Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements

Former Sentinel Management Group Inc. CEO Eric Bloom and head trader Charles Mosley have been indicted for allegedly defrauding investors of about $500 million prior to the firm’s filing for bankruptcy protection in 2007. The government is seeking forfeiture of approximately that amount.

The two men are accused of fraudulently getting and retaining “under management” this money by misleading clients about where their money was going, the investments’ value, and the associated risks involved. According to prosecutors, defendants allegedly used investors’ securities as collateral to get a loan from Bank of New York Mellon Corp. (BK), in part to buy risky, illiquid securities. Bloom is also accused of causing clients to believe that Sentinel’s financial problems were not a result of these risky purchases, the indebtedness to the BoNY credit line, and too much use of leverage.

In other securities law news, Egan-Jones Rating Co. wants the Securities and Exchange Commission’s attempts to pursue claims against it in an administrative forum instead of in federal court blocked. The credit rating agency, which has long believed that the SEC does not treat it fairly even as it “historically coddled and excused” the larger credit raters, contends that if it were forced to make its defense in an administrative hearing it would not be able to avail of its constitutional due process rights due to the SEC’s bias.The Commission’s administrative claims accuse Egan Jones and its president Sean Egan of allegedly making “material misrepresentations” in its 2008 registration application to become a nationally registered statistical rating agency for government and asset-backed and securities issuers.

Egan-Jones filed a complaint accusing the SEC of “institutional bias,” as well as of allegedly improper conduct when examining and investigating the small credit ratings agency (including having Office of Compliance Inspections and Examinations staff go “back and forth between divisions and duties” to engage in both examination and enforcement roles.)The credit rater is also accusing the Commission of improperly seeking civil penalties against it under the Dodd-Frank Wall Street Reform and Consumer Protection Act, even though the actions it allegedly committed happened way before Dodd-Frank was enacted.

One firm that has agreed to settle the SEC’s administrative action against it is OppenheimerFunds Inc. Without denying or admitting to the allegations, the investment management company will pay over $35 million over allegations that it and its sales and distribution arm, OppenheimerFunds Distributor Inc., made misleading statements about the Oppenheimer Champion Income Fund (OPCHX, OCHBX, OCHCX, OCHNX, OCHYX) and Oppenheimer Core Bond Fund (OPIGX) in 2008.

The SEC contends that Oppenheimer used “total return swaps” derivatives, which created significant exposure to commercial mortgage-backed securities in the two funds, but allegedly did not adequately disclose in its prospectus the year that the Champion fund took on significant leverage through these derivative instruments. OppenheimerFunds also is accused of putting out misleading statements about the financial losses and recovery prospects of the fund when the CMBS market started to collapse, allegedly resulting in significant cash liabilities on total return swap contracts involving both funds. The $35 million will go into a fund to payback investors.

Meantime, Nasdaq Stock Market and Nasdaq OMX Group are proposing a $40M “voluntary accommodation” fund that would be used to payback members that were hurt because of technical problems that occurred during Facebook Inc.’s (FB) IPO offering last month. Nasdaq would pay about $13.7 million in cash to these members, while the balance would be a credit to them for trading expenses.

A technical snafu had stalled the social networking company’s market entry by about 30 minutes, which then delayed order confirmations on May 18, which is the day that Facebook went public. Many investors contend that they lost money as a result of Nasdaq’s alleged mishandling of their purchases, sales, or cancellation orders for the Facebook stock. Some of them have already filed securities lawsuits.

Sentinel Management Chief, Head Trader Indicted in Illinois
, Bloomberg/Businessweek, June 1, 2012
Investors sue Nasdaq, Facebook over IPO, Reuters, May 22, 2012

Credit Rater Egan-Jones, Alleging Bias, Sues To Force SEC Proceeding Into Federal Court, BNA Securities Law Daily, June 8, 2012

OppenheimerFunds to pay $35M to settle SEC charge,, June 6, 2012
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