The SEC brought charges against broker-dealer FTN Financial Securities
Corp. (FTN) last week for allegedly assisting the now bankrupt Sentinel
Management Group, Inc. (Sentinel) in covering up Sentinel’s alleged
2006-2007 investment fraud.
In August 2007, two days after Sentinel filed for Chapter 11 bankruptcy,
the SEC charged the Illinois-based investment adviser with misappropriating,
commingling, and leveraging client assets without proper authorization.
Though Sentinel told its clients that their investments would be placed
primarily in highly liquid cash management products, the SEC claimed the
firm used client assets as collateral for a bank loan used to finance
trading in numerous illiquid securities.
In the complaint filed last week, the SEC alleged that FTN helped Sentinel
carry out the fraud through the approval of a five-day reverse repurchase
transaction. In the complaint, the SEC claimed that FTN "should have
known that Sentinel would use the Repo Transaction for an improper purpose,"
because of statements made to several FTN employees in March of 2006.
"Earlier in March 2006, before engaging in the Repo Transaction, FTN
had engaged in a transaction with Sentinel to purchase securities from
Sentinel at quarter-end, a transaction that Sentinel told FTN employees
it needed to ‘make our loan look lower.’ In addition, toward
the end of 2006, before engaging in the Repo Transaction, a Sentinel employee
made statements to one of those same FTN employees suggesting that Sentinel
intended to use the Repo Transaction to circumvent a regulatory requirement,"
wrote the SEC in the Complaint.
According to the SEC, Sentinel used the Repo Transaction with FTN to temporarily
pay down a portion of the client-collateralized bank loan in order to
reduce the amount Sentinel had to report on its 2006 year-end financial
statements. Sentinel did not include the Repo Transaction on the statements.
FTN neither admitted nor denied the SEC’s charges, but the firm did
consent to the entry of the SEC’s Cease-and-Desist Order. The Order
requires FTN to pay disgorgement of $1,495,878.00 and prejudgment interest