SEC says Sentinel defrauded clients

The U.S. Securities and Exchange Commission filed civil fraud charges Monday against Sentinel Management Group, the Northbrook-based cash management firm serving the U.S. futures industry.

The firm filed for Chapter 11 bankruptcy protection late Friday.

In a complaint filed in U.S. District Court in Chicago, the SEC alleged Sentinel defrauded clients by improperly co-mingling, misappropriating and leveraging their securities without their knowledge in violation of the Investment Advisers Act.

According to the complaint, the SEC alleges that Sentinel transferred at least $460 million in securities from client investment accounts to Sentinel's proprietary "house" account.

Sentinel also used securities from client accounts as collateral to obtain a $321 million line of credit as well as additional leveraged financing, the SEC alleged.

The SEC also alleged that Sentinel did not disclose to its clients practices of "co-mingling," which involved transferring and misappropriating their assets. Sentinel failed to inform them their investment portfolios were highly leveraged as a result of the financing activities, the SEC said.

"To the contrary, Sentinel provided its clients with daily account statements that did not reflect the improper activities," the SEC said in the complaint.

The SEC is also seeking an emergency temporary restraining order telling Sentinel to immediately cease in engaging in illegal conduct.

The SEC actions came as John H. Squires, the judge hearing the company's case in the U.S. Bankruptcy Court for the Northern District of Illinois, heard first-day motions in a courtroom packed with attorneys representing Sentinel and many of its more than 200 creditors.

Looking out over the crowded room, Squires predicted the case would be "a mega Chapter 11."

During the hearing, Christian Kemnitz, an attorney representing Discus Master Limited, an investment partnership based in the British Virgin Islands and one of Sentinel's biggest clients, accused the company of "disturbing" and "illegal" behavior.

"There's more going on here than simple mismanagement," Kemnitz said.

Earlier Monday, a document filed with the bankruptcy court revealed that the National Futures Association, the self-regulator for the futures industry, had faulted Sentinel's record-keeping just days before the company sought court protection.