Oct. 11 (Bloomberg) -- The principals of Sentinel Management Group Inc., the bankrupt Chicago-area cash management firm, were accused by its court-appointed bankruptcy trustee of ``a pattern of criminal conduct'' that defrauded investors.

Trustee Frederick J. Grede, formerly chief executive officer of the Hong Kong Futures Exchange, today sued Sentinel President Eric Bloom and two other executives, seeking to recover $350 million. The 10 other defendants named in the complaint filed in U.S. Bankruptcy Court in Chicago include trusts in the names of Bloom's parents.

Bloom and the other individual defendants, ``operating through a pattern of criminal conduct, committed a long-term, massive fraud against Sentinel and its customers,'' Grede said in the complaint.

Sentinel, based in Northbrook, Illinois, filed for Chapter 11 bankruptcy protection on Aug. 17, four days after freezing its clients' funds, citing credit market instability. On Sept. 24, Grede told creditors the firm had $861.5 million in assets and $1.15 billion in debt.

Bloom's attorney, Edward McDonald, a partner in the Washington-based law firm Dechert, didn't immediately respond to voice-mail and e-mail requests for comment.

Commingled Funds

Three days after filing for bankruptcy court protection, Sentinel was sued by the U.S. Securities and Exchange Commission. The commission said Sentinel improperly commingled client funds with one another and with its own assets. The SEC also accused Sentinel of using client assets as collateral for $312 million in loans it obtained from the Bank of New York Mellon Corp.

Grede's complaint repeats those allegations. The complaint described Sentinel as a firm that primarily managed short-term cash for clients that included commodity brokers, hedge funds and individual investors.

While Sentinel advertised itself as offering safe investment programs, it failed to disclose to investors that their assets were being collateralized and commingled, according to the complaint.

In the year before it went bankrupt, the firm's principals ``improperly transferred at least $20 million in ill-gotten gains to themselves and the other defendants in the form of bogus administrative fees, bonuses, dividends, account withdrawals and redemptions, salaries, false trading profits and other payments,'' Grede alleged.

`Criminal Scheme'

Substantially all that money ``constituted fraudulently realized proceeds of the defendants' criminal scheme,'' according to the complaint. Sentinel maintained three different and conflicting sets of records reflecting its assets and gave misleading account statements to its customers, the trustee said in the complaint.

Sentinel's chief bankruptcy counsel, Ronald Barliant of Goldberg Kohn in Chicago, declined to comment on the trustee's lawsuit.

The case is In Re Sentinel Management Group Inc., (Grede v. Bloom) 07B14987, U.S. Bankruptcy Court, Northern District of Illinois, Eastern Division (Chicago).

To contact the reporter on this story: Andrew Harris at the federal courthouse in Chicago at aharris16@bloomberg.net.

Last Updated: October 11, 2007 21:19 EDT