfolios[, and] further admitted that the interest distributed to investors bore no relation to the interest that the investors' securities had actually accrued.” Id. Judge Kocoras granted the SEC's motion for summary judgment based on this admission, finding that Mosley violated sections 17(a)(1)-(3) of the Securities Act, 15 U.S.C. § 77a et seq., because he “actively and knowingly participated in Sentinel's scheme to defraud its investors, obtained money by means of Sentinel's misrepresentations, and engaged in a course of fraudulent business.” Id.

         The same evidence supported Eric Bloom's criminal conviction. On January 19, 2017, the Seventh Circuit affirmed Bloom's convictions on eighteen counts of wire fraud and one count of investment fraud. Bloom, 846 F.3d at 246. The Court of Appeals concluded that the evidence was sufficient to support the jury's guilty verdict against Bloom on the allegation that he employed “a scheme to manipulate client yield rates by reallocating interest . . . in an effort to make the 125 Portfolio seem more lucrative that it was[.]” Id. at 250. The Trustee highlights United States v. Bloom, 846 F.3d 243 (7th Cir. 2017), as particularly relevant to UBS's situation due to the effect Bloom's yield manipulation had on SEG 1:

Sentinel used the yields from the house account and the Prime Portfolio [i.e., SEG 3] to inflate artificially the returns from the 125 Portfolio [i.e., SEG 1]. Sentinel's high-risk trading in the house account generated higher returns than the more conservative 125 Portfolio. The Prime Portfolio, which was slightly riskier than the 125 Portfolio, likewise generated higher returns. Sentinel redistributed some of these returns from the house account and the Prime Portfolio to the 125 Portfolio, effectively using the riskier accounts to subsidize the more conservative account. With these inflated rates of return in the 125 Portfolio, Sentinel could attract new clients by outperforming its competition. Indeed, it advertised these rates in its marketing material and on its website.
Sentinel employees testified that they doctored the yield rates on a daily basis from 2004 until the company's bankruptcy in 2007. Instead of paying customers the interest they actually earned, Sentinel employees divvied up interest payments according to the instruction of Bloom or Charles Mosley. Bloom in fact created a spreadsheet to help employees calculate how to redistribute funds, which was called the “Daily Yield/Rate Calculation.” The spreadsheet listed both the actual interest earned by customers' securities and the rate set by Sentinel.
The rate setting often favored the customers in “Seg 1” (125 Portfolio). For example, on December 7, 2006, the interest actually earned by Seg 1 was $96, 942.63. After the rate manipulation by Sentinel, that portfolio was allocated $103, 832.46. On that same day, Seg 3 (Prime Portfolio) actually earned $148, 005.09 in interest and the house account earned $17, 949.85. After Sentinel's rate adjustment, Seg 3 customers were paid just $112, 657.32 and the house account received $49.11.
. . . [O]n July 30, 2007, Bloom spoke with an employee who was setting the rates and agreed to inflate the 125 Portfolio to keep it competitive. At the end of that day, Seg 1 actually earned $63, 477.53, but was paid $100, 420.34 using the interest earned by customers in Seg 3 and by the house account. Another employee testified that he raised the matter with Bloom before May 15, 2007, and Bloom acknowledged that Seg 3 and the house account supplemented Seg 1.

(Trustee's Memorandum of Law in Opposition to UBS's Opening Br. [111] (“Trustee's Resp. Br.”), 12) (quoting Bloom, 846 F.3d at 252.)

         The Trustee has not submitted evidence regarding the specific securities that Defendant UBS was supposed to be earning interest on, nor on the exact difference between the interest UBS was allegedly overpaid and the “real” interest rate. Instead, the Trustee argues that because Sentinel was “substantially undersegregated” when it paid the $14.4 million in cumulative interest to UBS on March 30, 2007, it “did not have sufficient funds to return all of its customers' initial investments, let alone interest on those investments.” (Trustee's Resp. Br. 21-22.) “Simply put, ” the Trustee asserts, “there was no interest to pay UBS, ” and the entire $14.4 million therefore constitutes “false profits.” (Id.; see also Complaint 18-19.)

