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! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

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:

  • safe spaceReality is a Formidable Enemy
      Political Correctness Comedy We have recently come across a video that is simply too funny not be shared. It also happens to dovetail nicely with our friend Claudio's recent essay on political correctness and cultural Marxism. Since this is generally a rather depressing topic, we have concluded that having a good laugh at it might not be the worst idea.   How to most effectively create a “safe space” on campus Cartoon by Nate Beeler   It is especially funny (or...
  • Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh May 8, 2012. Gold imports by India, the world's biggest buyer of bullion, could rise on pent-up demand from jewellers after the federal government decided to scrap an excise duty on jewellery it imposed in March, the head of a trade body said on Monday. REUTERS/Ajay Verma (INDIA - Tags: BUSINESS COMMODITIES)Fresh Mainstream Nonsense on Gold Demand
      They Will Never Get It... We and many others have made a valiant effort over the years to explain what actually moves the gold market (as examples see e.g. our  article “Misconceptions About Gold”, or Robert Blumen's excellent essay “Misunderstanding Gold Demand”).  Sometimes it is a bit frustrating when we realize it has probably all been for naught.   Gold wants to know what it has done now... Photo credit: Ajay Verma / Reuters   This was brought home to...
  • fir wateringDrowning the Fir
      Presidential Duties Our editor recently stumbled upon an image in one of the more obscure corners of the intertubes which we felt we had to share with our readers. It provides us with a nice metaphor for the meaningfulness of government activity. First, here is a look at the picture – just quietly contemplate it for while and let it work its magic on you:   Yes, these two gentlemen are actually watering a tree in the middle of a downpour... Photo via...
  • Hollande 2The Wonder Years Are Over
      Everybody Is Unhappy PARIS – “France?” We were in a cab on the way from Charles de Gaulle Airport yesterday. We had innocently asked our cab driver how things were going in the country. He had some thoughts...   French president Francois Hollande: against all odds, he managed to attain the most powerful position in French society. And yet, even he is unhappy. Photo credit: Patrick Kovarik / AFP   “France is a mess. We have 5 million people unemployed. And...
  • mossack fonsecaGold – The Commitments of Traders
      Commercial and Non-Commercial Market Participants The commitments of traders in gold futures are beginning to look a bit concerning these days – we will explain further below why this is so. Some readers may well be wondering why an explanation is even needed. Isn't it obvious? Superficially, it sure looks that way.     As the following chart of the net position of commercial hedgers illustrates, their position is currently at quite an extended...
  • 5-SPX vs. tax receipts from 2007Corporate Tax Receipts Reflect Economic Slowdown
      Tax Receipts vs. the Stock Market Following the US Treasury's update of April tax receipts, our friend Mac mailed us a few charts showing the trend in corporate tax payments. Not surprisingly, corporate tax payments and refunds mirror the many signs of a slowing economy that have recently emerged. An overview in chart form follows below. First up, corporate tax receipts in absolute figures.   Corporate tax receipts in absolute dollars and cents – this is quite astonishing...
  • picture-social-contract-not-foundHeretical Thoughts and Doing the Unthinkable
      Heresy! NORMANDY, France – The Dow rose 222 points on Tuesday – or just over 1%. But we agree with hedge-fund manager Stanley Druckenmiller: This is not a good time to be a U.S. stock market bull.   Legendary former hedge fund manager Stanley Druckenmiller at the Ira Sohn conference – not an optimist at present, to put it mildly. Photo credit: David A. Grogan / CNBC   Speaking at an investment conference in New York last week, George Soros’ former partner...
  • ClintotrumpStaying Home on Election Day
      Pretenses and Conceits The markets are eerily quiet… like an angry man with something on his mind and a shotgun in his hand. We will leave them to brood… and return to the spectacle of the U.S. presidential primaries. On display are all the pretenses, conceits, and absurdities of modern government. And now, the race narrows to the two most widely distrusted and loathed candidates.   US election circus: Deep State Rep vs. Rage Channeller   The first, a loose...
  • time100-grid-covers-whiteThe World's 100 Most Influential Hacks, Yahoos and Monkey Shiners
      Hacks and Has-Beens NORMANDY, France – What has happened to TIME magazine? Henry Luce, who started TIME – the first weekly news magazine in the U.S. – would be appalled to see what it has become.   Time cover featuring the sunburned mummy heading the globalist IMF bureaucracy (which inter alia advocates that governments should confiscate a portion of the wealth of their citizens overnight, even while its own employees don't have to pay a single cent in taxes). Once you...
  • trumparyA Trump Landslide in November?
      Objective Reality After spending three weeks with objective truth at the ranch, we are now forced to return to the world of myths, delusions, and claptrap. Yes, we are in Buenos Aires looking at a TV! And there they are... talking about the world of politics, money, culture... the world of Facebook and CNBC... of Trump and Clinton... of ZIRP and NIRP... and of Game of Thrones.   The royal seating accommodation fought over in “Game of Thrones”. It looks decidedly...
  • Jackboot 2How the Deep State’s Cronies Steal From You
      Expanding in Ireland DUNMORE EAST, Ireland – We came down the coast from Dublin to check on our new office building. For this visit, we wanted to stay somewhere different than we normally do. So we chose a small hotel on the coast, called the Strand Inn.   Irish landscape with alien landing pads. Even the guys from Rigel II have heard about Ireland's corporate tax rate. Photo credit: Tourism Ireland   It is an excellent place for seafood and soda bread on a...
  • Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan, December 18, 2015.  REUTERS/Toru HanaiKuroda-San in the Mouth of Madness
      Deluded Central Planners Zerohedge recently reported on an interview given by Lithuanian ECB council member Vitas Vasiliauskas, which demonstrates how utterly deluded the central planners in the so-called “capitalist” economies of the West have become. His statements are nothing short of bizarre (“we are magic guys!”) – although he is of course correct when he states that a central bank can never “run out of ammunition”.   BoJ governor Haruhiko Kuroda Photo credit:...

Austrian Theory and Investment

Support Acting Man

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