From the January 01, 2009 issue of Futures Magazine • Subscribe!

Sentinel sues Citadel, Goldman

Sentinel Management Group’s bankruptcy trustee Fred Grede got busy in December, filing suits against Citadel, Goldman Sachs & Co. and FTN Financial Securities Corp in an attempt make creditors whole.

Grede says Citadel acquired Sentinel customer securities at a huge discount in a noncompetitive bulk sale and took a $47.1 million “market uncertainty concession,” at the expense of creditors. Codefendant Goldman was the immediate transferee of the securities and agreed to split subsequent profits with Citadel.

Grede claims Citadel exploited Sentinel management’s fear of detection when insiders sold off the most liquid portions of Sentinel’s securities portfolio to pay off futures commission merchants (FCMs) to cover a massive fraud. By paying off the FCMs, Sentinel was able to buy time and create the appearance of regularity and segregation. However, the suit says the transfers defrauded, hindered and delayed payments to customers and creditors and reduced the assets available to repay them.

In a separate suit, Grede says Sentinel’s head trader, Charles Mosley, was wined, dined and bribed into purchasing hundreds of millions of dollars worth of unsuitable structured investment products from FTN brokers Stephen M. Folan and Jacques de Saint Phalle. The brokers, Grede says, committed commercial bribery, securities fraud, breaches of fiduciary duty, violations of Illinois’ Blue-Sky law and the Illinois Consumer Fraud Act and are accused of negligence and unjust enrichment and intending to hinder, delay and defraud Sentinel’s creditors.

According to the suit, those Preferred Term Securities Limited (PreTSL), were “risky, illiquid securities with 30-year maturities.” As a cash management company, Sentinel was obligated but failed to maintain customer segregated funds and was required to invest customer funds solely in government securities and certain investment-grade corporate bonds.

An FTN spokesperson acknowledged receiving the complaint in an e-mai and noted, “We will defend this matter aggressively.”

Citadel and Goldman declined to comment.

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