By David Scheer Aug. 20 (Bloomberg) -- Sentinel Management Group Inc., the cash-management firm that froze client withdrawals last week, was sued by the U.S. Securities and Exchange Commission for allegedly lying to investors and misappropriating their assets. The firm fraudulently moved at least $460 million in securities from clients' accounts into its own and misused customers' holdings as collateral to obtain a $321 million line of credit ``for its own benefit,'' the SEC said in a lawsuit filed today at U.S. District Court in Chicago. ``Sentinel did not disclose to its clients its practices of commingling, transferring and misappropriating their assets, or inform them that their investment portfolios were highly leveraged,'' the SEC said in its complaint. ``To the contrary, Sentinel provided its clients with daily account statements that did not reflect the improper activities.'' The case shows how the sudden tightening of credit markets in recent weeks may flush out money managers who borrowed heavily against their clients' securities. The SEC said Sentinel's customers suffered undisclosed losses for months before the company sent them a letter Aug. 13, claiming it couldn't return their money without selling their assets ``at deep discounts'' and incurring losses. The letter falsely blamed Sentinel's predicament on the ``liquidity crisis,'' the SEC said. Caleb Castillo-Olszta, an operations associate answering phone calls at Sentinel's office in Northbrook, Illinois, said the company is not commenting on the regulator's case. No Asset Freeze The SEC's suit seeks a judicial order forcing Sentinel to forfeit profits, pay unspecified fines and refrain from future violations. The agency didn't ask the court to freeze assets, said Robert Burson, an SEC enforcement official overseeing the case. The firm used client securities to secure the $321 million line of credit from Bank of New York Mellon Corp., which has since declared the company in default, according to the regulator's complaint. The bank has said it intends to sell securities in Sentinel's account as soon as Aug. 22. The securities may include assets Sentinel took from clients, the SEC said. Bank of New York spokesman Kevin Heine said he couldn't immediately comment. Sentinel filed for bankruptcy Aug. 17. That same day, customers including Penson Worldwide Inc., a Dallas-based securities-clearing firm, accused the company of selling off their assets at below-market rates to hedge-fund manager Citadel Investment Group LLC. Bryan Locke, a spokesman for Citadel in Chicago, declined to comment. Sentinel managed $1.6 billion as of last month, according to a filing with the SEC. Its holdings included short-term commercial paper, investment-grade bonds and Treasury notes, the company had said on its Web site, which has since been taken down. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAdh72sQEYZU
I just read a similar article. Man I wonder who else is doing this shit? Borrow off someone else's assets, buy x, hope and pray when the position goes against you. Sounds like your typical hedge fund move. Does anyone use stops anymore. I am starting a new hedge fund called Martingale Investments you will have a choice of o% or 100% return. :eek:
perhaps I am a bit naive here as I am no legal eagle but does not Citadel run some risk getting involved with Sentinel "legally speaking "
What firm has the resources to combat Citadel over their pro-rata share of a measly little $500mm money market purchase? Next question.
By Tiffany Kary Aug. 21 (Bloomberg) -- Sentinel Management Group Inc., the bankrupt cash-manager accused of fraud by U.S. regulators, can disburse most of $312 million it received from an asset sale, a federal judge ruled. U.S. Bankruptcy Judge John Squires said yesterday Sentinel can immediately pay its clients money from last week's sale to hedge fund firm Citadel Investment Group LLC. Sentinel was barred Aug. 17 by a different federal judge from disbursing the proceeds after clients sued, accusing it of selling assets at a discount. The company filed for bankruptcy the same day. The distribution is ``in the best interests of the debtor, its estates and its creditors,'' and will be made subject to a $15.6 million holdback, Squires ordered in court papers filed in federal bankruptcy court in Chicago. The judge also ruled that a National Futures Association order issued Aug. 17 preventing Sentinel from transferring other assets will remain in effect. The commodities industry regulator had said it discovered Sentinel had failed to keep adequate books and records. The Securities and Exchange Commission accused Sentinel of lying to investors and misappropriating their assets by moving at least $460 million from clients' accounts into its own, and misusing the holdings as collateral to obtain credit. Withdrawals Sentinel, a Northbrook, Illinois-based firm that oversees $1.6 billion, froze client withdrawals on Aug. 14, citing credit market volatility. The Chapter 11 bankruptcy filing, which Sentinel said will allow it to restructure its debt, listed both assets and liabilities of more than $100 million. According to yesterday's court order, 23 different brokerages, including those that had objected to the Citadel sale, will be repaid at various percentages. SEC lawyer Robert Burson said the agency hasn't confirmed whether the money in the account to be distributed was segregated. The agency hasn't ``made a statement on any level of assurance we have'' about Sentinel's accounts, he said. Burson added that the court has allowed the SEC to expedite its request for Sentinel's books and records. According to a declaration by the regulator filed yesterday in Chicago federal court, Sentinel ``commingled and transferred client securities among the segregated accounts and a `house' account.'' Daniel Roth, president of the NFA, said the money to be distributed was from accounts that had been segregated. ``We were strongly in favor of allowing the customer- segregated funds to be distributed,'' Roth said. Two Brokerages Ronald Barliant, a lawyer for Sentinel, didn't immediately return a call seeking comment. Farr Financial Inc. and Velocity Futures LP, two brokerages who had filed the lawsuit to bar the sale of Sentinel's assets, were among the 23 firms receiving distributions. Robert Trizna, a lawyer for Farr, said he had asked a federal district court judge to modify a temporary restraining order and allow it to receive the disbursement. ``We had opposed the sale to Citadel because in our opinion it was a sweetheart deal,'' Trizna said. ``But at some point we wanted the liquidity, even if it wasn't 100 cents on the dollar.'' Jeff Marwil, a lawyer for Citadel, confirmed that it completed a transaction with Sentinel that closed Aug. 16. He declined further comment. Disbursements Trizna claimed that a lawyer for the Commodities Futures Trading Commission told him that, without the disbursements, some futures commission merchants -- businesses that handle buy and sell orders for commodities future contracts -- could fail. ``The judge was faced with the CFTC telling him that it was their understanding that if these distributions weren't made, that as many as 11 futures commissions merchants, which clear trades for their customers, would fail imminently,'' Trizna claimed. Dennis Holden, a spokesman for the CFTC, said he wasn't able to confirm Trizna's comment. The Chapter 11 case is In re Sentinel Management Group Inc., 07-14987, U.S. Bankruptcy Court, Northern District of Illinois, (Chicago). The client lawsuit is Farr Financial v. Sentinel Management 08-cv-4614, U.S. District Court, Northern District of Illinois, Eastern Division (Chicago). http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTaCs1D3Av4o
A 15-30% haircut on $500 mill creates a pretty nice target. The brokers will claim that the sale of assets was for less than fair value and left Sentinel insolvent. In bankruptcy law that constitutes a "fraudulent transfer" and the creditors have the right to reverse the deal. By the time the court rules, the assets may be trading normally and the creditors could recoup a lot of their money. I look for Citadel to fold early on this rather than face a lot of depositions designed to prove that it was a sweetheart deal.
Anyone have the list of 11 FCM's? >>The judge was faced with the CFTC telling him that it was their understanding that if these distributions weren't made, that as many as 11 futures commissions merchants, which clear trades for their customers, would fail imminently,'' Trizna claimed.<<
I just emailed Tiffany of Bloomberg who wrote that article and she replied right away saying "they won't disclose." I had also asked for the list of 23 brokers in addition to the 11 FCM's...