The disgraced former Head of Trading at Sentinel Management Group Inc., Charles Mosely, plead guilty today to one of the largest cases of criminal financial fraud cases ever prosecuted in Chicago. The pleading brings to full circle the case against Mosley and the Sentinel Management Group which collapsed in a spectacular fashion over six years ago.
In pleading guilty, Mosely, is admitting to defrauding customers in an investment scheme that ended up costing the investors over $500 million by exposing their accounts to a portfolio of highly risky derivatives. The risky derivatives eventually lead to the company going bankrupt. As part of the plea bargain, Mosley has agreed to testify against his former boss and Sentinel Chief Executive Officer Eric Bloom at Blooms trial in February. In return for his plea and cooperation prosecutors will seek a 10 year prison sentence against Mosley, who otherwise could have faced decades in prison if convicted of all the charges he otherwise would have faced.
Sentinel was a long standing firm set up by Bloom’s father, Phillip Bloom, in 1979. Bloom senior set up a company to manage short term investments for brokers which traded on the Chicago Board of Trade and the Chicago Mercantile Exchange and gave them a safe place to park their funds. The case against Mosley and Sentinel stems from the collapse of Sentinel in August 2007 when a risky, heavily leveraged trading strategy instituted by Bloom and Mosley went awry after the mortgage crisis began to rock the global economy. On August 17th, 2007 Sentinel filed for Chapter 11 bankruptcy protection after a judge sought to block Sentinel from selling assets to the hedge fund company Citadel Investment Group LLC.
On August 20, 2007, the SEC filed a complaint in the U.S. District Court in Chicago. The complaint alleged that Sentinel had defrauded clients by improperly commingled $460 million in securities from client’s investment accounts into Sentinel’s proprietary “house account”, and by using securities from their client’s accounts as collateral to obtain a $321 million line of credit and other leveraged financing. Sentinel allegedly disguised these acts by providing falsified account statements.
The Company was built on a promise, to invest in high quality, liquid securities, using the personal connections of Phillip Bloom to attract investors. Former Merc Chairman Leo Melamed was one of his initial backers. The National Futures Association, who visited Sentinels offices in Northbrook Il, found “Sentinel failed to maintain adequate books and records, including records to demonstrate the location” of some accounts.
In clear evidence of callousness, several recorded telephone calls between Mosley and Bloom in the days before the company’s collapse are detailed in Mosley’s 39-page plea agreement, including one call from Aug. 8, 2007, in which Mosley updated his boss on the losses they were taking on certain trades. “Ask my assistant to look in my couch for spare change,” Bloom told Mosley during the call, according to the plea agreement.
After entering his plea at the Dirksen U.S. Courthouse, Mosley, accompanied by his attorney, attempted to elude reporters waiting outside Guzman’s 12th-floor courtroom by ducking into a back hallway. He eventually exited through the lobby without comment.
It is not that hard for a company to take overly risky investments, to over leverage and to defraud their investors. Knowing what investment companies are doing with your investments, requiring frequent reports and most importantly knowing whom you are investing in are some keys to protecting an investment. While there are no guarantees in investing, taking some basic precautions, and conducting due diligence, can offer some level of protection.