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From Securities Regulation Daily, January 20, 2017

Seventh Circuit upholds fraud convictions for defunct FCM chief

By Brad Rosen, J.D.

A Seventh Circuit panel upheld the convictions and a 14-year prison sentence imposed against Eric Bloom, the former president and CEO of Sentinel Management Group, a Chicago-based FCM well known for providing cash management services to other FCM’s and industry professionals. In August, 2007, Sentinel collapsed in stunning fashion, filed for bankruptcy, and left customers and creditors in the lurch for $666 million. In 2012, Bloom was indicted on 18 counts of wire fraud and one count of investment adviser fraud. He was found guilty on all charges (U.S. v. Bloom, January 19, 2017, Hamilton, R.).

Unique business model. Sentinel had a unique business model. While it was registered as an FCM with the CFTC, it did not trade in futures or options. Rather, one of its main operations was to invest the customer segregated funds for other FCM’s. In so doing, it was required to follow CFTC Rule 1.25, which permitted investments in only the most liquid and most secure instruments such as Treasury bills. The company also offered an investment product to non-FCM’s, such as hedge funds, financial institutions, and individuals who were not constrained by strict requirements of the CFTC segregation rules. Sentinel also engaged in proprietary trading in its house account.

Sentinel’s essential pitch to clients was that it could offer above average returns on cash balances, receive same day liquidity, and keep their funds essentially bankruptcy-proof. Sentinel’s claim of superior returns was premised upon an assertion that pooling funds afforded greater investment flexibility.

Sentinel also told customers that it utilized two means to assure same-day liquidity, namely repurchase agreements and a loan from the Bank of New York. However, customers were not told this loan might also be used to fund Sentinel’s leveraged trading, and that customer funds would be used to collateralize the loan in the event of a shortfall in the house account. In other words, customers were misled about the safety of their funds, the use of their funds, as well as sources of the return on their funds.

The collapse. By the summer of 2007, national credit markets began to contract, in part, as a result of the burgeoning crisis in the national credit markets fueled by the subprime mortgage industry. Sentinel’s financial problems ballooned. The balance on its loan with the Bank of New York reached a high point of $546 million in late June, well beyond the company’s credit limit. As the court observed, "Sentinel no longer slouched toward bankruptcy, it careened". In early August, Sentinel’s outside lawyer advised Bloom to "hold off taking any additional deposits …even from existing customers." Bloom opted to ignore the advice and the following week accepted approximately $300 million of additional funds from customers. Shortly thereafter, Sentinel ceased operations and, on August 17, 2007, filed for bankruptcy.

Claims on appeal rejected. The prosecution against Bloom was premised on three theories. First, the government asserted that Bloom, despite assuring customers otherwise, put their funds at significant risk by using them as collateral for Sentinel’s risky proprietary trading. Second, Bloom fraudulently manipulated the rates of return paid to clients on their investments. Third, Bloom continued to accept new customer funds even after he knew that Sentinel was about to collapse. The jury found Bloom guilty on all counts.

On appeal, Bloom offered five arguments. First, he challenged the sufficiency of the evidence supporting his convictions. Second, he asserted that his convictions were tainted by prosecutorial misconduct. Third, Bloom argued that the court erred by refusing to instruct the jury properly on the meaning of a federal regulation governing futures commission merchants. Fourth, he challenged several of the lower court’s evidentiary rulings. Fifth, he argued that, in sentencing, the district court used too high a loss amount to calculate the sentencing guideline range. The court found no reversible error and Bloom’s conviction and 14-year prison sentence stand.

The case is No. 15-1445.

Attorneys: Helene B. Greenwald, U.S. Attorney’s Office, for the United States. Leonard Goodman (Len Goodman Law Office LLC) for Eric A. Bloom.

MainStory: TopStory CommodityFutures FinancialIntermediaries FraudManipulation IllinoisNews IndianaNews WisconsinNews

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