Risk Management

SEC: Sentinel Used Credit Crisis to Hide Losses

The cash-management firm allegedly also used the crunch as a smokescreen to conceal imprudent conduct.
Marie LeoneAugust 21, 2007

The Securities and Exchange Commission has charged Sentinel Management Group with misleading investors and using the credit crisis to hide losses and imprudent operations, according to the Associated Press. In a civil suit filed in U.S. District Court in Chicago, the SEC charged Sentinel with “fraudulent conduct [that] has placed its clients at risk of serious and irreparable loss.”

Last week, Sentinel tried to stop a run on its $1.5 billion short-term investment fund by barring investors from withdrawing cash. Company officials claimed in a letter to clients that in light of the recent credit crunch spurred by the subprime mortgage crisis, “fear has overtaken reason,” the AP reported. Sentinel reportedly told clients that it could not meet their requests to withdraw cash without selling investments at a loss.

But the SEC didn’t buy Sentinel explanation for freezing the fund. The commission described Sentinel’s claims as “false and misleading,” noting that for several months running, the company was improperly commingling client’s securities.

Further, the SEC charged that Sentinel – which manages short-term investments for hedge funds, institutions, pension funds, and individuals – fraudulently transferred $460 million in securities from client accounts to a Sentinel “house” account. Once in the house account, Sentinel used the cash as collateral to secure a $321 million credit line, the commission alleged.

Sentinel told CFO.com that its was not commenting on the lawsuit at this time.

The SEC is seeking an injunction against Sentinel, and civil fines and restitution of allegedly ill-gotten gains. On Friday, Sentinel filed for Chapter 11 bankruptcy protection amid a flurry of investor lawsuits that accused the company of selling off assets for less than they were worth and without obtaining the proper approval, the AP added.

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