Half A Billion Missing At Sentinel: But Where Did It Go?

by Carla Johnson, Investors Offshore.com, London

04 September 2007

Investors in money-management firm Sentinel, which filed for bankruptcy last month, face a bleak outlook as investigations by the Securities and Exchange Commission and the National Futures Association reveal major shortfalls in its assets.

While Sentinel blamed the sub-prime liquidity crisis when it suspended redemptions in mid-August, the SEC filed civil fraud charges last week in the US District Court in Chicago against Sentinel Management Group, alleging that it defrauded clients by improperly commingling, misappropriating and leveraging their securities without their knowledge in violation of the Investment Advisers Act.

The SEC says that Sentinel transferred at least $460 million in securities from client investment accounts (known as SEG III accounts) to Sentinel's proprietary "house" account, known as its SEG I account.

The NFA had issued an order prohibiting Sentinel from 'liquidating, selling, transferring, encumbering or otherwise disposing of any securities' after criticizing its books and records. Sentinel was nonetheless allowed to sell liquid assets in the SEG I account after it had filed for bankruptcy to Chicago hedge fund Citadel Investment Group, which bought some $400 million of highly liquid assets for $312 million. The funds were partly distributed to broker creditors of Sentinel, and it is thought that these transactions might not have been allowed had the NFA and the Court been aware of the origins of the SEG I money in the SEG III accounts. It is possible that SEG III creditors, who face the loss of at least 50% of their investments, may be successful in reclaiming the SEG I assets from the brokerages concerned, in an echo of a similar situation at collapsed futures dealer Refco. At any rate, they are likely to try.

The NFA said that its approval of the payments to the brokerages came before it discovered that $505 million was missing. “There is a legitimate issue now as to how that shortfall should be treated with regard to the equitable distribution of those funds,” said a senior officer.

Once the scale of Sentinel's losses had become clear last week, the US trustee monitoring the bankruptcy, in consultation with the SEC, Sentinel and its creditors, appointed Frederick J. Grede, chairman of the consulting firm Vega Financial Engineering and a former chief executive of the Hong Kong futures exchange to manage Sentinel.

What no-one seems to know at this point is how a shortfall of half a billion dollars came about in a firm which was supposedly providing a conservatively run money management haven to hedge funds and other financial players. About 200 creditors packed a first court hearing last week.

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