The Securities and Exchange Commission has charged Chicago-based Sentinel Management Group of fraud and misappropriation of clients’ assets, including using customers’ securities to obtain loans of up to $500 million, according to the Chicago Tribune.
In a lawsuit that the SEC filed Monday, the Commission says that Sentinel secretly transferred at least $460 million of its clients’ assets into the company’s in-house trading account. This occurred at least several months prior to its financial trouble becoming public last week. The company then used those assets to obtain loans from the Bank of New York, the lawsuit says.
“The credit extended under this line of credit reached as high as $500 million in June 2007 and is now $321 million,” the SEC said.
“Sentinel’s fraudulent conduct has placed its clients at risk of serious and irreparable loss,” the lawsuit said.
Sentinel’s clients included futures brokers, hedge funds and affluent individuals.
On Aug. 13, Sentinel told its clients it would no longer honor requests for withdrawals. Sentinel closed its door to clients last week, completed the sale of a $312 million of its clients’ securities to Chicago-based Citadel Investment Group and filed for bankruptcy on Friday.
Futures brokers must have immediate access to funds to meet their financial commitments. Commodity regulators warned Monday that a dozen futures brokers with Sentinel accounts could go out of business soon if they can’t access their money. It’s unclear when the brokers will be able to access money now that Sentinel filed for bankruptcy.
The sale angered Sentinel’s clients who believe that Citadel got fire-sale prices for securities that over time would have suffered no losses. Sources familiar with the matter said Sentinel and Citadel struck the deal around 2 a.m. Thursday and exchanged money and securities around 10 a.m. that day.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.