Sentinel faces suits over asset sell-off

24 Aug 2007 email

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by Jim Kharouf

Unfortunate customers of Sentinel Management will lose millions according to court filings by FCMs and comments by sources close to the situation after accusations of ill timing and missing communications were leveled at the beleaguered company. One such FCM, Penson GHCO, is particularly angered, claiming that Sentinel sold a large portion of its assets without consent.

Sentinel, which was desperately working to resolve the liquidity crunch, jumped too early at an offer from Citadel, a large hedge fund which offered 75% for Sentinel’s $312m in segregated accounts for FCMs.

In a court filing, Penson GHCO alleged that it tried to offer a deal in the afternoon of 16 August whereby it would assume control of the entire segregated fund portfolio for free from Sentinel, along with the help of Fortis Bank with the intention of helping “with the orderly liquidation (as opposed to a distress sale) and that Penson GHCO would offer liquidity assistance”.

Penson attorneys contacted Commodity Futures Trading Commission (CFTC), National Futures Association (NFA) and finally Sentinel officials to offer their plan.

However, Sentinel cut its deal with Citadel in the early morning hours of 16 August with the consent of NFA.
When Penson attorneys contacted Sentinel CEO Larry Bloom about its proposal to take over the portfolio for
free, Bloom said “It’s too late. You should have called us yesterday,” according to Penson GHCO, which claimed it made a similar offer to manage the assets for Sentinel on 15 August as well.

Penson GHCO is suing both Sentinel and Citidel over the transaction claiming that the latter “intentionally and maliciously interfered with Penson GHCO” in its efforts to manage the portfolio. Penson GHCO will reportedly lose $6.5m in getting just 75 cents on the dollar for its segregated fund deposits with Sentinel. Other FCMs will lose substantial sums as well (see story page 3). A Penson spokesperson declined to comment on the Sentinel matter.

NFA spokesperson Larry Dykeman told FO Week that NFA was fully aware of the portfolio sale to Citadel at a discount. The idea, he said, was to get as much cash back to the brokers so they could meet margin requirements. By press time, 23 firms had received partial redemptions and no firms involved had failed to meet margin requirements.

“There are obviously some not happy with the deal [with Citadel] but it was shown to us as the only option they had at that time,” Dykeman said. “It wasn’t the best solution but it saved these FCMs from getting in a lot more trouble.”

Penson GHCO had over $35m deposited in Sentinel segregated account, or more than 30% of its $120.5m in segregated funds it holds for customers, according CFTC filings. Other firms have also sued Sentinel including Vision Financial Markets, a firm with a reported $368.7m in segregated funds and Velocity Futrures with $19.5m in segregated funds, according to CFTC filings.

One FCM executive said that Penson GHCO and Fortis could have handled the portfolio quickly and efficiently by offering the securities to Sentinel customers or perhaps by securing a line of credit with the portfolio and distributing cash back to the firms that requested it.

“They could have quickly turned that into liquidity,” he said.

“At this point in time, we will not be supporting this [parliamentary] inquiry. But we put it on notice that in a future time, which we envisage will be in the next four weeks or so, we will, unless Wayne Swan does the bleeding obvious and stops this going forward,”

Australian senator Barnaby Joyce on the proposed ASX-SGX merger