SEC charges Sentinel with fraud
The Securities and Exchange Commission Monday accused Sentinel Management Group of fraud, just a week after the money management firm blamed a credit crunch for its problem - a revelation that helped send stocks tumbling.
The Northbrook, Ill., investment company, which claims $1.2 billion in assets, is charged with an "ongoing fraud and misappropriation and misuse of client assets," according to the SEC complaint.
The disclosure is significant because Sentinel's troubles were seen as more evidence of growing problems in the credit market. When word first broke that Sentinel was not allowing investors to redeem their investments, the company was misidentified in news reports as being a money market fund. That suggested to investors that the credit market had worsened to the point that even safer assets were affected.
But as USA TODAY reported last week, Sentinel wasn't a money market fund after all. And the SEC's strongly worded complaint indicates regulators suspect a "full boat fraud," says Andrew Stoltmann, a securities attorney at Stoltmann Law Offices. Sentinel is charged with "the most serious thing (an investment firm) can be accused of doing: stealing client assets."
Officials at Sentinel said the company had no comment and would not speak for attribution. But in its complaint, the SEC spelled out allegations, including:
- Illegal commingling of accounts. Sentinel moved at least $460 million of investors' securities into its "house" account for its own purposes, the SEC says. When the SEC asked Sentinel which securities in the house account belonged to clients, company officials indicted they didn't know, the SEC says.
- Undisclosed leverage. Sentinel used clients' accounts as collateral to get a line of credit now worth $321 million, the SEC says. Account statements given to investors did not disclose that the securities were pledged as collateral.
- Misleading information regarding its redemption suspension. On Aug. 13, Sentinel told clients it was not permitting any redemptions because that would force it to sell "securities at deep discounts to their fair value" due to turbulence in the credit markets. The SEC, though, says the losses were instead the result of other factors, including leverage.
- False account information. Daily account statements given to Sentinel clients did not accurately reflect the value of securities, the SEC says. Investors in one fund, called Seg3 by Sentinel, were told in a statement that the value of securities was more than $670 million. But the SEC says the account only had $94 million worth of securities.
No individuals were named in the complaint. Given the seriousness of the charges, thought, it's likely more charges will be filed, Stoltmann says.
At a hearing in a federal district court in Illinois, the SEC asked for a temporary restraining order, says Bob Burson, a regional director at the SEC. It's yet to be determined whether Sentinel clients - mostly big institutional investors - can access $300 million of Sentinel's funds held by Bank of New York, Reuters says.
One of the trickiest parts of the case will be determining who owns what, says Jill Fisch, professor of business law at Fordham University. The SEC's actions will largely determine how much of the company's assets, if any, will be held aside for investors, Fisch says.
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