CHICAGO―The chief executive officer of the bankrupt Sentinel Management Group, Inc., was convicted today of defrauding more than 70 customers of more than $500 million before the firm collapsed in August 2007. The defendant, ERIC A. BLOOM, misappropriated securities belonging to customers by using them as collateral for a loan that Sentinel obtained from Bank of New York Mellon Corp., which 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.
A federal jury deliberated less than two hours after a four-week
trial in U.S. District Court before returning guilty verdicts on 18
counts of wire fraud and one count of investment adviser fraud. The case
is one of the largest financial fraud cases ever prosecuted in Federal
Court in Chicago.
Bloom, 49, of Northbrook, remains free on bond while awaiting
sentencing, which was not scheduled pending post-trial motions. Each
count of wire fraud carries a maximum penalty
of 20 years in prison and a $250,000 fine, or, alternatively, a fine
totaling twice the loss to any victim or twice the gain to the
defendant, whichever is greater, and restitution is mandatory. The
investment adviser fraud count carries a maximum penalty of five years
in prison and a $250,000 fine. The government is also seeking a
forfeiture judgment of more than $500 million. The court must impose a
reasonable sentence under federal statutes and the advisory United
States Sentencing Guidelines.
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 head trader, Charles K. Mosley,
50, of Vernon Hills, pleaded guilty last October to two counts of
investment adviser fraud and is awaiting sentencing.
“Sentinel was sinking like the Titanic,” Assistant U.S. Attorney
Clifford Histed told the jury in closing arguments. “Sentinel was not a
victim of the credit crisis,” he said, adding that the “financial crisis
merely exposed the fraud” that had been going on for years.
According to the evidence at trial, Bloom, the president and CEO of
Sentinel who was responsible for its 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 August 13,
2007. Sentinel declared bankruptcy on August 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
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 e-mail. 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.