         UBS challenges this characterization of the interest earned on its SEG 1 account. (UBS's Opening Br. 8.) At the very least, UBS contends that the Trustee cannot possibly prove his blanket denial of the cumulative interest's legitimacy: “the Trustee has failed to plead or show any facts about the specific amount of alleged ‘false profits' transferred to UBS on each of the hundreds of days that UBS invested customer funds in Sentinel.” (Id. at 12.) In a related dispute, Grede v. FCStone, LLC, No. 09-CV-136 (the “FCStone test case”), UBS's expert Frances McCloskey concluded that Sentinel acted appropriately when paying interest to its customers. (McCloskey Rep. ¶¶ 273-277.) McCloskey's “analysis of the securities' yields and returns paid to customers revealed that returns from securities on customer statements provided the overwhelming majority of the return paid to customers, but that customer returns in most groups were supplemented in small amounts by Sentinel's House repo portfolio.” (Id. at ¶ 274.) McCloskey found no instance in which Sentinel redirected returns from one SEG to another, rather than from Sentinel's own funds to the customer SEGs. (Id.) McCloskey also repeatedly emphasizes that “Sentinel does not display any of the characteristics that define a Ponzi or Ponzi-like scheme, ” but was “engaged in a legitimate business [ ] providing investment management to its customers.” (Id. at ¶¶ 269-272.)

         UBS also argues that the Trustee himself has conceded the legitimacy of the cumulative interest through earlier testimony from its expert James Feltman. (Id. at 12-14.) During his deposition in the FCStone test case, Feltman testified as follows:

Question: Was there anything improper with Sentinel accruing interest and allocating it to customers on a daily basis? . . .
FELTMAN: Not from the standpoint of the process. The actual procedure that Sentinel used or the procedure that Sentinel used incorporated examining the entire portfolio of securities it held including interest on repos and taking into account the daily interest charges on the loan and putting that into the overall calculus on a gross and net basis, but at the end of the day Sentinel made, in my view, a significant attempt to match the interest accrued and allocated to customer accounts to the actual earnings that the securities would have reflected for those customers.

(Dep. of James Feltman in Grede v. FCStone, LLC, No. 09-CV-136 (“FCStone Feltman Dep.”), at 219:4-20, Ex. 22 to UBS's SoF [98-22].) Feltman stood by that conclusion when he testified at the FCStone trial. (UBS's SoF ¶ 30.)

         The Trustee contends that this quotation was taken out of context, and that Feltman's deposition taken as a whole supports the position he took in his reports: that “interest was fraudulently calculated and paid using the profits on the entire comingled pool, and that the manner in which Sentinel credited interest was designed to avoid suspicions about its illegal activity.” (Trustee's Resp. Br. 13.) Immediately after making the statement quoted above, Feltman pointed out that “to the extent that withdrawals included interest earned by a customer, the actual payment of interest was made with comingled funds” because those funds were repeatedly routed into and through the SEN clearing account. (FCStone Feltman Dep. 222:4- 10) (discussing proof 14 of the 2013 Omnibus Feltman Report which states: “Interest income was paid to customers with cash from the comingled [SEN account] or other customers' deposits.” Id. at 55.) The Trustee also notes Feltman's testimony in the FCStone bench trial. When asked about the interest payments, Feltman stated: “I [ ] concluded that that the interest allocations were items that the company . . . created and were not derived from the securities that were on that customer statement for the day”; “they're estimates[, ] . . . what Sentinel thought their customers would expect”; and that Sentinel allocated interest from the whole pool, not the securities identified on customer statements. (FCStone Trial Tr. 581:5-8, 589:10-12, 591:13-19.) The Trustee concludes that the portion of Feltman's deposition testimony offered by UBS merely shows “that Sentinel tried really hard to appear legitimate”-not that the alleged profits were not fraudulent. (Trustee's Resp. Br. 25.)

