Release Number 5494-08
For Release: May 1, 2008
CFTC Sues Sentinel Management Group, Inc. and Two of Its Executive Officers for Fraud, Segregation, and False Reporting Violations Involving $562 Million in Customer Funds
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) announced today that it sued Northbrook, Illinois based Sentinel Management Group, Inc. (Sentinel) and its president and chief executive officer, Eric A. Bloom, and former senior vice-president, Charles K. Mosley, charging them with fraud and segregation violations involving their handling of $562 million in commodity customer segregated funds. 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 (CEA). Its importance cannot be overstated, and any fraud or segregation violations will carry swift and severe repercussions,” said 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.
Commodity Customer Losses Exceeded $130 Million
As of August 13, 2007, Sentinel claimed to have $1.2 billion of customer assets under management, including $562 million in FCM customer segregated funds. On August 17, 2007, Sentinel filed a voluntary petition for protection under Chapter 11 of the Bankruptcy Code, in the U.S. Bankruptcy Court for the Northern District of Illinois. Sentinel currently owes in excess of $130 million in customer segregated funds.
The CFTC complaint alleges that Sentinel, Bloom, and Mosley committed fraud and misused commodity customer segregated funds from at least May 21, 2007 through August 17, 2007. According to the complaint, Sentinel improperly commingled its commodity customers’ assets with its own assets and the assets of others. It also improperly used commodity customers’ assets to secure a Sentinel loan with the Bank of New York (BONY), removing as much as $444 million of commodity customers’ securities from segregation to collateralize its loan. As alleged, Sentinel was not authorized to encumber or remove customer securities from segregation in this manner. Further, as alleged, Sentinel falsely reported to the CFTC that, among other things, Sentinel had no amounts payable from September 2005 through July 2007.
The complaint further alleges that Mosley was primarily responsible for Sentinel’s securities trading and caused FCM commodity customer securities to be removed from segregation to secure the BONY loan. The complaint also charges that Mosley is liable for aiding and abetting Sentinel’s violations.
Additionally, the complaint alleges that Bloom was a controlling person of Sentinel and had knowledge of the improper handling of commodity customer funds, thereby making him liable for Sentinel’s fraud.
The following CFTC Division of Enforcement staff are responsible for this action: Mark Bretscher, Cynthia Cannon, Michael Tallarico, William Janulis, Scott Williamson, Rosemary Hollinger, and Richard Wagner.
Last Updated: May 6, 2008