Wednesday, August 22, 2007

Bankruptcy trustee takes control at Sentinel/Sentinel repays some clients - But many customers haven't seen a dime

Bankruptcy trustee takes control at Sentinel
By Jeremy Grant in Washington
Copyright The Financial Times Limited 2007
Published: August 23 2007 22:57 | Last updated: August 24 2007 00:00


The fate of hedge funds and investors with funds tied up in collapsed US investment management firm Sentinel was allowed to be placed in the hands of an independent bankruptcy trustee on Thursday night, amid continuing unease over the way certain creditors of the firm were treated.

The collapse of the Chicago-based firm caused ripples in global credit markets.

It has become a test of the ability of the two main financial regulators – the Securities and Exchange Commission and Commodity Futures Trading Commission – to work together in tackling a financial crisis involving an entity that is overseen by both.

Some investors with funds at Sentinel have complained that other funds holders, mostly futures brokers, were compensated for their losses before them, as futures regulators rushed to head off any disruption to the futures industry.

A bankruptcy judge in Chicago granted Sentinel’s request that its affairs be handed to a trustee, yet to be named, so that its accounts could be clarified before any further disbursement of funds was possible to creditors.

Sentinel was this week hit with an SEC lawsuit alleging that it fraudulently moved $460m of clients’ funds to its own “house” account.

On Wednesday, Paris-based hedge fund Capital Fund Management said that it could lose up to 10 per cent of its assets as a result of the alleged fraud, including as much as 27 per cent at its Discus Master Fund.

Arthur Hahn, a Chicago-based lawyer at Katten Muchin, whose firm is acting for Discus, told the Financial Times: “On behalf of Discus and a number of other claimants we’ve pushed very strongly for the appointment of an independent trustee who will give us a clear accounting and hopefully distribute assets as quickly as possible.”

The CFTC and the National Futures Association appear to have moved rapidly to ensure that the futures brokers associated with so-called “seg one” account were compensated, consistent with their regulatory mandate in the futures business.

The terms refers to segregated accounts that must be held separately from a fund manager’s own “house” account. Charley Cooper, the CFTC’s chief of staff, told the Financial Times: “The system worked. And of primary importance, the integrity of customer segregated funds was maintained.”

Separately, Roel Campos, who resigned this month as one of the SEC’s five commissioners, is set to join the law firm Cooley Godward Kronish next month.






Sentinel repays some clients - But many customers haven't seen a dime
By Robert Manor and Becky Yerak
Copyright © 2007, Chicago Tribune
August 22, 2007

A lucky few customers of Sentinel Management Group, which filed for bankruptcy protection Friday, appear to have lost no money. And 20 or more others got much of their money back Tuesday.

But many customers -- perhaps totaling 120 -- haven't seen a dime, and almost certainly will not be made whole, top executives of the National Futures Association said Tuesday.

The NFA is an industry self-regulatory group that oversees Sentinel, a cash-management firm that acted as a bank of sorts for commodity futures traders and others.

The NFA officials said Sentinel repaid some of its customers before seeking bankruptcy protection from creditors and arranged to partly pay off more clients Tuesday.

At the beginning of last week, Northbrook-based Sentinel, which claimed to manage $1.6 billion, announced it would not allow any withdrawals.

Sentinel, led by Chief Executive and President Eric Bloom, claimed in a letter to clients that shaky financial markets had forced it to block investors' access to their money. The Securities and Exchange Commission said this week that Sentinel defrauded its customers by misappropriating their assets and pledging them as collateral for loans.

Bloom could not be reached for comment, and Sentinel has declined to comment since its troubles became public.

Daniel Roth, president of the NFA, said his organization made it clear to Bloom Aug. 14 that Sentinel had to act decisively.

"We told him to resolve this situation quickly," Roth said.

The big concern, Roth said, was to get money back to futures brokers in an account called Seg 1. Seg is short for segregation. An industry rule says that futures brokers must segregate their customers' money from brokers' money.

So the assets in Seg 1 belonged to brokers' clients, not the brokers, and in the fast-moving world of futures trading, customers need immediate access to their money.

By Aug. 15, Roth said, Sentinel had paid $100 million to four of its futures broker clients who had accounts containing nothing but cash.

That left about 20 futures brokers in the Seg 1 account who had top-rated corporate and government securities at Sentinel.

Roth said Bloom was hoping to get 90 cents on the dollar in Sentinel's quick deal to sell the assets in Seg 1 to Citadel Investment Group, the Chicago hedge fund. But some of the assets could not be sold, Roth said, and the Citadel deal brought in enough to repay the brokers at just 75 cents on the dollar.

The Bank of New York Mellon, which held the proceeds from the Citadel sale, distributed about $300 million to those futures brokers Tuesday.

'No big firms have failed'

As a result, the NFA had met its goal of extracting as much cash as it could, as quickly as it could, so that futures brokers could avoid insolvency.

"No firms have failed," Roth said.

Seg 1 brokers had no reason to break out the champagne after taking a 25 percent loss, although they may get a little more money as time goes on.

"The clients of Sentinel got money," said Robert Trizna, a Chicago lawyer who is representing Farr Financial. "One could classify that as some form of relief."

The 120 clients who are expected to fare the worst were in an account called Seg 3. It held assets for hedge funds, endowments, well-to-do individuals and even included personal assets of futures brokers.

Daniel Driscoll, the NFA's chief operating officer, said Sentinel told those in the Seg 3 account that their assets totaled $700 million.

But investigators have found that the Seg 3 account has just $96 million in it.

Not enough to make whole

"It doesn't add up anywhere near $700 million," Driscoll said. He said some other money may be available to Seg 3 customers, but not nearly enough to make them whole.

"Based on what we have seen now, it would appear to be less than 50 cents on the dollar," Driscoll said.

In bankruptcy court proceedings this week, a lawyer for investment fund Discus Master Limited noted that Sentinel owed his client $400 million.

"On behalf of Discus and a number of other clients, we're working closely with regulators and debtor's counsel to find out where the money is and to retrieve it as quickly as possible," Arthur Hahn, lawyer for Discus, said in an interview Tuesday.

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byerak@tribune.com

rmanor@tribune.com

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