Former Sentinel CEO Gets 14 Years

Eric A. Bloom, the former CEO of a bankrupt Northbrook investment company, has been sentenced to 14 years in federal prison after defrauding hundreds of the firm’s customers, the United States Attorney’s Office announced.

Bloom, 49, Northbrook was convicted last March of 18 counts of wire fraud and one count of investment adviser fraud after a four-week trial in U.S. District Court - the largest financial fraud case ever prosecuted in the Federal Court of Chicago. He had been found guilty of defrauding customers of Sentinel Management Group, Inc. of more than $665 million before it collapsed in August 2007.

Sentinel’s former head trader, Charles K. Mosley, 51 of Vernon Hills, pleaded guilty in October 2013 to two counts of investment adviser fraud. He was sentenced after Bloom to eight years in prison.

Crain’s Chicago Business reports in imposing the punishment Friday, U.S. District Judge Ronald A. Guzman called the scheme “a truly horrific fraud.”

From the FBI Chicago Division:

“The magnitude of Bloom’s crimes is enormous, and the impact on his victims devastating, with victims around the world suffering losses . . . The Financial crisis did not cause Sentinel’s implosion; it merely tore away the façade of Sentinel’s legitimacy,” Assistant U.S. Attorney Clifford C. Histed argued in a sentencing memo. “The Sentinel case has had an enormous effect on the business and legal community in Chicago for years, and will continue to do so for years to come, and has become an infamous risk management case study.”

According to court records and the evidence at trial, Bloom was responsible for Sentinel’s day-today 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 Aug. 13, 2007. Sentinel declared bankruptcy on Aug. 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 CFTC and the SEC filed separate civil enforcement lawsuits following the collapse of Sentinel, which remains in bankruptcy proceedings.

Bloom will begin serving his sentence on April 30. Mosley was ordered to surrender on July 29.

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