In case you thought I was the only one saying that somethings fishy; read the commentary about this Hedge fund blow up, my criticism happens real time as I characterize every position everyday...4 times....these guys blew up and by the looks of it; someone didnt pay very close attention when they should have, so they get a blowing up, & post facto begin the process of characterization. that is bad management folks. From AJTJ Ihub thread.
French hedge fund faces Sentinel losses
Financial Times
By Jeremy Grant in Washington and Peggy Hollinger in Paris
Updated: 8:42 a.m. ET Aug 23, 2007
Further indications of the financial damage done by the collapse of Sentinel Management Group started to emerge on Wednesday when Capital Fund Management, a Paris hedge fund, said it stood to lose 27 per cent of its assets as a result of the cash management firm's troubles.
CFM said in a letter to 600 clients that its Discus Master Fund probably faced losses of $407m. Sentinel's collapse contributed last week to wild swings in global stock and credit markets.
The latest development came amid increasing unease among many clients of Sentinel over the way its collapse was handled by the three regulators that each had some oversight of the cash management firm: the Securities and Exchange Commission, Commodity Futures Trading Commission, and National Futures Association.
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It could fuel debate over the regulatory structure of the US financial services industry. The performance of regulators before and during the current credit and mortgage market turmoil has also come under fire in Washington.
Sentinel stands accused by the SEC of misappropriating customer funds and falsely blaming its inability to meet customer redemption requests on turmoil in the wider financial market. The SEC also has accused Sentinel of improperly mixing $460m of clients' money with its own 'house' funds, part of which it allegedly used as collateral for a $321m bank loan.
On Thursday, a request is expected to be heard by Sentinel in a Chicago court to have a trustee appointed to manage the firm while its management deals with multiple regulatory enquiries.
The aim of the move is to clarify the state of Sentinel's three segregated – or 'seg' – accounts by handing management over to an independent trustee.
Sentinel operated three 'seg' accounts, each of which was pools of assets from three different types of clients. 'Seg one' contained assets of domestic US clients of futures brokers registered with the CFTC and NFA; a second account contained assets of futures brokers with foreign customer deposits; and a third contained assets from endowments, wealthy individuals and hedge funds – such as CFM.
Sentinel was not supposed to mix any of these accounts with its own funds, but according to an SEC lawsuit filed this week did so, in one case using such assets to obtain bank loan financing for itself without telling clients that it had done so.
Lou Garcia, an SEC official in Chicago who oversaw an investigation into Sentinel, said this week: "Sentinel's records concerning clients' securities holdings are unreliable, at least in part, due to the commingling and misappropriation of those securities."
Arthur Hahn, a Chicaco-based lawyer at Katten Muchin, whose firm is acting for Discus, told the Financial Times: "On behalf of Discus and a number of other claimants we've pushed very strongly for the appointment of an independent trustee who will give us a clear accounting and hopefully distribute assets as quickly as possible."
The CFTC and NFA appear to have moved as rapidly as possible to ensure that the futures brokers associated with the 'seg one' account were compensated, consistent with their regulatory mandate in the futures business.
Lawyers and futures industry experts said it was not surprising that the NFA and CFTC would want to act quickly to ensure that the futures brokers at risk in the 'seg one' accounts recouped as much of their assets because the regulators' duties were primarily to guard against the failure of any futures brokers. "That's not unusual that the regulators would push to get 'seg' money back," said one lawyer familiar with the issue.
However, 'seg three' account clients – like CFM – complain privately that futures brokers appear to have received preferential treatment as a result of the Citadel deal at the hands of the two futures regulators. "The NFA and CFTC structured a robbery," said one senior hedge fund manager with 'seg three' assets.
They argue that, as the SEC's fraud case against Sentinel alleges, Sentinel improperly mixed up some 'seg three' funds in with the 'seg one' account, meaning that the Citadel deal should not have gone ahead without consideration of the implications for 'seg three' asset owners.
However, Dan Roth, NFA president, told the FT: "Our concern is the futures-related activities of Sentinel. We've seen no indication that there was any depletion of 'seg three' accounts to benefit 'seg one' accounts and we saw no reason whatsoever to delay the return of those customer 'seg' funds to those customers."
The CFTC was not immediately available for comment.
Industry insiders also questioned the extent to which all three regulators were talking to each other after it became apparent in media reports last week that there were problems with Sentinel.
Jeff Barclay, a lawyer specialising in regulatory issues at Schuyler, Roche & Zwirner, said: "All of those regulators were regulating the entity. How was this not detected? I think that's a legitimate question."
Mr Roth said: "There was no lack of communication between the regulators and there was an almost constant flow of communication about what was going on."
Copyright The Financial Times |
