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 ofmoney 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.

 


 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

6 Responses to “The Sentinel Case – Another Nail in the Coffin of ‘Market Confidence’”

  • RickCaird:

    The Sentinel decision seems to be so far under the radar of most people. That could only be by design. I have been chasing several sources on this and no one can rationalize the decision. Each and every one of us knows this decision is wrong. It is a license to steal, but a license only available to large financial concerns. I cannot believe the two courts did not understand the issue. The only other explanation I can up with is corruption of one kind or another.

  • JasonEmery:

    There are numerous other recent examples, including one that was in the news a few days ago. Most relate to gold and silver that was stolen from native residents of what is now called ‘Latin America’. Spanish soldiers stole the loot, often committing murder in the process, and then shipped it back to Spain.

    But some of the ships sunk. When salvage operators find the gold and silver pieces, courts frequently rule that it belongs to Spain, as a ‘national treasure’. But they are conveying title of the items to a descendant of the thief, not the original owner, the native peoples.

    There is an old saying: ‘possession is 9/10 of the law.’ Salvage operators should keep their mouths shut and sell their loot to private collectors, rather than bragging about their discoveries.

  • AustrianJim:

    It seems to require only a modest amount of mental exertion to realize that just as a thief cannot transfer title to property that he does not own, so a trustee cannot use as collateral the property he is charged with minding, but does not own. The fact that he was voluntarily given trusteeship by the owner makes no difference.

    Great article, but depressing. Seems like we go take another small step backward from the principles of private property and towards something that is very frightening. But what? I would pledge my kingdom for a crystal ball right now. Or, perhaps I can just pledge yours instead.

  • It appears necessity knows no law and neither do the lawyers occupying the benches in our courts. The Supreme Court ruled that extortion was a tax. Now they rule that what is mine isn’t mine if a banker crook like John Corzine gets ahold of the account. Clearly, a ruling in favor of the customers would take down the entire hypothecation scheme and heaven knows the bench, which is another word for bar, which is another word for bank would never allow that. Anyone with a futures account should close down and get out before they steal the rest. It would probably be a good idea to have plenty of cash and gold coins in your matress as well.

  • jimmyjames:

    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.

    ***************
    A panic dash to cash would shine a light on the whole FRB fraud and would also be the kiss of death to this sick joke we call a financial system-
    There could be no further flight to safety when you cannot access your savings-
    Better to have at least some savings allocated to something that has no counter party risk-something that can never go to zero value and have it in a place where rehypothecation ie: legal theft-cannot exist-

  • Silvermoneyfuture.com:

    PT

    So depressing. Indeed, it reminds us of Daly vs First Bank of Montgommery, 1968.

    Once the Judge understood that the bank had not put forward real money for Daly’s mortgage he stated that in response to the bank’s president Mr Morgan: “sounds like fraud to me!”

    He ruled in favor of Daly; the bank could not foreclose on a house for which they had not risked real money.

    The decision was overturned the next day by a more senior judge who stated outside of the courtroom:

    “If I let you do that – you and everyone else – it would bring the whole system down. I cannot let you go behind the bar of the bank. We are not going behind that curtain!”

    The time is soon coming that we shall all remove our cash from the system, turn it into gold and silver, lock it up, and take our seats and watch what happens when the curtains are pulled back on the banking and fiat monetary system. It can be played out via the Internet. Live.

    It will be the greatest show on earth.

