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
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 Sentinels $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
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 Its 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 wasnt the best
solution but it saved these FCMs from getting in a lot more
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
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,