         3. UBS's Relationship with Sentinel and the March 2007 Transfer

         Unlike many of Sentinel's clients, UBS managed to withdraw its entire position in SEG 1 well ahead of Sentinel's collapse. The Trustee filed numerous avoidance actions against other SEG 1 investors who received funds on the days immediately surrounding Sentinel's bankruptcy, see e.g. FCStone I, 746 F.3d at 252-54 (holding that various pre- and post-petition transfers were not avoidable); however, those transfers bear little resemblance to the one at issue here.

         UBS's predecessor, ABN AMRO, Inc., had invested funds with Sentinel since 2000. (UBS's SoF ¶ 11.) UBS acquired ABN AMRO's interest in Sentinel on September 30, 2016. (Id. at ¶ 16.) For the duration of its relationship with Sentinel, UBS was assigned to Group 7 of Sentinel's SEG 1 portfolio. (Id. at ¶ 19.) Like that of all Sentinel's clients, UBS's position was governed by an Investment Agreement that authorized Sentinel to purchase and sell securities for UBS's account and required Sentinel to hold those assets in segregation. (Id. at ¶ 11.) Under the terms of the Investment Agreement, UBS was entitled to redeem its investment at any time. (Id. at ¶ 14) (citing Investment Agreement § 4(b), Ex. 4.A. to UBS's SoF [98-4].)

         On March 13, 2007-roughly six months after UBS acquired ABN AMRO's interest in SEG 1-several UBS employees circulated an e-mail among themselves which contained internal analyses showing that UBS's investments with Sentinel were earning the highest monthly interest rate among five firms with which UBS had placed investments. (Ex. 40, E-mail from William Frothingham to Robert Gaffney, et. al., of 3/13/07, Ex. 40 to Trustee's SoAF [112-42]; UBS Investment Analyses, Ex. 41 to Trustee's SoAF [112-43].) Two weeks later, on March 28, 2007, UBS employee Gregory Hardiman called Sentinel's Sales Manager, Steven Stitle, to discuss pulling UBS's funds from SEG 1. (Trustee's SoAF ¶ 31) (citing Administrator BloomWAV42A0, Ex. 42 to Trustee's SoAF [112-44]; Transcript of phone call between Gregory Hardiman and Steven Stitle of 3/28/07 (“Hardiman Call Tr.”), Ex. 43 to Trustee's SoAF [112-45].) Their conversation was recorded by Sentinel. Hardiman told Stitle that “[UBS had] made a decision internally to exit the positions” but that UBS would give Sentinel an opportunity to explain how Sentinel was earning their yields in the SEG 1 fund and consider re-entering the fund in the future. (Hardiman Call Tr. 2:9-12.) Stitle asked Hardiman if UBS had any specific concerns, and Hardiman replied that “I think it's more of a . . . lack of understanding of [the] detailed positions.” (Id. at 3:5-6.) Hardiman continued:

My understanding is [Sentinel's] rates of return are fairly high relative to what anybody out there is getting at the moment[, ] . . . historically. I'd like to understand how you're [ ] achieving that. . . . The perception would be you're taking more risk as a result, and I'd like to understand what those risks are and where you're picking up your yields . . . in the underlying portfolio.

(Id. at 5:2-13.) Stitle offered to “put together a team probably with the CEO and myself and . . .just shoot out there and do a little dog and pony show, ” but Hardiman insisted that any future presentation “has to be specific to the portfolio” and that he “would like to see the portfolio manager in there . . . explaining what he's doing and how.” (Id. at 4:10-21.) Hardiman also provided a list of concerns he had regarding SEG 1:

What are the risks, what - where are you at within 125 [the 125 Portfolio, a.k.a. SEG 1], where are you getting the pickup and . . . how. So are you going out double A, you know, going all . . . the way out on the credit spectrum in terms of 125 and all the way out in terms of duration. . . . You know, what is it. And - and I believe we'd like to understand that.

