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Commodity Futures Trading Commission v. Sentinel Management Group

August 6, 2012


The opinion of the court was delivered by: Charles P. Kocoras United States District Judge


This matter comes before the Court on the motion of Plaintiff Commodity Futures Trading Commission ("CFTC") for partial reconsideration of our March 30th, 2012 judgment denying the CFTC's motion for summary judgment against Eric A. Bloom ("Bloom") and Charles K. Mosley ("Mosley") (collectively, "Defendants"), and granting Defendants' cross-motion for summary judgment. For the following reasons, Plaintiff's motion is denied in part and granted in part.


On March 30th, 2012, we issued a Memorandum Opinion ("March 30th Opinion") denying the CFTC's motion for summary judgment and granting Defendants' cross-motion for summary judgment. CFTC v. Sentinel Mgmt. Group, Inc., 08 C 2410, 2012 U.S. Dist. LEXIS 46198 (N.D. Ill. Mar. 30, 2012). We held that Defendants, as a matter of law, did not violate Sections 4b(a)(2), 4d(a)(2), 4d(b), 4g(a), and 6(c) of the Commodity Exchange Act ("CEA"). 7 U.S.C. §§ 6b(a)(2), 6d(a)(2), 6d(b), 6g(a), and 9.

The CFTC now requests that we reconsider our ruling with respect to Section 4b(a)(2), 7 U.S.C. § 6b(a)(2), and Section 4d(b), 7 U.S.C. § 6d(b). We briefly recite the facts relevant to the instant motion.

Sentinel Management Group ("Sentinel") was an investment group registered as both an "investment advisor" with the United States Securities and Exchange Commission ("SEC"), and as a "futures commission merchant" ("FCM") with the CFTC. Bloom was Sentinel's president and chief executive officer for nearly twenty years, controlling the company's day-to-day operations. He also served as Sentinel's chief compliance officer from January 2006 through August 2007. Mosley served as Sentinel's vice president, head trader, and portfolio manager for approximately five years.

Sentinel's business strategy relied on recruiting FCMs to invest their excess margin funds with Sentinel. CFTC regulations allow FCMs to deposit their customers' excess margin funds only with banks, clearing houses, or other FCMs. Sentinel sought the CFTC's advice on how to legally accept and invest FCMs' funds. The CFTC recommended that Sentinel register as an FCM pursuant to 17 C.F.R. § 1.49(d)(2), which Sentinel did. Soon after Sentinel's registration, the CFTC issued Sentinel a "No Action Letter," whereby exempting Sentinel from the net capital requirements otherwise applicable to FCMs, provided that Sentinel abstained from trading commodities. Sentinel represented that its registration as an FCM was "solely so that it may hold customer's funds deposited with it by other FCMs for the exclusive purpose of investing such funds."

Sentinel held the assets of its client portfolios in segregated custodial accounts with the Bank of New York Mellon Corporation ("BONY"). It also maintained a House Portfolio with BONY, which Sentinel held for its own proprietary trading. BONY maintained these accounts and provided Sentinel with financing through nightly overnight loans. BONY required Sentinel to maintain enough securities in its clearing accounts on a daily basis to collateralize the loan. Crystal York ("York"), Sentinel's employee primarily responsible for booking the loan each night, testified that she indiscriminately chose which securities to pledge as collateral with no consideration for how Sentinel allocated the BONY loan among the portfolios. York testified that she generally used the highest valued securities, which most often were funds belonging to Sentinel's FCM-clients. In the summer of 2007, Bloom instructed Sentinel employees to collateralize the BONY loan with Sentinel's FCM-clients' excess margin funds only if other securities were insufficient.

In 2004, the CFTC allowed for FCMs to use reverse repurchase agreements ("reverse repos") as a form of leverage. See 17 C.F.R. § 1.25. On Bloom's recommendation, Sentinel began using reverse repos, whereby it would sell securities to a broker at an amount that was below-market value with a commitment to repurchase that security at a pre-determined higher price. Sentinel profited through these arrangements if the securities' value at the time of repurchase exceeded the difference between the sale price and the repurchase price.

Sentinel's troubles began in June 2007, when a broker who held over $1 billion in outstanding reverse repos with Sentinel began to redeem them. The following month, another broker with $600 million in outstanding reverse repos followed suit. At first, Sentinel paid these brokers with money obtained from the nightly BONY loans. By August 13th, 2007, Sentinel lacked the capital to meet its clients' redemption orders. BONY sent Bloom a letter on August 17th notifying him that Sentinel had defaulted on the loan agreement, and that it had the right to sell the securities that Sentinel had pledged as collateral. Sentinel filed for Chapter 11 bankruptcy the same day.

On April 28th, 2008, the CFTC filed a complaint alleging that Bloom, Mosley, and Sentinel violated various sections of the Commodities Exchange Act ("CEA").*fn1 On March 30th, 2012, we denied the CFTC's summary judgment motion and granted Defendants' cross-motion for summary judgment in its entirety. The CFTC filed the instant motion on April 26th, requesting that we revisit our ruling.


Rule 59(e) allows for a litigant to file a motion to alter or amend a judgment within 28 days after the entry of judgment. Fed. R. Civ. P. 59(e). To prevail on such a motion, the moving party must present either newly discovered evidence or establish that judgment was the result of a manifest error of law or fact. Oto v. Metro. Life Ins. Co., 224 F.3d 601, 606 (7th Cir. 2000). A "manifest error" is the wholesale disregard, misapplication, or failure to recognize controlling precedent. Id. Any errors of law or fact must be clearly established by the moving party. Sigsworth v. City of Aurora, 487 F.3d 506, 512 (7th ...

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