UPDATE 1-Bank of New York faces $600 mln fraud case trial

* Bank denies misconduct, defends actions

* Case stems from ’07 Sentinel Management Group bankruptcy

(Adds comment from bank.)

By Ann Saphir

CHICAGO, April 19 (BestGrowthStock) – The Bank of New York Mellon
Corp (BK.N: ) is defending itself in a $600 million fraud case in
which the New York lender is accused of letting a client
improperly use investor funds to back loans from the bank.

The trial, which opened in federal court in Chicago on
Monday, was brought by the trustee of Sentinel Management
Group, a closely held cash management firm based in Northbrook,
Illinois that filed for bankruptcy in August 2007.

Sentinel, which managed money for futures brokers and hedge
funds, had its accounts at the Bank of New York Mellon, from
which it borrowed more than $300 million at the time of
Sentinel’s collapse.

As a registered futures broker, Sentinel was required to
keep its customer funds separate from its own, but Sentinel
used those funds to back its loans from the bank, the trustee
argued in court papers. The loans were to boost Sentinel’s

“Sentinel, the bank knows, is playing the leverage game
with someone else’s assets,” Chris Gair, the Jenner & Block
attorney representing Sentinel’s trustee, told U.S. District
Judge James Zagel in an opening statement on Monday.

“It knows that Sentinel’s audited financials cannot
possibly be true because securities cannot be in two places at
one time. And that’s what they knew before everything really
started coming apart.”

Sentinel, which had only $2 million of its own capital,
collapsed after the credit markets seized up in the summer of
2007. Its founders later settled allegations they defrauded
Sentinel’s customers to benefit themselves.

The trustee, Frederick Grede, is seeking damages of about
$600 million from the bank.

“The trustee’s claims are without merit,” The Bank of New
York Mellon, the world’s largest custodian of financial assets,
said in a statement. “We are vigorously defending ourselves in
court and seek to recover the funds owed to our company.”

In court papers, the bank said it did not know and was not
in a position to know about Sentinel’s alleged fraud and that
it had never made any misrepresentations to Sentinel’s
(Reporting by Ann Saphir; editing by Robert MacMillan and
Andre Grenon)

UPDATE 1-Bank of New York faces $600 mln fraud case trial