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updated: 3/27/2014 6:02 AM

Sentinel Management CEO convicted of $500 million fraud

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The chief executive officer of the bankrupt Sentinel Management Group Inc. was convicted Tuesday of defrauding more than 70 customers of more than $500 million before the firm collapsed, according to a news release from the Justice Department.

A jury convicted Eric A. Bloom, 49, of Northbrook, on 18 counts of wire fraud and one count of investment adviser fraud.

He remains free on bond awaiting sentencing. Each count of wire fraud carries a maximum penalty of 20 years in prison and a $250,000 fine, or alternatively, a fine totaling twice the loss to any victim or twice the gain to the defendant, whichever is greater. He must make restitution.

The government is also seeking forfeiture of more than $500 million.

Bloom used securities belonging to customers as collateral for a loan from Bank of New York Mellon Corp. That loan was used, in part, to buy high-risk, illiquid securities for a trading portfolio maintained for the benefit of Sentinel's officers, including Bloom, members of his family, and corporations controlled by the Bloom family.

Sentinel was located in Northbrook and managed short-term cash investments of futures commission merchants, commodity pools, hedge funds, and others.

Sentinel's head trader, Charles K. Mosley, 50, of Vernon Hills, pleaded guilty in October to two counts of investment adviser fraud and is awaiting sentencing.

"Sentinel was sinking like the Titanic," Assistant U.S. Attorney Clifford Histed told the jury in closing arguments. "Sentinel was not a victim of the credit crisis," he said, adding the "financial crisis merely exposed the fraud" that had been going on for years.

Evidence was presented that Bloom misled customers four days before Sentinel declared bankruptcy by blaming its financial problems on the "liquidity crisis" and "investor fear and panic" when he knew the actual reasons were its purchase of the securities, excessive use of leverage, and the resulting indebtedness on the Bank of New York loan, which had a balance exceeding $415 million on Aug. 13, 2007. Sentinel declared bankruptcy Aug. 17, 2007.

Between January 2003 and August 2007, Bloom fraudulently obtained and retained under management more than $1 billion of customers' funds by falsely representing the risks associated with investing with Sentinel, the use of customers' funds and securities, the value of customers' investments, and the profitability of investing with Sentinel, according to prosecutors.

Bloom directed employees to use customers' securities in two portfolios as collateral for the bank loan and repurchase-agreement loans, without telling customers.

He also had employees falsify returns generated by the securities, directing them to pool the trading results for all portfolios, then allocate the returns as they saw fit, and produce false account statements, the news release stated.

The Commodity Futures Trading Commission and the Securities and Exchange Commission have separate civil lawsuits in the matter. Sentinel is in bankruptcy proceedings.

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