Aug. 14 (Bloomberg) -- Sentinel Management Group Inc., the Illinois-based cash-management firm that oversees $1.6 billion, froze client withdrawals after saying that credit-market turmoil made it impossible to trade without incurring losses.

Sentinel, based in the Chicago suburb of Northbrook, said it contacted the Commodity Futures Trading Commission for approval to halt redemptions ``until we can honor them in an orderly fashion,'' according to an Aug. 13 client letter posted on TheStreet.com Web site. Regulators said the firm never made such a request.

``They're not honoring withdrawal requests, and the plan is over time to get out of positions,'' Jeff Barclay, a lawyer with Chicago-based Schuyler, Roche & Zwirner who represents Sentinel clients, said in an interview today. ``Their intent is to return money to clients, which is an admirable position, but it's a breach of contract and bad for a client that needs the money tomorrow for a margin call,'' Barclay said after speaking with members of the firm's legal staff today.

The collapse of the subprime-mortgage market has pushed down prices on fixed-income securities including corporate bonds and loans. The credit crunch forced hedge funds managed by Bear Stearns & Co. and Sowood Capital Management LP to liquidate last month, and it spilled over to equity markets last week, causing losses at computer-driven funds including those run by Goldman Sachs Group Inc.

`Investor Fear'

``Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade,'' Sentinel said in its letter, which didn't specify which funds were affected. ``We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients.''

Eric Bloom, Sentinel's president and chief executive officer, didn't return phone calls seeking comment.

Word of Sentinel's move help push U.S. stocks to the lowest level since April. The S&P 500 dropped 26.38, or 1.8 percent, to 1426.54, cutting this year's rise to 0.6 percent. The Dow Jones Industrial Average lost 207.61, or 1.6 percent, to 13,028.92, also the lowest since April. The Nasdaq Composite Index decreased 43.12, or 1.7 percent, to 2499.12.

Not CFTC's Call

The CFTC talked with Sentinel about its status but wasn't asked to approve a freeze, a commission official said. Such a decision isn't up to the Washington-based regulator, added the official, who asked not to be identified because the discussions were private.

``We are aware of the situation and we are monitoring it,'' CFTC spokesman Dennis Holden said.

CME Group Inc., the world's largest futures exchange, also said today that Sentinel told the CFTC the firm would stop accepting redemptions. Some of the firms that do business on CME's exchange use Sentinel for investment services. It didn't name any of the firms. No Sentinel customer funds are on deposit with the CME, the exchange said.

The CME has about $53.4 billion from customer firms such as Goldman Sachs and Bear Sterns that acts as collateral against possible trading losses and to guarantee position holdings during market swings, according to the exchange.

Sentinel is regulated by the CFTC, National Futures Association and U.S. Securities and Exchange Commission, according to its Web site.

``The decision whether to halt redemptions appears to be a business decision by Sentinel pursuant their contract with their customers and not a regulatory issue,'' Dan Driscoll, the future association's chief operating officer, said in a telephone interview.

Investing for Clients

Sentinel invests for clients such as managed-futures funds, high-net-worth individuals and hedge funds that want to be able to withdraw their cash quickly. Investments include short-term commercial paper, foreign currency, investment-grade bonds and Treasury notes, according to the Web site.

The firm's Prime Portfolio pooled account had 82 percent of its assets in floaters, or debt that pays floating-rate interest, as of June 30, according to the Web site. The weighted-average maturity of securities in the fund was 33 years, mostly in corporate securities. Only about 6 percent of assets were in overnight loans.

In contrast, Horizon Cash Management LLC, a $3.2 billion cash-management firm based in Chicago, has an average maturity across its separately managed accounts of 254 days.

The Prime Portfolio is designed to give clients ``a short- term investment alternative that combines safety of principal, liquidity and competitive yields through a portfolio of investment-grade securities,'' Sentinel said on the Web site. It also said that the firm follows ``concentration limits'' on investment holdings in order to reduce risk.

`Short Duration'

``Finally, maintaining very short duration helps ensure stable values even in volatile market conditions,'' according to the Web site.

Sentinel's clients include so-called futures commission merchants, businesses that manage buy and sell orders for commodities futures contracts. FCMs are required by the CFTC to keep their customers' money segregated from funds they invest on their own behalf. By that measure, Sentinel is 17th in terms of customer money for U.S. FCMs, according to July 31 data from the CFTC.

FCMs make some of their money by earning overnight interest on their customers' cash on hand.

Sentinel Management Group isn't affiliated with Montpelier, Vermont-based Sentinel Asset Management Inc., a $5.5 billion family of mutual funds.

To contact the reporters on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net; Matthew Leising in New York at mleising@bloomberg.net.

Last Updated: August 14, 2007 19:02 EDT