Sentinel Management Group Inc., the cash-management firm that froze client withdrawals last week, was sued by the U.S. Securities and Exchange Commission for allegedly lying to investors and misappropriating their assets.
The firm fraudulently moved at least $460 million in securities from clients' accounts into its own and misused customers' holdings as collateral to obtain a $321 million line of credit ``for its own benefit,'' the SEC said in a lawsuit filed today at U.S. District Court in Chicago.
``Sentinel did not disclose to its clients its practices of commingling, transferring and misappropriating their assets, or inform them that their investment portfolios were highly leveraged,'' the SEC said in its complaint. ``To the contrary, Sentinel provided its clients with daily account statements that did not reflect the improper activities.''
The case shows how the sudden tightening of credit markets in recent weeks may flush out money managers who borrowed heavily against their clients' securities. The SEC said Sentinel's customers suffered undisclosed losses for months before the company sent them a letter Aug. 13, claiming it couldn't return their money without selling their assets ``at deep discounts'' and incurring losses. The letter falsely blamed Sentinel's predicament on the ``liquidity crisis,'' the SEC said.
Caleb Castillo-Olszta, an operations associate answering phone calls at Sentinel's office in Northbrook, Illinois, said the company is not commenting on the regulator's case.
No Asset Freeze
The SEC's suit seeks a judicial order forcing Sentinel to forfeit profits, pay unspecified fines and refrain from future violations. The agency didn't ask the court to freeze assets, said Robert Burson, an SEC enforcement official overseeing the case.
The firm used client securities to secure the $321 million line of credit from Bank of New York Mellon Corp. (BK), which has since declared the company in default, according to the regulator's complaint. The bank has said it intends to sell securities in Sentinel's account as soon as Aug. 22. The securities may include assets Sentinel took from clients, the SEC said.
Bank of New York spokesman Kevin Heine said he couldn't immediately comment.
Sentinel filed for bankruptcy Aug. 17. That same day, customers including Penson Worldwide Inc., a Dallas-based securities-clearing firm, accused the company of selling off their assets at below-market rates to hedge-fund manager Citadel Investment Group LLC. Bryan Locke, a spokesman for Citadel in Chicago, declined to comment.
Sentinel managed $1.6 billion as of last month, according to a filing with the SEC. Its holdings included short-term commercial paper, investment-grade bonds and Treasury notes, the company had said on its Web site, which has since been taken down.
To contact the reporter on this story: David Scheer in Washington at email@example.com