On August 9th, the Seventh Circuit held that the trustee for a failed futures commission merchant ("FCM") could not recover from the Bank of New York ("BONY") customer funds used by the FCM to secure an overnight loan. After Sentinel (an investment manager for FCMs) collapsed, it was discovered that it had pledged hundreds of millions of dollars in customer assets to secure the loan from BONY. Sentinel's trustee sought to dislodge the bank's secured position but the Seventh Circuit holds that the trustee's claims for fraudulent transfer and equitable subordination, and its efforts to void the contracts with BONY, all fail. Sentinel's failure to keep client funds properly segregated is not, on its own, sufficient to rule as a matter of law that Sentinel acted with the actual intent to hinder, delay, or defraud needed to establish a fraudulent transfer. Given that the bank was not an insider, the trustee needed evidence of gross and egregious conduct to obtain an equitable subordination, evidence which the trustee did not possess. And finally, because the contracts with the bank were not illegal, they could not be voided. In re: Sentinel Management Group, Inc. (Grede v. Bank of New York).