(Id. at 5:17-6:2.) Stitle assured Hardiman that “those are questions we can answer fairly easily” and that he would contact Hardiman again in a month to set up the presentation. (Id. at 6:16-19.)

         Immediately after the phone call, Stitle e-mailed Eric Bloom and Charles Mosley stating:

Just got off the phone with Greg Hardiman @ UBS. They are pulling the $$$ because they are not comfortable with how we obtain the yields we post without incurring some “unknown” level of risk. Greg agreed to give us a chance to explain how we achieve this but is expecting a Q & A session in Stamford with you, me & Charles. I suspect the bulk of the questions will be directed to Charles. . . .
Conversation was slightly more positive than I expected. Bottom line is that they can't stay invested in a vehicle that they don't fully understand & are [sic] comfortable with.

(E-mail from Steven Stitle to Eric Bloom and Charles Mosley of 3/28/07 (“Stitle E-mail”), Ex. 44 to Trustee's SoAF [112-46].) The meeting never occurred. On March 30, 2007-two days after the call-UBS withdrew its entire stated account balance from Sentinel: $108, 387, 950.97. This amount included the $14, 401, 341.15 worth of cumulative interest credited to UBS's account that the Trustee now seeks to avoid. (Trustee's SoAF ¶ 33.)

         Later, in August 2007, Hardiman discussed the news of Sentinel's then-recent collapse in an e-mail to a coworker: “Hope people realize the value added by exiting the Sentinel fund . . . Don't think people really appreciate/understand what could have been and the headache, potential issues/losses avoided here. People should be aware that we performed due diligence on the fund and made an informed decision to exit.” (E-mail from Gregory Hardiman to Kevin Maloney of 8/16/07, Ex. 46 to Trustee's SoAF [112-48].) In another e-mail summarizing UBS's financial position in light of the overall market downturn over the summer of 2007, Hardiman repeated his claim that “[a]fter due diligence performed, we exited Sentinel in Q107, avoiding a potentially large loss.” (E-Mail from Gregory Hardiman to James Buckland, et. al., of 8/23/07, Ex. 47 to Trustee's SoAF [112-49].) Another employee then talked up Hardiman's work to others, stating: “We inherited a $100mm placement with Sentinel with the ABN merger that Greg decided to exit in Q1 due to his concerns about the funds.” (E-mail from John Laub to Daniel Coleman, et. al., of 8/23/07, Ex. 48 to Trustee's SoAF [112-50].)

         The parties dispute the relevance and meaning of this evidence. The Trustee argues that these internal communications reveal Sentinel's fraudulent intent when making the transfer, as the phone calls and emails establish that UBS was “suspicious” of the generous returns Sentinel was earning, and created an incentive for Sentinel's managers to cover up their segregation violations and fraudulent interest calculations by paying UBS all of what Sentinel (wrongfully) said UBS was owed. (Trustee's Resp. Br. 14-15.) UBS argues that the communications are irrelevant as they only speak to UBS's intent when requesting the transfer, and that, at best, they merely “confirm that the reason UBS closed its account with Sentinel was because it was unfamiliar with Sentinel and did not fully understand Sentinel's investment process.” (UBS's Resp. to Trustee's SoAF ¶¶ 31-34.)

         In addition to providing Sentinel and UBS's internal communications regarding the transfer, the Trustee also supplies evidence regarding the origin of the money Sentinel used to pay UBS. The Trustee, through an expert witness, Anne Rasho Vanderkamp, claims that the money used to pay off UBS's account did not come from an account segregated for SEG 1. (Decl. of Anne Rasho Vanderkamp ¶ 5 (“Vanderkamp Decl.”), Ex. 45 to Trustee's SoAF ...


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