CEO And Head Trader Of Bankrupt Sentinel Management Sentenced To Prison Terms For $665 Million Fraud Scheme Before Firm’s 2007 Collapse
CHICAGO — The former chief executive officer of the bankrupt Sentinel Management Group, Inc., was sentenced today to 14 years, and the firm’s former head trader was sentenced to eight years, in federal prison for defrauding hundreds of victims, including customers of Sentinel’s own clients, of more than $665 million before the firm collapsed in August 2007. The former CEO, ERIC A. BLOOM, misappropriated securities belonging to scores of customers by using them as collateral for a loan that Sentinel obtained from Bank of New York Mellon Corp. The bank loan was used, in part, to purchase millions of dollars’ worth of high-risk, illiquid securities not for customers, but 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.
Bloom, 49, of Northbrook was convicted in March 2014 of 18 counts of wire fraud and one count of investment adviser fraud after a four-week trial in U.S. District Court. The case is the largest financial fraud case ever prosecuted in Federal Court in Chicago.
U.S. District Court Judge Ronald Guzman said Bloom lied, cheated, and stole from Sentinel’s clients. “I don’t know how he [Bloom] could have expected anything short of horrific losses in any market downturn,” the judge said in imposing the sentence, which he ordered Bloom to start serving on April 30.
Sentinel was located in suburban Northbrook and managed short-term cash investments of futures commission merchants, commodity pools, hedge funds, and other customers. Sentinel’s former head trader, CHARLES K. MOSLEY, 51 of Vernon Hills, pleaded guilty in October 2013 to two counts of investment adviser fraud. He was sentenced after Bloom to eight years in prison, and was ordered to surrender on July 29.
Judge Guzman also ordered both defendants to pay restitution totaling $665,923,451.
“The magnitude of Bloom’s crimes is enormous, and the impact on his victims devastating, with victims around the world suffering losses . . . The Financial crisis did not cause Sentinel’s implosion; it merely tore away the façade of Sentinel’s legitimacy,” Assistant U.S. Attorney Clifford C. Histed argued in a sentencing memo. “The Sentinel case has had an enormous effect on the business and legal community in Chicago for years, and will continue to do so for years to come, and has become an infamous risk management case study,” he added.
Robert B. Wasserman, the Commodity Futures Trading Commission’s chief counsel for its Division of Clearing and Risk, testified at today’s hearing and said in a previous declaration said that Bloom’s fraud scheme “posed the threat of a massive liquidity crisis in the futures market and subjected over a dozen FCMs to immediate risk of insolvency.”
According to court records and the evidence at trial, Bloom was responsible for Sentinel’s day-to-day operations, misled customers four days before Sentinel declared bankruptcy by blaming Sentinel’s financial problems on the “liquidity crisis” and “investor fear and panic” when he knew that the actual reasons for Sentinel’s financial problems were its purchase of high-risk, illiquid 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 on 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. Bloom used customers’ securities invested in Sentinel’s “125 Portfolio” and its “Prime Portfolio” as collateral for its loan with Bank of New York to purchase millions of dollars’ worth of high-risk, illiquid collateralized debt obligations (CDOs).
Bloom lied about customers’ investments and engaged in an undisclosed trading strategy with Sentinel’s own “House Portfolio,” which they traded for the benefit of themselves and Bloom family members. The undisclosed trading strategy included extensive borrowing and a high concentration of CDOs that were inconsistent with the representations Bloom made to customers regarding separate investment portfolios. The undisclosed strategy affected all customers, regardless of the trading portfolio in which they were invested, because Bloom directed employees to use customers’ securities as collateral when Sentinel borrowed money from the Bank of New York and so-called “repo” lenders, and then used the borrowed money to carry out the undisclosed trading strategy. (Under a repurchase agreement, known as a “repo,” a party such as Sentinel, effectively a borrower, sold securities to a counterparty, effectively a lender, with an agreement to repurchase the securities at a later date.)
As part of the fraud scheme, Bloom falsely represented the returns generated by the securities in each Sentinel portfolio to customers. Rather than giving customers the actual returns generated by a particular portfolio, Bloom directed employees on a daily basis to pool the trading results for all of Sentinel’s portfolios and then allocated the returns to the various portfolios as they saw fit. To conceal the scheme, to encourage customers to invest additional funds, and to otherwise lull customers, Bloom on a daily basis caused false and misleading account statements to be created and distributed to customers, including via email. These account statements reported returns earned by customers without disclosing that the returns actually were allocated by Bloom and his employees and were not the result of the market performance of the customers’ particular portfolios. The account statements also listed the purported value of securities being held by each portfolio without disclosing that the securities were being used as collateral for Sentinel’s loan from Bank of New York.
In July and August 2007, Bloom knew that Sentinel was approaching insolvency and that defaulting on the Bank of New York loan was a real possibility, yet he caused Sentinel to take in more than $100 million in customers’ money and continued to conceal Sentinel’s true financial condition from customers.
The sentence was announced by Zachary T. Fardon, United States Attorney for the Northern District of Illinois; Robert J. Holley, Special Agent-in-Charge of the Chicago Office of the Federal Bureau of Investigation; and James Vanderberg, Special Agent-in-Charge of the U.S. Department of Labor Office of Inspector General in Chicago. Also assisting in the investigation were the Labor Department’s Employee Benefits Security Administration, the Commodity Futures Trading Commission, and the Securities and Exchange Commission. The CFTC and the SEC filed separate civil enforcement lawsuits following the collapse of Sentinel, which remains in bankruptcy proceedings.
The government was represented by Assistant U.S. Attorneys Clifford C. Histed and Patrick M. Otlewski.