Northbrook-based fund in liquidity crunch

Sentinel Management Group, which oversees about $1.6 billion in assets, sought Tuesday to prevent clients from withdrawing their cash to avoid having to liquidate investments at a discount.

"Sentinel caught the biggest headlines today, and there were rumors about more liquidity issues and more distress concerning the investment banks," said David Katz, chief investment officer at Matrix Asset Advisors in New York.

"The market is shooting first and asking questions later, and as in the past weeks, weakness has begotten more weakness."

Northbrook-based Sentinel, a futures commission merchant with the U.S. Commodity Futures Trading Commission, told clients in an Aug. 13 letter: "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."

"We do not see an alternative and we don't believe it is in anyone's best interest if a run on Sentinel took place and we were in a forced liquidation mode," the letter said.

Early on Tuesday, CNBC television reported the existence of the letter and said Sentinel had asked the commission to allow it to halt client redemptions until it could conduct them in an orderly fashion. The commission later said it had received no such request and that even if it had, it had no authority to act on such a request.

Sentinel, which provides cash management services for a number of commodity brokers and hedge funds, had no comment.

News about Sentinel came on the heels of problems at hedge funds managed by Goldman Sachs and other companies in the U.S. and abroad. On Tuesday, several Canadian investment trusts had trouble repaying short-term loans, further evidence that a crisis that began in mortgages had led to a wider credit tightening.

The CME Group, the largest U.S. futures exchange, said in a statement that Sentinel was not a clearing member of the CME Group while assuring investors that its clearing member firms have continued to meet all of their obligations. MF Global, one of the world's largest brokers of exchange-listed futures and options, issued a statement saying it had no exposure to Sentinel.

A commission official late Tuesday who requested anonymity said U.S. futures exchanges were trying to get other futures companies to step in and ease Sentinel's concerns about client redemptions.

The Chicago Board of Trade, Chicago Mercantile Exchange, New York Mercantile Exchange and New York Board of Trade, along with the National Futures Association, have told the commission they will seek out other companies to take over some of Sentinel's accounts, the official said. This should ease the concern of clients who want to take their money out of Sentinel and prevent the problem from spreading market wide, the official said.

Sentinel's holdings include the funds of other futures commission merchants that buy and sell commodities. If they cannot get their money from Sentinel, they could be short of funds to meet margin requirements on exchanges where they do business or have a hard time meeting other financial obligations.

Sentinel's refusal to make redemptions appears to violate federal commodities laws, the commission official said. "If a client asks for money back … you've got to give it back."

But the commission is not likely to take an enforcement action. "That may exacerbate the situation," the official said.