The US Commodity Futures Trading Commission (CFTC) has sued Illinois-based Sentinel Management Group, Inc. (Sentinel) and its senior management, charging them with fraud and segregation violations involving their handling of USD562mn in commodity customer segregated funds.
The CFTC is seeking orders of permanent injunction against the defendants - who include president and chief executive officer, Eric A. Bloom, and former senior vice-president, Charles K. Mosley - and repayment to defrauded customers, monetary penalties, and other relief.
“Segregation of customer funds is the core customer protection mechanism under the Commodity Exchange Act (CEA). Its importance cannot be overstated, and any fraud or segregation violations will carry swift and severe repercussions,” explained Gregory Mocek, Director of the CFTC’s Division of Enforcement.
According to the CFTC complaint, filed in the United States District Court for the Northern District of Illinois, Sentinel has been registered as a Futures Commission Merchant (FCM) since June 1980, and is also registered as an investment adviser with the Securities and Exchange Commission. Unlike a typical FCM, Sentinel did not trade futures contracts on behalf of any customers.
Rather, it purported to provide short-term money management services to various institutional, corporate and individual customers. Among other things, it managed segregated customer funds for other FCMs, allowing the customers of those FCMs to invest funds at a slightly better rate than they could obtain in other short-term programs, while claiming to observe the CFTC’s legal requirements that FCM customer funds be segregated.
As of 13th August, 2007, Sentinel claimed to have USD1.2bn of customer assets under management, including USD562mn in FCM customer segregated funds.
On 17th August, 2007, Sentinel filed a voluntary petition for protection under Chapter 11 of the Bankruptcy Code, in the US Bankruptcy Court for the Northern District of Illinois. Sentinel currently owes in excess of USD130mn in customer segregated funds.
The CFTC complaint alleges that Sentinel, Bloom, and Mosley committed fraud and misused commodity customer segregated funds from at least 21st May, 2007 through 17th August, 2007.
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