Sentinel records faulted before bankruptcy

CHICAGO (Reuters) - Sentinel Management Group Inc., the cash management firm serving the U.S. futures industry that filed for Chapter 11 bankruptcy protection late on Friday, failed to keep adequate books and records, according to a National Futures Association document filed in federal court on Monday.

The NFA went to Sentinel's offices on August 14, the document shows, and reviewed the firm's books and records. That review found "that Sentinel failed to maintain adequate books and records, including records to demonstrate the location" of some accounts and whether or not the account's assets were in any way encumbered, the NFA document says.

As a result, the NFA issued an order prohibiting Sentinel from "liquidating, selling, transferring, encumbering or otherwise disposing of any securities." That order came one day after the firm, which managed about $1.6 billion of assets, had already frozen client accounts -- a move that helped roil global financial markets last week.

In its filing last week with the United States Bankruptcy Court for the Northern District of Illinois, Sentinel said its board decided it was in "the best interests of the corporation, its creditors and other interested parties that a voluntary petition be filed ... in an effort to restructure the indebtedness of the corporation."

Sentinel told clients in an August 13 letter: "we are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients."

The Northbrook, Illinois-based firm said then that "we don't believe it is in anyone's best interest if a run on Sentinel took place and we were in a forced liquidation mode."

That announcement had helped to drive U.S. stocks lower, taking the Dow Jones industrial average .DJI to a four-month low, as it added to concerns about failing entities due to highly volatile markets and a credit squeeze.

News about Sentinel came on the heels of problems at funds managed by Bear Stearns Cos. BSC.N, Goldman Sachs Group Inc. (GS.N) and other companies in the United States and abroad.

The bankruptcy filing said Sentinel estimated assets and liabilities both exceeded $100 million, but it wasn't more specific. It said it estimated it had at least 200 creditors.