(Reuters) - Two former executives at Sentinel Management Group Inc were indicted for allegedly defrauding customers out of more than $500 million before the futures brokerage went bankrupt in 2007, federal prosecutors in Chicago said on Friday.
Eric Bloom, who was Sentinel’s chief executive, and Charles Mosley, who was a senior vice president and head trader, were accused of pledging customer securities as collateral for a bank credit line that funded a “house” trading portfolio meant to benefit them and Bloom’s family.
U.S. Attorney Patrick Fitzgerald in Chicago, who announced the charges, called the case one of the largest criminal financial fraud cases ever prosecuted by his office.
Sentinel’s collapse has been compared with the October 2011 bankruptcy of the larger MF Global Holdings Ltd. No criminal charges have been brought in that case, which Fitzgerald’s office is also investigating.
According to the indictment in the Sentinel case, Bloom also misled customers in a letter four days before the firm’s bankruptcy, blaming its inability to honor client redemptions on a market “liquidity crisis” and “investor fear and panic.”
That letter fueled volatility in global financial markets at the time. But the real reasons for Sentinel’s problems, prosecutors contended, were excess leverage, exposure to illiquid securities and a $415 million balance on the credit line from Bank of New York Mellon Corp.
Bloom, 47, and Mosley, 48, were charged on Thursday by a federal grand jury in Chicago with 18 counts of wire fraud, and one count each of securities fraud and making false statements.
Each wire fraud count carries a maximum penalty of 20 years in prison plus a fine. The indictment also seeks the forfeiture of more than $500 million.
Prosecutors said the fraud ran from January 2003 to August 17, 2007, when Sentinel filed for bankruptcy protection in Chicago. The firm was based in suburban Northbrook, Illinois.
Theodore Poulos, a lawyer representing Bloom, and Charles Nesbit, a lawyer representing Mosley, did not immediately respond to requests for comment.
Bank of New York Mellon spokesman Ron Gruendl declined to comment. The bank was not charged with criminal wrongdoing.
According to the indictment, Bloom and Mosley defrauded more than 70 customers by misrepresenting the risks of investing with Sentinel and the expected returns, how customer funds would be used and the value of customers’ investments.
The defendants were accused of using the credit line to buy risky, illiquid securities, including collateralized debt obligations that Mosley bought from two brokerages in exchange for gifts, vacations, tickets to sports events and parties.
Bloom and Mosley have been fighting charges in related civil cases brought by the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission. Sentinel settled with both agencies in 2009, court records show.
In March, a Chicago federal judge rejected Bloom’s bid to dismiss the SEC case, and ruled for the SEC on several claims against Mosley. He also dismissed several CFTC claims against both defendants, a decision that agency wants reconsidered.
Bloom and his father, Sentinel founder Philip Bloom, agreed in 2008 to pay $10.7 million to settle a lawsuit brought by the firm’s bankruptcy trustee.
Bloom lives in Northbrook, and Mosley in nearby Vernon Hills, Illinois. An arraignment date for them has not been set.
The MF Global bankruptcy brought back memories of Sentinel’s collapse. Both companies were registered futures brokers that were required to keep customer funds separate from their own.
Investigators, including from Fitzgerald’s office, are examining whether MF Global’s brokerage unit may also have improperly commingled client and in-house money.
Randall Samborn, a spokesman for Fitzgerald, declined to comment on MF Global.
The cases are in the U.S. District Court, Northern District of Illinois. The criminal case is U.S. v. Bloom et al. The civil cases are SEC v. Sentinel Management Group Inc et al, No. 07-04684; and CFTC v. Sentinel Management Group Inc et al, No. 08-02410.
Reporting By Jonathan Stempel in New York; Editing by Martha Graybow, Phil Berlowitz, Lisa Von Ahn and Kenneth Barry