The US Commodity Futures Trading Commission has accused Sentinel Management Group, its president and chief executive Eric A. Bloom and former senior vice-president Charles K.
The US Commodity Futures Trading Commission has accused Sentinel Management Group, its president and chief executive Eric A. Bloom and former senior vice-president Charles K. Mosley of fraud and other offences relating to their handling of USD562m in commodity customer segregated funds.
When Sentinel filed for bankruptcy last year, it emerged that the firm had failed to keep client assets segregated and had used customer funds as collateral for a loan to the company. More than USD100m is still owed to clients whose assets were misused in this way.
In a complaint filed in the US District Court for the Northern District of Illinois, the CFTC is seeking orders of permanent injunction against the defendants, repayment to defrauded customers, monetary penalties and other relief.
‘Segregation of customer funds is the core customer protection mechanism under the Commodity Exchange Act,’ says Gregory Mocek, director of the CFTC’s enforcement division. ‘Its importance cannot be overstated, and any fraud or segregation violations of the law or our regulations will carry swift and severe repercussions.’
Sentinel has been registered as a futures commission merchant since June 1980 and is also registered as an investment adviser with the Securities and Exchange Commission. Unlike a typical futures commission merchant, Sentinel did not trade futures contracts on behalf of customers, but purported, the CFTC says, to provide short-term money management services to institutional, corporate and individual customers.
The complain alleges that Sentinel managed segregated customer funds for other futures commission merchants, allowing their customers to invest funds at a slightly better rate than they could obtain in other short-term programmes, while claiming to observe the CFTC’s legal requirement that such customer funds be segregated.
As of August 13 last year, Northbrook, Illinois-based Sentinel claimed to have USD1.2bn of customer assets under management, including USD562m in segregated funds for futures commission merchant customers. On August 17, the firm filed a voluntary petition for protection under Chapter 11 of the Bankruptcy Code.
The CFTC complaint alleges that Sentinel, Bloom, and Mosley committed fraud and misused commodity customer segregated funds from at least May 21, 2007 up to August 17 by improperly commingling its commodity customers’ assets with its own assets and the assets of others. It currently owes more than USD130m in customer segregated funds.
The regulator alleges the firm used commodity customers’ assets to secure a Sentinel loan from Bank of New York, removing as much as USD444m of commodity customers’ securities from segregation for use as collateral, although the firm was not authorised to encumber or remove customer securities from segregation in this manner. It also claims Sentinel falsely reported that it had no amounts payable from September 2005 until July 2007.
The complaint argues that Mosley was primarily responsible for Sentinel’s securities trading and caused futures commission merchant commodity customer securities to be removed from segregation to secure the Bank of New York loan, and that he is liable for aiding and abetting Sentinel’s violations.
It also alleges that Bloom, as a controlling person of Sentinel, had knowledge of the improper handling of commodity customer funds, thereby making him liable for Sentinel’s fraud.
