CHICAGO (CN) - The liquidation trustee claims securities brokers defrauded Sentinel Management Group and its creditors of $280 million, by bribing Sentinel's head trader with lap dances at strip clubs, misleading the company about the liquidity of securities, and churning the accounts to reap commissions.
The federal complaint states: "This is a complaint by the Trustee against securities brokers Delores E. ('Doli') Rodriguez, Barry C. Mohr Jr., Jacques de Saint Phalle ('de St. Phalle'), Keefe, Bruyette & Woods, Inc. ('KBW'), and Cohen & Company Securities, LLC ("Cohen") for aiding and abetting a breach of fiduciary duty, commercial bribery, securities fraud, violation of the Illinois Blue-Sky law, violation of the Illinois Consumer Fraud Act, negligence and unjust enrichment. In addition, the Trustee seeks avoidance of transfers of cash and securities of well over $130 million to defendant KBW and of over $150 million to defendant Cohen made with the actual intent to hinder, delay and defraud Sentinel's creditors.
"The scheme began in approximately 2004, when de St. Phalle, Rodriguez and Mohr were employed by defendant KBW, and included other KBW officials as well. When Rodriguez and Mohr left KBW in 2006, they continued the scheme at their new employee, Cohen. For a short time, KBW also continued to pursue the scheme without Rodriguez and Mohr.
"Sentinel was a cash manager for various customers, including futures commission merchants, hedge funds, and individuals. As each of the defendants well knew, Sentinel was required to invest its customers' funds exclusively in safe, highly liquid securities, such as government securities and certain investment-grade corporate bonds.
"Nevertheless, defendants recommended and sold to Sentinel, through Sentinel's head trader, Charles Mosley, hundreds of millions of dollars worth of structured finance products. These securities were wholly unsuitable for Sentinel. They were unsuitable for Sentinel's customer portfolios because they were risky, illiquid securities with 30-year maturities, characteristics completely inconsistent with Sentinel's duty to invest customer funds in only safe, high-grade securities. And they were unsuitable for Sentinel's own small proprietary portfolio because Sentinel did not have anywhere close to sufficient assets to purchase that volume of securities. Defendants knew, or should have known, that these securities were unsuitable for Sentinel and sold them to Sentinel anyway.
"Defendants sold these securities to Sentinel utilizing two corrupt and deceptive methods. First, defendants compromised, co-opted, duped and bribed Mosley by improperly providing him and his subordinates with lavish meals, wine, entertainment, lodging, travel, tickets to sporting events, personal checks, and other benefits and things of value. In the case of defendant de St. Phalle, while he was employed by KBW, those benefits included a visit to strip clubs and paying for 'lap dances' for Mosley at that club. Second, having compromised Mosley's independent judgment, one or more of the defendants furthered their deceptive scheme by providing Sentinel with false and misleading information about the liquidity of the securities, particularly KBW's and Cohen's ability and willingness to make a market in these securities, and the ratings of certain of the securities.
"Defendants participated in this conduct in order to earn huge income, commissions, compensation and profits associated with the sale of these securities. To magnify this unlawful income, defendants traded in and out of various similar positions when there was no legitimate reason for Sentinel to engage in such transactions.
"In August of 2007, Sentinel collapsed under the weight of the illiquid and risky securities it had purchased, including the securities from KBW and Cohen, and the huge debt it had incurred to finance the purchase of such securities. The securities Sentinel was left holding turned out to be worth only a fraction of their face value, and many were worth nothing at all."
The trustee is represented by Chris Gair with Jenner & Block.
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