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Prosecutors charge Sentinel execs with $500M fraud

Prosecutors charge Sentinel execs with $500M fraud

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Published by Zoe Galland
Two former top Sentinel Management Group Inc. executives are accused of leading a $500 million swindle, in the first criminal charges brought against managers of the defunct firm.
Two former top Sentinel Management Group Inc. executives are accused of leading a $500 million swindle, in the first criminal charges brought against managers of the defunct firm.

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Published by: Zoe Galland on Jun 01, 2012
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09/27/2012

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UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF ILLINOISEASTERN DIVISIONUNITED STATES OF AMERICA v.ERIC A. BLOOM andCHARLES K. MOSLEY ))))))No. Violations: Title 15, United StatesCode, Sections 80b-6 and 80b-17,Title 18, United States Code,Sections 1027, 1343 and 2COUNT 1(Wire Fraud)The SPECIAL JANUARY 2012 GRAND JURY charges:1.At times material to this indictment:a.Sentinel Management Group, Inc. was a corporation headquarteredin Northbrook, Illinois. Sentinel was in the business of managing short-term cashinvestments of futures commission merchants, commodity pools, hedge funds, at leastone pension fund, and other entities and persons.b.Defendant ERIC A. BLOOM was president and chief executiveofficer of Sentinel, and was responsible for its day-to-day operations. At times prior toOctober 2002, BLOOM was Sentinel’s trader and portfolio manager. At times prior to2004, BLOOM was its chief financial officer, and prior to 2006, he also was Sentinel’scompliance officer.c.Defendant CHARLES K. MOSLEY was senior vice-president, headtrader, and portfolio manager of Sentinel. MOSLEY was responsible for Sentinel’strading activities and reported directly to defendant BLOOM.
 
Regulatory Background
d.The Commodity Futures Trading Commission was a federalregulatory agency responsible for, among other things, enforcing the CommodityExchange Act and regulations issued pursuant to the Act.e.A futures commission merchant, also known as an FCM, was aperson or business engaged in accepting orders for the purchase or sale of commodityfutures and that, in connection with such orders, accepted money, securities, orproperty to margin, guarantee, or secure futures trades resulting from those orders.Under the Commodity Exchange Act and CFTC regulations, FCMs were required totreat all their customers’ money, securities, and property as belonging to thosecustomers and to separately account for those assets. FCMs were prohibited fromcommingling their customers’ money, securities, or property with the FCMs' ownfunds, known as “house funds,” and from using customers’ funds to secure credit forthe FCMs’ own benefit. FCMs were responsible for segregating and preserving theircustomers’ funds. Sentinel was registered with the CFTC as an FCM.f.The Securities and Exchange Commission was a federal regulatoryagency responsible for, among other things, enforcing the federal securities laws,including the Investment Advisers Act of 1940 and the regulations issued pursuant tothe Advisers Act.g.An investment adviser was any person (including a business) who,for compensation, engaged in the business of advising others as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.2
 
Investment advisers owed their customers a fiduciary duty to act in good faith, to fullydisclose all material facts, to disclose conflicts of interest between the advisers andtheir customers, and to use reasonable care to avoid misleading their customers.Sentinel was registered with the SEC as an investment adviser and owed a fiduciaryduty to Sentinel’s customers. Defendants BLOOM and MOSLEY, as officers of andpersons associated with an investment adviser, also owed a fiduciary duty to Sentinel’scustomers.
Sentinel’s Business Operation
h.Sentinel offered customers different investment programs, each of which purported to have its own investment policy designed to meet differentrequirements, risk profiles, and investment objectives. Two of Sentinel's investmentprograms were its "125 Portfolio" and its "Prime Portfolio," as further described below:i.
Sentinel’s 125 Portfolio
was intended, according to Sentinel’smarketing material, “to provide Sentinel’s FCM clients with a short-term investmentalternative that combines safety of principal, liquidity and competitive yields compliantwith the CFTC’s Rule 1.25.” Investments permitted by CFTC Regulation 1.25 includedbank-issued certificates of deposit, government securities, highly-rated corporate notesand bonds, and repurchase agreements involving the investments described above.Sentinel offered and sold investments in the 125 Portfolio primarily, though notexclusively, to other FCMs looking to invest customer funds on a short-term basis. j.
Sentinel's Prime Portfolio
was intended, according to Sentinel'smarketing materials, for its FCM customers’ house funds and for its non-FCM3

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