Sentinel, which was desperately working to resolve the liquidity crunch, jumped too early at an offer from Citadel, a large hedge fund which offered 75% for Sentinels $312m in segregated accounts for FCMs.
In a court filing, Penson GHCO alleged that it tried to offer a deal in the afternoon of 16 August whereby it would assume control of the entire segregated fund portfolio for free from Sentinel, along with the help of Fortis Bank with the intention of helping with the orderly liquidation (as opposed to a distress sale) and that Penson GHCO would offer liquidity assistance.
Penson attorneys contacted Commodity Futures Trading Commission (CFTC), National Futures Association (NFA) and finally Sentinel officials to offer their plan.
However, Sentinel cut its deal with Citadel in the early morning hours of 16 August with the consent of NFA.
When Penson attorneys contacted Sentinel CEO Larry Bloom about its proposal to take over the portfolio for
free, Bloom said Its too late. You should have called us yesterday, according to Penson GHCO, which claimed it made a similar offer to manage the assets for Sentinel on 15 August as well.
Penson GHCO is suing both Sentinel and Citidel over the transaction claiming that the latter intentionally and maliciously interfered with Penson GHCO in its efforts to manage the portfolio. Penson GHCO will reportedly lose $6.5m in getting just 75 cents on the dollar for its segregated fund deposits with Sentinel. Other FCMs will lose substantial sums as well (see story page 3). A Penson spokesperson declined to comment on the Sentinel matter.
NFA spokesperson Larry Dykeman told FO Week that NFA was fully aware of the portfolio sale to Citadel at a discount. The idea, he said, was to get as much cash back to the brokers so they could meet margin requirements. By press time, 23 firms had received partial redemptions and no firms involved had failed to meet margin requirements.
There are obviously some not happy with the deal
Penson GHCO had over $35m deposited in Sentinel segregated account, or more than 30% of its $120.5m in segregated funds it holds for customers, according CFTC filings. Other firms have also sued Sentinel including Vision Financial Markets, a firm with a reported $368.7m in segregated funds and Velocity Futrures with $19.5m in segregated funds, according to CFTC filings.
One FCM executive said that Penson GHCO and Fortis could have handled the portfolio quickly and efficiently by offering the securities to Sentinel customers or perhaps by securing a line of credit with the portfolio and distributing cash back to the firms that requested it.
They could have quickly turned that into liquidity, he said.