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Bankrupt firm’s CEO, head trader indicted in $500M fraud scheme

Home  Eric A. Bloom Northbrook. Bloom was charged criminal fraud case.

Home of Eric A. Bloom in Northbrook. Bloom was charged in a criminal fraud case.

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Updated: July 6, 2012 10:42AM

Northbrook-based Sentinel Management Group’s website once claimed that since 1979 it had “never lost a dime” of its clients’ funds.

On Friday, federal prosecutors announced criminal indictments against the CEO and chief trader of the bankrupt company, saying it was responsible for a $500 million fraud, calling it one of the largest financial fraud’s charged in the history of the U.S. Attorney’s Office in Chicago.

What happened in the interim?

Attorneys representing key players of Sentinel attributed the firm’s collapse to the same market forces that caused major investment firms to go under in 2007.

But investors — as well as the federal law enforcement — see it differently.

They say the company, which at one point said it had $1.2 billion client assets under management, improperly put investors’ money into a so-called “house” account, aiming to benefit a select few with the firm.

The Securities and Exchange Commission has a pending civil case in federal court that was filed in 2007 charging that the company pulled the wool over eyes of investors by claiming it maintained its good record by only investing in safe, highly-liquid cash management products. It promised clients “immediate daily access to 100 percent of their investment no matter how volatile market conditions become,” according to the SEC’s complaint.

That all come crashing down. Sentinel placed at least $460 million of its clients’ securities into the “house” account, a commingled account that was not disclosed to investors, court records indicate.

In August 2007, the company filed for Chapter 11 bankruptcy.

At that time, Sentinel controlled accounts for about 70 clients, made up primarily of large institutional investors as well as at least one pension fund.

Charged Friday were Eric A. Bloom, 47 of Northbrook and Charles K. Mosley, 48, of Vernon Hills. Bloom was president and CEO of Sentinel and responsible for day-to-day operations. Mosley was the chief trader.

The two will be arraigned at a later date. Each was charged with 18 counts of wire fraud, one count of securities fraud and one count of making false statements to an employee pension plan. The indictment seeks forfeiture of more than $500 million.

Mosley and Bloom allegedly used their customers’ securities invested in two portfolios as collateral for its credit line with Bank of New York Mellon Corp. to buy millions of dollars of high-risk securities, including collateralized debt obligations or CDOs.

The government alleges that Mosely bought the CDOs from two brokerage firms and in return received substantial benefits “in the form of gifts, vacations, expensive tickets to sporting events and parties.”

Court papers say that Sentinel’s hierarchy also benefited because members’ compensation and bonuses were based on that “house” account.

Sentinel hid the activity, according to charges, giving investors phony daily account statements, including in emails.

Attorneys for Bloom, Theodore Poulos and Terence Campbell released the following statement on Friday:

“We are disappointed that the government has brought charges against Eric Bloom. Mr. Bloom had virtually all of his own personal savings invested with Sentinel, and Sentinel’s bankruptcy — which occurred almost five years ago — was caused by the massive global financial crisis that struck in mid-2007, not by any criminal conduct on the part of Eric Bloom,” the statement indicated. “Mr. Bloom intends to plead not guilty and vigorously defend against these charges.”

Neither Mosley nor his attorney could not be reached for comment. Bloom refused comment on Friday.

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