In re Sentinel Management Group, Inc.

Decision Date08 December 2008
Docket NumberNo. 07 B 14987.,07 B 14987.
Citation398 B.R. 281
PartiesIn re SENTINEL MANAGEMENT GROUP, INC., Debtor.
CourtU.S. Bankruptcy Court — Northern District of Illinois

Catherine L. Steege, Esq., Vincent E. Lazar, Esq., Christine L. Childers, Esq., Mark A. Berkoff, Esq., Marc Fenton, Esq., Susheel Kirpalani, Esq., and Benjamin I. Finestone, Esq., Attorneys for Plan Proponents.

Geoffrey S. Goodman, Esq., and William J. McKenna, Esq., Attorneys for The AdHoc Committee of Seg 1 Customers of Sentinel Management Group, Inc.

Timothy R.Casey, Esq., Attorney for Penson GHCO and Penson Financial Futures Inc.

Robert V. Shannon, Esq., Attorney for Farr Financial, Inc. and IPGL Ltd.

Frederick J. Grede, Trustee or Other Attorneys.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the contested confirmation of an amended plan submitted by Frederick J. Grede, the Chapter 11 Trustee (the "Trustee") for Sentinel Management Group, Inc. ("Sentinel") and the Official Committee of Unsecured Creditors (the "Committee") (the Committee together with the Trustee, collectively referred to as the "Plan Proponents"). For the reasons set forth herein, the Court confirms the plan, as amended and discussed herein, with an additional amendment and overrules the objections. Namely, the Court directs the Plan Proponents to amend the "catch-up" provision in the plan as discussed infra. The Plan Proponents are directed to file a Fourth Amended Plan within seven days from the date of this Opinion, and shall file a proposed order of confirmation that conforms with the appropriate Official Form pursuant to Federal Rule of Bankruptcy Procedure 3020.

The Plan Proponents filed a Chapter 11 Plan of Liquidation on May 12, 2008 [Docket No. 499] and related Disclosure Statement on May 13, 2008 [Docket No. 501]. A number of creditors objected to the plan which led to the Plan Proponents filing an Amended Chapter 11 Plan of Liquidation on June 9, 2008 [Docket No. 571] and related Disclosure Statement [Docket No. 573], which was followed by a further Modified Chapter 11 Plan of Liquidation [Docket No. 591] (the "First Amended Plan") and related Disclosure Statement [Docket No. 592] (the "Disclosure Statement") on June 18, 2008.

On June 19, 2008, the Court entered an order approving the Disclosure Statement as containing adequate information within the meaning of 11 U.S.C. § 1125(a) and approving the Plan Proponents' Joint Motion for Order Approving Solicitation and Voting Procedures and Setting Hearing on Confirmation of Liquidating Plan (the "Solicitation Procedures Order") [Docket No. 596]. The Solicitation Procedures Order, among other things, (i) set the dates, procedures, and forms applicable to the solicitation process, (ii) established tabulation procedures, (iii) established a deadline for objecting to the First Amended Plan and (iv) scheduled the hearing to consider confirmation of the First Amended Plan. The Solicitation Procedures Order set August 1, 2008 as the deadline for submitting a ballot and/or filing and serving objections to confirmation of the First Amended Plan.

The objections to confirmation were significant. Specifically, ten SEG 1 Customers (defined infra), collectively referred to as the Ad Hoc Committee of SEG 1 Customers1 (the "Ad Hoc Committee") filed an objection to the First Amended Plan on August 1, 2008 [Docket No. 903]. The following creditors also filed objections to the First Amended Plan on August 1, 2008:(a) Lehman Brothers, Inc. ("Lehman") [Docket No. 939]; (b) Farr Financial, Inc. ("Farr Financial"), IPGL Ltd. ("IPGL"), Penson GHCO ("Penson"), and Penson Financial Futures, Inc. ("Penson Financial") [Docket No. 940]; (c) Citadel Equity Fund, Ltd. [Docket No. 942]; and (d) The Bank of New York Mellon2 ("BNY") [Docket No. 943]. In response to the objections, the Plan Proponents filed a Memorandum in Support of Confirmation of the Amended Chapter 11 Plan of Liquidation [Docket No. 981].

A hearing was held on August 12, 2008 and August 13, 2008 to consider confirmation of the Amended Plan (the "Confirmation Hearing"). On August 25, 2008, pursuant to agreements reached with certain objecting parties, the Plan Proponents filed a Second Amended Chapter 11 Plan of Liquidation [Docket No. 1018]. The Plan Proponents also filed the Liquidation Trust Agreement on August 25, 2008 [Docket No. 1020].

