Eric Bloom, the CEO of Sentinel Management Group, Inc., the now bankrupt hedge fund, has been convicted of bilking over 70 customers of more than $500 million prior to the firm’s collapse. According to the U.S. Department of Justice, Bloom misappropriated securities that belonged to customers when he used the financial instruments as collateral to get a loan for Sentinel from Bank of New York Mellon Corp. (BK). The loan was partially used to buy risky illiquid securities for a trading portfolio to benefit Bloom, other Sentinel officers, corporations controlled by his family, and his relatives.
Also, says the DOJ, even though Bloom knew that Sentinel was at risk of defaulting on the loan from the bank, he caused the hedge fund to take over $100 million from customers while hiding its true financial state. A federal jury returned guilty verdicts against him on one count of investment adviser fraud and 18 counts of wire fraud.
The guilty verdict comes six months after Charles K. Mosley, Sentinel’s former head trader, pleaded guilty to two counts of investment adviser fraud related to the charges filed against Bloom. Mosely admitted to covering up their actions. In his plea agreement, he said that customers were sent statements according to interest income rates that he and Bloom had calculated rather than the performance of investment portfolios.
The SEC sued Sentinel in 2007, accusing the firm of transferring at least $460 million in securities from client funds and using the holdings of customers to get a $321 million credit line. Rather than disclosing that Sentinel was moving, comingling, and misappropriating assets, says the SEC, the firm issued regular account statements that showed no indication of the improper activities. As a result customers of Sentinel suffered undisclosed losses for months until they got a letter from the firm saying that the assets would have to be sold at discount and at a loss, supposedly because of the liquidity crisis.
In August, an appeals court judge Chicago said that BNY Mellon would have to face a lawsuit challenging its $312 million lien on assets of Sentinel. This reversed a district judge’s decision to uphold the lien. (The liquidation trustee had sued BNY Mellon to subordinate or disallow its lien claiming bank employees were aware that Sentinel was wrongly using the assets of investors as collateral as part of the hedge fund’s credit line.) In January, U.S. Bankruptcy Judge Jacqueline P. Cox said that BNY Mellon would have to give back the $337 million it received from Frederick Grede, the trustee liquidating Sentinel.
If you suspect your investment losses are a result of negligence or misconduct at the financial firm representing you, please contact our securities fraud lawyers today.
US Justice Department Convicts Hedge Fund CEO Of $500 Million Fraud, HedgeCo.Net, March 26, 2014
BNY Mellon Must Face Challenge to $312 Mln Sentinel Lien, Bloomberg, August 26, 2013
Sentinel trustee wants Bank of NY Mellon to return $337 million, Reuters, December 18, 2013
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