The SEC has ordered broker-dealer FTN Financial Securities to pay nearly $2 million for allowing a registered investment advisor, Sentinel Management, to defraud its clients through a reverse repurchase transaction. FTN Financial Securities, headquartered in Nashville, was ordered to pay disgorgement of $1.5 million and prejudgement interest of about $377,758.73 within ten days of the SEC's decision. That decision was made on Nov. 17. By engaging in the reverse repo transaction Sentinel was able to hide its poor financial health, the SEC claims. Sentinel eventually filed for bankruptcy in 2007. FTN Financial Securities was the counterparty to the reverse repo and, according to the SEC, should have known about Sentinel's intentions. On Dec. 28, 2006, FTN purchased about $35 million par value of income notes from Sentinel for about $25 million. On Jan. 2, 2007, FTN resold the income notes back to Sentinel to complete the transaction. "Sentinel used the proceeds from the repo transaction to temporarily pay down a portion of its bank loan balance before year-end 2006 in order to reduce the amount reported in its year-end financial statements," says the SEC. "Sentinel's 2006 financial statements failed to record a liability associated with Sentinel's obligation to repurchase the securities when the repo transaction was unwound."Why should FTN have been wary of Sentinel? According to the SEC, FTN had previous knowledge of Sentinel's bad intentions through another transaction conducted in March 2006. At that time, FTN had agreed to purchase securities from Sentinel at the end of the calendar quarter in a deal which Sentinel itself told FTN was needed to "make our loan look lower."Other evidence: Before engaging in the year-end 2006 repo deal, FTN's management was concerned that some of the securities Sentinel had purchased from FTN to use in the repo deal did not meet the year-end liquidity needs of Sentinel's clients.The repo transaction, says the SEC, even violated FTN's general practices. FTN typically accepted only highly rated securities such as Treasury and agency securities in repo deals. FTN also didn't engage in repo deals with brokerage customers.