    JC.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • India: Why its Attempt to Go Digital Will Fail
      India Reverts to its Irrational, Tribal Normal (Part XIII) Over the three years in which Narendra Modi has been in power, his support base has continued to increase. Indian institutions — including the courts and the media — now toe his line. The President, otherwise a ceremonial rubber-stamp post, but the last obstacle keeping Modi from implementing a police state, comes up for re-election by a vote of the legislative houses in July 2017.  No one should be surprised if a Hindu...
  • Moving Closer to the Precipice
      Money Supply and Credit Growth Continue to Falter The decline in the growth rate of the broad US money supply measure TMS-2 that started last November continues, but the momentum of the decline has slowed last month (TMS = “true money supply”).  The data were recently updated to the end of April, as of which the year-on-year growth rate of TMS-2 is clocking in at 6.05%, a slight decrease from the 6.12% growth rate recorded at the end of March. It remains the slowest y/y growth since...
  • How to Stick It to Your Banker, the Federal Reserve, and the Whole Doggone Fiat Money System
      Bernanke Redux Somehow, former Federal Reserve Chairman Ben Bernanke found time from his busy hedge fund advisory duties last week to tell his ex-employer how to do its job.  Namely, he recommended to his former cohorts at the Fed how much they should reduce the Fed’s balance sheet by.  In other words, he told them how to go about cleaning up his mess.   Praise the Lord! The Hero is back to tell us what to do! Why, oh why have you ever left, oh greatest central planner of all...
  • What is the Buffet Indicator Saying About Gold?
      Chugging along in Nosebleed Territory Last Friday, both the S&P 500 and the Nasdaq composite indexes closed at record highs in the US, with the Dow Jones Industrial Average only a whisker away from its peak set in March. What has often been called the “most hated bull market in history” thus far continues  to chug along in defiance of its detractors.   Can current stock market valuations tell us something about the future trend in gold prices? Yes, they actually...
  • The 21st Century Has Been a Big, Fat Flop
      Seeming Contradiction CACHI, ARGENTINA – Here at the Diary we have fun ridiculing the pretensions, absurdities, and hypocrisies of the ruling classes. But there is a serious side to it, too. Mockery makes us laugh. And laughing helps us wiggle free from the kudzu of fake news.   Is it real? Is it real? Is it real? Above you can see what the problem with reality is, or potentially is, in a 6-phase research undertaking that has landed its protagonist in a very disagreeable...
  • A Cloud Hangs Over the Oil Sector
      Endangered Recovery As we noted in a recent corporate debt update on occasion of the troubles Neiman-Marcus finds itself in (see “Cracks in Ponzi Finance Land”), problems are set to emerge among high-yield borrowers in the US retail sector this year. This happens just as similar problems among low-rated borrowers in the oil sector were mitigated by the rally in oil prices since early 2016. The recovery in the oil sector seems increasingly endangered though.   Too many oil...
  • Will Gold or Silver Pay the Higher Interest Rate?
      The Wrong Approach This question is no longer moot. As the world moves inexorably towards the use of metallic money, interest on gold and silver will return with it. This raises an important question. Which interest rate will be higher?   It’s instructive to explore a wrong, but popular, view. I call it the purchasing power paradigm. In this view, the value of money — its purchasing power —is 1/P (where P is the price level). Inflation is the rate of decline of...
  • Warnings from Mount Vesuvius
      When Mount Vesuvius Blew   “Injustice, swift, erect, and unconfin’d, Sweeps the wide earth, and tramples o’er mankind” – Homer, The Iliad   Everything was just the way it was supposed to be in Pompeii on August 24, 79 A.D.  The gods had bestowed wealth and abundance upon the inhabitants of this Roman trading town.  Things were near perfect.   Frescoes in the so-called “Villa of the Mysteries” in Pompeii, presumed to depict scenes from a...
  • Rising Oil Prices Don't Cause Inflation
      Correlation vs. Causation A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).   Gushing forth... a Union Oil Co. oil well sometime early in the 20th century   But is it valid to...
  • A Bumper Under that Silver Elevator – Precious Metals Supply and Demand
      The Problem with Mining If you can believe the screaming headline, one of the gurus behind one of the gold newsletters is going all-in to gold, buying a million dollars of mining shares. If (1) gold is set to explode to the upside, and (2) mining shares are geared to the gold price, then he stands to get seriously rich(er).   As this book attests to, some people have a very cynical view of mining...  We would say there is a time for everything. For instance, when gold went ...
  • Silver Elevator Keeps Going Down – Precious Metals Supply and Demand
      Frexit Threat Macronized The dollar moved strongly, and is now over 25mg gold and 1.9g silver. This was a holiday-shortened week, due to the Early May bank holiday in the UK. The lateral entrant wakes up, preparing to march on, avenge the disinherited and let loose with fresh rounds of heavy philosophizing... we can't wait! [PT]   The big news as we write this, Macron beat Le Pen in the French election. We suppose this means markets can continue to do what they wanted...
  • The Knives Come Out for Trump
      A Minor Derailment GUALFIN, ARGENTINA – Yesterday, stocks fell. And volatility shot up.   When too many people have too many knives out at once, accidental cubism may result   Reports Bloomberg:   The Dow Jones Industrial Average tumbled more than 370 points, Treasuries rallied the most since July and volatility spiked higher as the turmoil surrounding the Trump administration roiled financial markets around the globe. Major U.S. stock indexes...

Support Acting Man

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com