Eric A. Bloom, president and CEO of the bankrupt Sentinel Management Group, Inc., and its head trader, Charles K. Mosley, were indicted on federal fraud charges for allegedly defrauding more than 70 customers of more than $500 million before the firm collapsed in August 2007, according to an announcement by Patrick J. Fitzgerald, United States Attorney for the Northern District of Illinois and other Federal investigators.
Defendants Bloom and Mosley, allegedly misappropriated the securities purchased or held for customers and used them as collateral for a loan that Sentinel obtained from Bank of New York Mellon Corp. (BoNY). The collateral was in part used to purchase millions of dollars worth of high-risk, illiquid securities not for customers, but for a trading portfolio maintained for the benefit of Sentinel’s officers according to the government release.
Sentinel was registered as a futures commission merchant (FCM) but its main business was custodial cash management. The firm would invest excess customers funds held by FCMs and investment pools on a short-term basis in “purportedly” safe liquid instruments.
According to the indictment, between January 2003 and August 2007, Bloom and Mosley fraudulently obtained and retained more than $500 million of customers’ funds by falsely representing the risks associated with investing with Sentinel, the use of customers’ funds and securities, the value of customers’ investments, and the profitability of investing with Sentinel.
The indictment also alleges “that Bloom and Mosley lied about customers’ investments and engaged in an undisclosed trading strategy with Sentinels’ own “House Portfolio,” which they traded for the benefit of themselves and Bloom family members.”
Bloom and Mosley were each charged with 18 counts of wire fraud, one count of securities fraud, and one count of making false statements to an employee pension plan in the 20-count indictment by a federal grand jury.
Fred Grede, trustee in the Sentinel bankruptcy says the indictment won’t affect his work specifically but added, “It relieves some frustration of the customers.”
Grede has clawed back money from the owners of Sentinel shortly after the bankruptcy as well as settling a suit with hedge fund Citadel and Goldman Sachs. Citadel acquired Sentinel customer securities at a discount in a noncompetitive bulk sale just prior to the bankruptcy. Goldman was the immediate transferee of the securities and shared in Citadel’s profits.
Grede says customers have only received, on average, about 35¢ on the dollar. He has several clawback cases, the largest one in October, involving about 15 FCMs who received all or a significant portion of what was owed them while other customers were left with nothing. “My position is that all customers should share equally in the loss,” Grede says.
A handful of customers received 100% of their assets from Sentinel after it sent a letter stating it had halted redemptions. Other customers received 70¢ on the dollar after one pool of assets was sold to Citadel.
Grede also is awaiting a decision from the Seventh Circuit Court of Appeals on a $340 million lawsuit the trustee filed against the Bank of New York Melon (BONY). BONY was the clearing bank, lender, and depository for investment pools for Sentinel. Sentinel allegedly used customer segregated accounts held at BONY as collateral for loans it received from the bank.
The Commodity Futures Trading Commission and the Securities and Exchange Commission, which assisted in the investigation, have filed separate civil enforcement lawsuits following the collapse of Sentinel, which remains in bankruptcy proceedings.