Friday, August 24, 2007

Sentinel makes Chapter 11 filing - Clients sue over discount asset sale

Sentinel makes Chapter 11 filing - Clients sue over discount asset sale
By Becky Yerak and Robert Manor
Copyright © 2007, Chicago Tribune
August 18, 2007

Sentinel Management Group Inc. filed for Chapter 11 bankruptcy Friday, less than a week after the Northbrook-based cash-management firm halted redemptions from investors because of market volatility.

Its list of creditors with the 20 largest unsecured claims includes four Chicago-area firms: SMW Trading Co., Jump Trading LLC, Fortis Clearing Americas and Stone Capital Group Inc.

Chapter 11 allows a business to operate as it reorganizes its finances through a court-approved plan.

According to the filing, Sentinel has between 200 and 1,000 creditors and assets and liabilities of more than $100 million.

Numerous other local creditors listed include Alaron Clearing LLC, the Chicago Bears, the Chicago Tribune and Levy Restaurants.

"The purpose of the filing is to give the company the protections of Chapter 11 so they can continue to serve the interests of their customers," said Ronald Barliant, the attorney representing Sentinel.

The bankruptcy filing came as clients began hitting Sentinel with lawsuits, accusing it of selling assets too cheaply and without approval. On Thursday it was revealed that Sentinel had sold hundreds of millions of dollars in assets to giant Chicago hedge fund Citadel Investment Group.

Penson GHCO, the futures-clearing subsidiary of publicly traded Penson Worldwide Inc. of Dallas, filed suit late Friday afternoon in Cook County Circuit Court against both Sentinel and Citadel Investment Group, claiming that Sentinel sold assets to Citadel at discounts of up to 30 percent of face value.

Penson Worldwide, which went public in May 2006, said it would suffer an after-tax loss of $6.5 million if Sentinel's sale of certain assets isn't reversed.

Sentinel declined to comment Friday, and a Citadel spokeswoman could not be reached.

Earlier Friday, Penson said in a statement Sentinel sold some of its assets without approval and in breach of contract.

"To liquidate such a portfolio at such a discount to market value constitutes, among other things, a reckless disregard of industry fair practice," Penson President Daniel Son said in a statement Friday, calling it a "hastily arranged sale of Sentinel's assets at unfair prices."

Futures brokers said they used Sentinel to temporarily stash client money. Before the portfolio sale to Citadel it managed $1.6 billion and mostly served futures brokers, futures hedge funds, rich individuals and institutions.

Sentinel promised to obtain the best interest possible consistent with safety and to make money readily available.

On Monday, however, the company halted redemptions, citing instability in credit markets.

Also Friday afternoon, a U.S. district judge blocked the sale of some of the $312 million in Sentinel assets to Citadel, granting a temporary restraining order that applied only to Farr Financial Inc. and Velocity Futures.

The two Sentinel clients argued before U.S. District Judge Ronald Guzman that they would suffer if the sale of Sentinel's assets were allowed to go through at the discount Citadel expected to pay.

Guzman's order remains in effect until Aug. 31. The order prevents Sentinel from transferring or selling any interests Farr or Velocity placed with Sentinel.

"We think this transaction is closed," said Steven Roeder, a lawyer representing Citadel.

In an interview afterward, Roeder said the Farr and Velocity assets account for a "very small" portion of the sale.

After the hearing, Robert Trizna, a lawyer representing Farr, said his client has been kept in the dark for days.

"The next week or two will be very interesting as we discover what went on," Trizna said. "What did Citadel know and when did it know it?"

Citadel had bought $312 million in securities from Sentinel this week, less than the approximately $500 million originally thought to have changed hands.

Lawyers representing Sentinel clients have complained that Sentinel could have gotten a better price.

"It is disgraceful," said Jeff Barclay, who represents futures brokers. "This is a terrible transaction."

Lawyer Jeffrey Schulman, who represents some non-broker clients of Sentinel, said he knows nothing beyond two letters sent by Sentinel. Sentinel's "Web site is down and phone calls go nowhere," he said.

Meanwhile, the fate of an unknown number of Sentinel's clients remains in limbo.

"We know nothing," said one futures broker. "Nobody will talk with us."

The broker said his firm had more than $10 million on deposit with Sentinel. On Tuesday, as news of Sentinel's problems spread, he directed that the assets in his account be transferred to another institution.

"The answer we got is 'We never have done that,'" he said.

On Wednesday, Sentinel wasn't answering the phone, so the firm dispatched a worker to Sentinel's Northbrook office.

"He was turned away at the door," the broker said.



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