On October 27, 2008, the Trustee filed a motion to approve, among other things, BNY's objection to the First Amended Plan [Docket No. 1151]. BNY's objection to the First Amended Plan was resolved on November 20, 2008 based upon a settlement entered into between the Trustee and BNY and approved by the Court (the "BNY Settlement") [Docket No. 1215]. On November 20, 2008, upon approval of the BNY Settlement, the Plan Proponents filed a Third Amended Chapter 11 Plan of Liquidation (the "Third Amended Plan" or "Plan"), which incorporates the amendments made in the Second Amended Plan, plus the agreements reached between the Trustee and BNY [Docket No. 1210].

Despite the settlement with BNY, many objections remain unresolved. Specifically, the Ad Hoc Committee, Penson, Penson Financial, Farr Financial, and IPGL (collectively the "Plan Objectors") filed a joint post-Confirmation Hearing brief (the "Post-Confirmation Hearing Submission").3

Based upon the number of objections that remain unresolved in the Plan Objectors' Post-Confirmation Hearing Submission, the Court will address each objection by category in turn. Upon the testimony and evidence presented to the Court at the Confirmation Hearing, the Court makes the following findings of fact and conclusions of law.

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Additionally, whether the Court should confirm the Third Amended Plan is a core proceeding under 28 U.S.C. § 157(b)(2)(L).

II. FACTS AND BACKGROUND
A. Sentinel and Its Customers

Sentinel was an Illinois corporation, headquartered in Northbrook, Illinois and was registered with the Securities and Exchange Commission as an Investment Adviser. Sentinel also was registered with the United States Commodity Futures Trading Commission ("CFTC") as a futures commission merchant ("FCM").4 Sentinel's day-to-day operations involved the management of cash investments for numerous clients, including commodity brokers (which were registered FCMs), hedge funds, financial institutions, pension funds, and individuals. Generally, Sentinel was

a privately held corporation, thinly capitalized, owned and operated by its founder, Philip Bloom, and his son, Eric Bloom, both of whom owned a significant percentage of its stock. Its chief trader, Charles Mosley, and the Blooms controlled day-to-day operations of Sentinel including its website, accounting systems, investments, dealings with [BNY], customer statements and various financial arrangements.

Grede v. McGladrey & Pullen LLP, No. 08 C 2205, 2008 WL 4425447, at * 2 (N.D.Ill. Sept.26, 2008).

As a FCM, and an entity managing other FCM investments, Sentinel was required to strictly segregate the investments of its customer groups from each other and from Sentinel's own funds. In fact, however, it did not segregate customer funds. Rather, Sentinel commingled customer funds with its own funds and used the customer funds as collateral for its loans from BNY. (Confirmation Hearing Trans. Aug. 12, 2008 at 35:1-37:14.)

The principals of Sentinel divided its customers into four groups. The first customer group, known within Sentinel as SEG 1 (the "SEG 1 Customers"), was to consist solely of the funds and property of customers of FCMs, which typically invested their customers' funds through Sentinel. The second customer group, known as SEG 2 (the "SEG 2 Customers"), was to consist solely of the funds and property of customers of FCMs that were engaged in trading at foreign exchanges. The third group, known as SEG 3 (the "SEG 3 Customers"), was to consist of the funds and property of all other types of clients, including FCM house (non-customer) funds, as well as the funds and property of hedge funds, trust accounts, endowments, and individuals. The fourth customer group, known as SEG 4 (the "SEG 4 Customers"), was to consist of the funds and property of SEG 3 Customers whose property was denominated in Euros. In addition to managing investments for the SEG 1, SEG 2, SEG 3, and SEG 4 Customers' portfolios, Sentinel owned a "house" or "street" portfolio of securities which it traded for the benefit of Philip Bloom, Eric Bloom, and Charles Mosley, the officers, directors, and insiders of Sentinel.

B. Sentinel's Collapse and the Citadel Sale

On August 13, 2007, Eric Bloom, the president and chief executive officer of Sentinel, sent a letter to Sentinel's customers. The letter provided that Sentinel was halting redemptions out of a concern for the liquidity crisis in the credit markets. Sentinel was fearful that it would not be able to meet significant redemption requests without resorting to discount sales, which would cause unnecessary losses to its customers. This resulted in immediate demands for redemption by numerous customers.

On August 16, 2007, Sentinel entered into an agreement with Citadel Equity Fund, Ltd. and Citadel Limited Partnership (collectively "Citadel") whereby Sentinel agreed to sell, assign, and transfer to Citadel certain securities (the "Citadel Sale Securities") held for the benefit of SEG 1 Customers (the "Citadel Sale"). The final sale price paid by Citadel to Sentinel was approximately $320.5 million (the "Citadel Proceeds"). (Disclosure Statement p. 14.) The Citadel Sale Securities were transferred to Citadel on August 16 and 17, 2007.

C. ...

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