By Robert Manor
Tribune staff reporter
Hedge fund Citadel Investment Group has purchased approximately $500 million of assets at discounted prices from Sentinel Management Group, people involved in talks to rescue customers of the troubled cash management company said Thursday.
"We are hearing the price was 85 cents to 90 cents on the dollar," said Jeffrey Barclay, a lawyer who represents some of the futures brokers whose money was trapped at Sentinel when it froze redemptions earlier this week.
Barclay, who was among those aware Citadel was buying part of Sentinel's assets, said many brokers are angry because they will be receiving less than the full value of the securities that are being sold to Citadel. The assets, Barclay said, are considered to be high quality.
"Citadel evidently bought the best portfolio," said Barclay.
Barclay noted that the assets were originally purchased with cash from the brokers' clients, which mean the brokers have a legal obligation to protect the money. "There is going to be a fight over this," he said. "There are lawyers all over Chicago drafting lawsuits as we speak."
Chicago-based Citadel, which has $16 billion under management or is roughly 10 times Sentinel's size, declined comment Thursday.
The Citadel deal does not help Sentinel's other non-broker customers, who may have as much as $1 billion on deposit with the company, which remains in a perilous state. Sentinel suspended redemptions from its estimated $1.6 billion in assets Monday after financial markets dried up last week.
Sentinel, headquartered in Northbrook, invests cash for futures brokers, futures investment funds and others who need to have nearly instant access to their money. Exchanges require futures traders to put up cash as collateral to insure they can honor their financial commitments, so it is critical that they have access to cash on short notice. Sources said they were impressed with the speed with which Citadel moved to do the Sentinel deal. Less than 72 hours elapsed between Citadel's first call to Sentinel and the hedge fund's transfer of cash to the company and receipt of the assets. Participants describe an almost around the clock blur of meetings, conference calls, offers and counter offers.
The speed was essential because international financial unrest was undermining the value of Sentinel's assets.
One of the other competitors for the deal was Horizon Cash Management, of Chicago. For several days Horizon offered to manage the assets coveted by Citadel, said Horizon president and founder Diane Mix. She is a former president of Sentinel who started a competing firm in 1991.
"We would act as the investment advisor," Mix said.
She said she proposed that a trust company hold the assets, and her firm would manage them. With $3.2 billion under management, she said her firm has the cash to meet the brokers needs for ready money, allowing time for the assets to mature at full value.
Mix said she did not know why Sentinel favored Citadel over her firm.
The Commodity Futures Trading Commission and the National Futures Association are charged with overseeing Sentinel.
Neither would comment Thursday, although a top official at the NFA was involved in talks Thursday aimed at resolving Sentinel's problems.
As of Thursday, some customers of Sentinel have already gotten their money back. Sentinel said in a letter to its clients that it had redeemed some of its accounts. The number of accounts and amount of money returned was not disclosed, but people familiar with the matter said it came to about $100 million.
On Monday Sentinel said that "we cannot meet any significant redemption requests without selling securities at a deep discounts to their fair value and therefore causing unnecessary losses to our clients." The company then cut off depositors from their money.
The company's financial distress appear to be a symptom of a global panic in credit markets.
Many types of loans and other securities have lost value over fears about the weakness of mortgage securities, particularly those backed by subprime lenders.
A person familiar with the matter said Sentinel's assets included highly complex financial instruments, many financed with borrowed money, which were losing value at a rapid pace.
Those were not the kind of investment's touted on Sentinel's Web site, which was taken down this week.
"All client funds are placed in readily marketable government and corporate securities, a large portion of which are in overnight investments," the company had claimed on its Web site. It described its investment strategy as "fail-safe."
Sentinel declined to comment Thursday.
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