Redemption requests have just become the least of Sentinel Management Group’s problems.
The Northbrook, Ill.-based cash manager—which counts a number of hedge funds among its clients—filed for bankruptcy on Friday, only to be hit yesterday with fraud charges filed by the Securities and Exchange Commission.
The $1.5 billion firm, already under fire from some of its clients over its deal to sell some $500 million in assets to Citadel Investment Group, listed between 200 and 999 creditors in its filing. But that deal is on hold for the time being—Sentinel’s clearing and custodial firm, the Bank of New York, has refused to wire the proceeds of the Citadel sale to Sentinel clients due to a trio of temporary restraining orders. Sentinel has asked the Chicago bankruptcy court to force BoNY to do so. To make matters worse, BoNY has declared Sentinel in default, and says it will begin selling securities in its accounts, possibly as early as next week.
In addition to angry investors, Sentinel is also facing an angry regulator—one with the authority to make its life very difficult. In the wake of Sentinel’s decision to suspend client redemptions last week—it initially sought permission to do so from the Commodity Futures Trading Commission, which promptly disclaimed any authority to grant that permission—the SEC has accused the firm of lying to its clients and misappropriating their funds. In its complaint, the regulator alleges that Sentinel inappropriately moved some $460 million worth of securities from client accounts into its own, using the client assets to collateralize a $321 million credit line “for its own benefit.” The firm then sent a letter to investors last week freezing redemptions in which it blamed the problems on the “liquidity crisis” in the credit markets. The SEC claims that the excuse is a lie.
“Sentinel did not disclose to its clients its practices of commingling, transferring and misappropriating their assets,” the SEC alleges in its complaint. “To the contrary, Sentinel provided its clients with daily account statements that did not reflect the improper activities.”
Investor Plans Fight Over Citadel Deal For Sentinel Assets