Wednesday, March 26, 2014

Corruption: Chicago CEO convicted of defrauding customers of more than $500 million

U.S. Attorney’s Office 
Northern District of Illinois

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 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 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.

The verdict 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 is being represented by Assistant U.S. Attorneys Clifford C. Histed and Patrick M. Otlewski.