But who won? How much? And who counted it?
Left: Happier days for Sentinel chief executive Eric Bloom, in the formal dress uniform of Indiana University’s Zeta Beta Tau fraternity. Forelock-tug to Andrew.
A funny thing happened on the way to freezing the assets of Sentinel Management Group Inc. All but $15.6 million of the $312 million it received from last week’s secrecy-enshrouded deal with Citadel Investment Group LLC lit out on a wire, propelled by a US Bankruptcy Court judge to the vigorous applause of, among others, the Commodity Futures Trading Commission and the National Futures Association.
The very same NFA that, after learning of what the US Securities and Exchange Commission charitably characterized as Sentinel’s “false and misleading” Aug. 13 letter announcing its suspension of redemptions, wandered over to the firm’s offices and found that the company had
...failed to maintain adequate books and records, including records to demonstrate the location of all Seg III Account’s assets, and whether or not the account’s assets are in any way encumbered.
Or, as the SEC put it:
Sentinel has not kept accurate books and records...necessary to verify the ownership of the securities in its client and ‘house’ accounts and to prevent the firm from selling assets that it is not entitled to sell and distributing the sale proceed [to] persons not entitled to receive them. [Emphasis added].
Which does raise some interesting questions about who decided who got paid out of the $312 million, who actually got paid, and who decided the basis for the calculation of those payments, some addressed but none satisfactorily answered in the public record so far.
On Monday, Judge John Squires said that Sentinel could immediately pay the proceeds of the Citadel transaction, which according to court documents was concluded in the early morning hours of Aug. 16, with an effective date of Aug. 15, to its clients. Those proceeds had been frozen by a different federal judge on Aug. 17, the day Sentinel filed for bankruptcy.
A filing by Ronald Barliant, one of Sentinel’s bankruptcy attorneys, said that the assets sold to Citadel had been custodied in the ‘Seg 1’ account at the Bank of New York, which had been reluctant to accept Aug. 17 instructions “to wire transfer the proceeds to debtors’ clients” in light of temporary restraining orders issued in other courts that day. According to the SEC fraud case, the Seg 1 account contained the assets of registered FCMs with only domestic customer deposits.
According to a Bloomberg report, Daniel Roth, president of NFA—the same NFA that had found Sentinel had failed to keep adequate books and records—said the money to be distributed was from accounts that had been segregated.
“We were strongly in favor of allowing the customer-segregated funds to be distributed.”
Roth said, without explicitly explaining how he came to that conclusion in light of the apparently universal acknowledgement, at least among regulators, that Sentinel’s books provide only a vague indication as to the ownership of the its assets.
Also on board with the distribution of the proceeds, according to Bloomberg, citing Robert Trizna, an attorney for Farr Financial Inc, which obtained one of the restraining orders issued Friday:
Trizna claimed that a lawyer for the Commodities Futures Trading Commission told him that, without the disbursements, some futures commission merchants...could fail.
“The judge was faced with the CFTC telling him that it was their understanding that if these distributions weren't made, that as many as 11 futures commission merchants...would fail imminently,” Trizna claimed.
Bloomberg also reported that, according to the court order,
“23 different brokerages, including those that had objected to the Citadel sale, will be repaid at various percentages.” As of Tuesday evening, online court records held no documents confirming those facts. Or any other facts explaining why the Seg 1 account was innoculated against Sentinel’ts alleged pandemic of fraud, commingling, misappropriation, misrepresentation, misleading and misfeasance.
Conveniently, however, for the futures industry supervisory bodies, the release of the funds should prevent any nasty clearing house incidents. Especially at the Chicago Mercantile Exchange, which despite publicly confirming that it had no exposure to Sentinel, helped broker the Citadel transaction, according to a report in The Wall Street Journal.
No clearing house incidents, ergo no congressional hearings into how a tiny cash management firm might trigger a little, and it would be little, momentary market mayhem. And that is the important thing.
Your number didn’t come up in the lottery? Good luck. According to the SEC, the Bank of New York is going to start liquidating your securities today, and doubtless Sentinel’s other counterparties plan similar initiatives. The stone cold certainty is that unravelling Sentinel’s machinations will ensure the passage of many a moon before the first installment whatever’s left comes your way.
Calls to both the NFA and the CFTC were not returned by pixel time.
Noted with interest: Among the counsel in this fast-metastasizing legal bunfight? Representing Citadel, one Jeff Marwil, restructuring and insolvency partner at Winston & Strawn, Chicago. Better known, certainly on these pixels, as receiver for the Bayou Group.
Sentinel Can Pay $312 Million to Clients, Judge Says
by Tiffany Kary
Bloomberg Aug. 21 2007
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