The chief executive officer and the head trader of the bankrupt Sentinel
Management Group Inc. were indicted on federal fraud charges for allegedly
defrauding more than 70 customers of more than $500 million before the firm
collapsed in August 2007, federal law enforcement officials announced today.
Sentinel, which was located in suburban Northbrook, managed short-term cash
investments of futures commission
merchants, commodity pools, hedge
funds, at least one pension fund, and other customers. The defendants, Eric A.
Bloom and Charles K. Mosley, allegedly misappropriated securities belonging to
customers by using them as collateral for a loan that Sentinel obtained from
Bank of New York Mellon Corp. (BoNY) that was in part used to purchase millions
of dollars worth of high-risk, illiquid securities not for customers, but for a
trading portfolio maintained for the benefit of Sentinel’s officers, including
Mosley, Bloom, certain Bloom family members, and corporations controlled by the
Bloom family.
Bloom, the president and CEO of Sentinel who was responsible for its
day-to-day operations, allegedly misled customers four days before Sentinel
declared bankruptcy by blaming Sentinel’s financial problems on the “liquidity
crisis” and “investor fear and panic” when he knew that the actual reasons for
Sentinel’s financial problems were its purchase of high-risk, illiquid
securities; excessive use of leverage; and the resulting indebtedness on the
BoNY credit line, which had a balance exceeding $415 million on August 13, 2007.
Sentinel declared bankruptcy on August 17, 2007.
Bloom, 47, of Northbrook, and Mosley, 48, of Vernon Hills, will be arraigned
on a date yet to be scheduled in U.S. District Court in Chicago. They were each
charged with 18 counts of wire fraud, one count of securities fraud, and one
count of making false statements to an employee pension plan in a 20-count
indictment that was returned by a federal grand jury yesterday. The indictment
seeks forfeiture of more than $500 million.
The case is one of the largest criminal financial fraud cases ever prosecuted
in federal court in Chicago. The indictment was announced by Patrick J.
Fitzgerald, United States Attorney for the Northern District of Illinois; Robert
D. Grant, Special Agent in Charge of the Chicago Office of the Federal Bureau of
Investigation; and James Vanderberg, Special Agent in Charge of the U.S.
Department of Labor Office of Inspector General in Chicago. Also assisting in
the investigation were the Labor Department’s Employee Benefits Security
Administration, the Commodity Futures
Trading Commission, and the Securities
and Exchange Commission. The CFTC and
the SEC filed separate civil enforcement lawsuits following the collapse of
Sentinel, which remains in bankruptcy proceedings.
According to the indictment, between January 2003 and August 2007, Bloom and
Mosley fraudulently obtained and retained under management more than $500
million of customers’ funds by falsely representing the risks associated with
investing with Sentinel, the use of customers’ funds and securities, the value
of customers’ investments, and the profitability of investing with Sentinel.
Bloom and Mosley allegedly used customers’ securities invested in Sentinel’s
“125 Portfolio” and its “Prime Portfolio” as collateral for its credit line with
BoNY to purchase millions of dollars worth of high-risk, illiquid securities,
some of which were collateralized debt obligations (CDOs). Mosley allegedly
purchased the CDOs from two brokerage firms and received substantial personal
benefits from those firms in the form of gifts, vacations, expensive tickets to
sporting events, and parties.
The indictment alleges that Bloom and Mosley lied about customers’
investments and engaged in an undisclosed trading strategy with Sentinels’ own
“House Portfolio,” which they traded for the benefit of themselves and Bloom
family members. In addition to his salary, Mosley received an annual bonus based
on the profitability of the House Portfolio. The undisclosed trading strategy
included extensive leverage and a high concentration of CDOs that was
inconsistent with the representations Bloom and Mosley made to customers
regarding separate investment portfolios. The undisclosed strategy affected all
customers, regardless of the trading portfolio in which they were invested,
because the defendants allegedly used customers’ securities as collateral when
they borrowed money from the BoNY and so-called “repo” lenders and then used the
borrowed money to carry out the undisclosed trading strategy. (Under a
repurchase agreement, known as a “repo,” a party such as Sentinel, effectively a
borrower, sold securities to a counterparty, effectively a lender, with an
agreement to repurchase the securities at a later date.)
“The use of their customers’ securities as collateral allowed the defendants
to borrow more money than Sentinel otherwise could, subjected the customer
securities to potential legal claims by creditors, and allowed the defendants to
employ leverage to the extent that Sentinel itself, and all of the customer
portfolios, were at increased risk of adverse market movements and insolvency,”
the indictment states.
As part of the fraud scheme, Bloom and Mosley allegedly falsely represented
to customers the returns generated by the securities in each Sentinel portfolio.
Rather than giving customers the actual returns generated by a particular
portfolio, the defendants on a daily basis pooled the trading results for all of
Sentinel’s portfolios and then allocated the returns to the various portfolios
as they saw fit, the indictment alleges. To conceal the scheme, to encourage
customers to invest additional funds, and to otherwise lull customers, Bloom and
Mosley on a daily basis allegedly caused false and misleading account statements
to be created and distributed to customers, including via e-mail. These account
statements reported returns earned by customers without disclosing that the
returns actually were allocated by the defendants and were not the result of the
market performance of the customers’ particular portfolios. The account
statements also listed the purported value of securities being held by each
portfolio without disclosing that the securities were being used as collateral
for Sentinel’s loan from BoNY. The daily account statements were also misleading
in that many of them, particularly those issued in July and August 2007,
contained incorrect securities and inflated values of certain securities, the
indictment alleges.
In July and August 2007, when Bloom and Mosley knew that Sentinel was
approaching insolvency and that defaulting on the over-$400 million bank line of
credit was a real possibility, they allegedly caused millions of dollars in
investments in Sentinel to be obtained and retained by concealing Sentinel’s
true financial condition from customers.
Each count of wire fraud carries a maximum penalty of 20 years in prison and
a $250,000 fine, or, alternatively, a fine totaling twice the loss to any victim
or twice the gain to the defendant, whichever is greater, and restitution is
mandatory. Securities fraud and making false statements to a pension plan each
carry a maximum penalty of five years in prison and a $250,000 fine. If
convicted, the court must impose a reasonable sentence under federal statutes
and the advisory United States Sentencing Guidelines.
The government is being represented by Assistant U.S. Attorneys Clifford C.
Histed and Patrick M. Otlewski.
The investigation falls under the umbrella of the Financial Fraud Enforcement
Task Force, which includes representatives from a broad range of federal
agencies, regulatory authorities, inspectors general, and state and local law
enforcement who, working together, bring to bear a powerful array of criminal
and civil enforcement resources. The task force is working to improve efforts
across the federal executive branch and, with state and local partners, to
investigate and prosecute significant financial crimes, ensure just and
effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and
financial markets, and recover proceeds for victims of financial crimes. For
more information on the task force, visit www.stopfraud.gov.
An indictment contains only charges and is not evidence of guilt. The
defendants are presumed innocent and are entitled to a fair trial at which the
government has the burden of proving guilt beyond a reasonable doubt.
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