Further signs of the financial damage done by the collapse of Sentinel Management Group emerged 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.
The 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.
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 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 has also accused Sentinel of moving $460m of clients’ money into its own “house” funds, part of which it allegedly used as collateral for a $321m bank loan.
A request is expected to be heard on Thursday by Sentinel in a Chicago court to have the court appoint a trustee to manage the firm while its management deals with multiple regulatory enquiries.
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.”
However, Dan Roth, NFA president, told the Financial Times: “There was no lack of communication between the regulators and there was an almost constant flow of communication about what was going on.”
Sentinel is in the midst of disbursing funds to some clients as part of a deal involving the purchase of a special segregated, or “seg one”, account by Citadel, a Chicago hedge fund.
The clients in question were futures brokers whose clients’ assets Sentinel held in such an account – meaning they were supposed to be separated from Sentinel’s house funds.
On Tuesday, a judge ordered Sentinel could start paying its “seg one” clients under the arrangement with Citadel.