September 13, 2016
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. 12 CR 409-1 -
Ronald A. Guzman, Judge.
Bauer, Kanne, and Hamilton, Circuit Judges.
Hamilton, Circuit Judge.
August 2007 Sentinel Management Group collapsed. Sentinel
managed short-term cash investments for futures commission
merchants, individuals, hedge funds, and other entities. Its
bankruptcy left customers and creditors in the lurch: over
$600 million was lost. In the wake of the collapse, Sentinel
president and CEO Eric Bloom was convicted of wire fraud and
investment adviser fraud.
government's case rested on three theories. First, the
government presented evidence that Bloom, despite assuring
customers otherwise, put their funds at significant risk by
using them as collateral for Sentinel's risky proprietary
trading. Second, the government contended that Bloom
fraudulently manipulated the rates of return paid to clients
on their investments. Third, the government claimed that
Bloom continued to accept new customer funds even after he
knew that Sentinel was about to collapse. The jury found
Bloom guilty on all counts, eighteen of wire fraud and one of
investment adviser fraud.
appeal, Bloom offers five arguments, which we address in
turn. First, Bloom challenges the sufficiency of the evidence
supporting his convictions. Second, he argues that his
convictions were tainted by prosecutorial misconduct. Third,
Bloom argues that the court erred by refusing to instruct the
jury properly on the meaning of a federal regulation
governing futures commission merchants. Fourth, he challenges
several of the district court's evidentiary rulings.
Fifth, he argues that in sentencing the district court used
too high a loss amount to calculate the sentencing guideline
range. We find no reversible error.
first provide an overview of Sentinel's business and its
representations to customers regarding how it used their
funds. Then we summarize Sentinel's collapse in 2007 and
Bloom's later indictment, conviction, and sentencing.
Sentinel's Business Model
was founded in 1979 by Philip Bloom, the father of defendant
Eric Bloom. The company had a single office in Northbrook,
Illinois, and had about twenty-one employees. Sentinel
managed investments for various clients such as hedge funds,
financial institutions, and individuals. Its primary business
was handling short-term investments for futures commission
merchants, also known as FCMs. FCMs represent investors who
trade in the futures and options markets, and they are
regulated by the Commodity Futures Trading Commission (CFTC).
Eric Bloom joined the company in 1988. He worked in several
different positions during his career at Sentinel, sometimes
occupying multiple positions at once. Bloom served as head
trader from 1988 until 2003 and chief compliance officer
until 2006. He also served as president and CEO from 1991
until August 2007 when the company filed for bankruptcy.
business model was unusual and perhaps unique. It was
registered with the CFTC as an FCM, but it did not trade in
futures or options. Instead, Sentinel invested funds for
other FCMs and, like a mutual fund, paid a return based on
profits and losses. Sentinel was the only company that the
CFTC permitted to operate in this manner.
was a proviso, however. The CFTC required Sentinel to follow
the CFTC regulations for FCMs. In particular, CFTC Rule 1.25
limited the types of securities Sentinel could purchase with
customer funds. 17 C.F.R. § 1.25. To minimize risk of
loss and to assure that cash was returnable on demand, Rule
1.25 permitted investment only in highly liquid, highly rated
securities such as U.S. Treasury bills. It also required
Sentinel to keep the funds of customers segregated from each
other and segregated from Sentinel's own funds. Sentinel
signed "seg letters" and Investment Management
Agreements to this effect. These letters and agreements
represented to the CFTC and clients that Sentinel segregated
customer funds from its own "house" funds, that
Sentinel would not have any interest in the customer funds,
and that Sentinel would comply with CFTC rules.
was also registered with the Securities and Exchange
Commission (SEC) as an investment adviser. As an adviser,
Sentinel owed its clients a fiduciary duty of good faith.
SEC v. Capital Gains Research Bureau, Inc., 375 U.S.
180, 194 (1963) (investment adviser has "an affirmative
duty of utmost good faith, and full and fair disclosure of
all material facts") (internal quotation marks and
citation omitted). Defendant Eric Bloom was named on
Sentinel's investment adviser registration as the person
authorized to give investment advice on behalf of the
company. The SEC Custody Rule also required segregation of
customer funds. 17 C.F.R. § 275.206(4)-2.
provided two investment options for its clients: the 125
Portfolio and the Prime Portfolio. The 125 Portfolio was for
FCMs, and it allowed them to invest their customers'
funds. This portfolio was intended to provide safe,
short-term investments with same-day liquidity. It was
subject to CFTC regulations, including Rule 1.25. At the
time, Rule 1.25 permitted investment only in securities with
a rating of AA or better. After 2007, however, the rule was
revised to limit investment to securities that are fully
guaranteed by the federal government. At Sentinel, the pooled
accounts of customer funds from the 125 Portfolio were called
second option for Sentinel customers-the Prime Portfolio-was
for non-FCM clients such as hedge funds, financial
institutions, and individuals. FCMs could also invest their
own "house" funds (not customer funds) in the Prime
Portfolio. The Prime Portfolio was slightly riskier. It was
intended to provide a higher rate of return than the 125
Portfolio by investing in securities with longer maturity
dates and slightly lower ratings. Nonetheless, Sentinel and
Bloom promised that this portfolio would not stoop below
high-quality "investment grade" securities. These
funds were called "Seg 3."
addition to the two public portfolios, Sentinel had a
"house account" for its own proprietary trading.
This account was not constrained by the grade of securities.
It could purchase securities of any rating or no rating.
Defendant Bloom's father, Philip Bloom, owned the
majority of the funds in the house account.
Sentinel's Representations to Customers About Its Use
of Their Funds
told its customers their funds would be safe, and it backed
this assurance with specific claims about its business model
and investment practices. The pitch was that customers could
earn higher-than-average interest, receive same-day cash
redemptions, and keep their funds effectively
bankruptcy-proof. Sentinel claimed this was possible because
it pooled cash from multiple clients, which afforded it
greater investment flexibility. It made these claims through
marketing materials, sales presentations, and its website.
was an attractive option to many Sentinel customers,
particularly FCMs. Since FCMs were investing their
customers' funds, preservation of principal was paramount
for them. Liquidity was also vital because FCMs receive
margin calls that require them to provide cash to exchanges
on behalf of their clients on short notice.
told customers how it could assure the safety of their
customers' principal. Its marketing materials said that
it purchased "only the highest quality and most liquid
securities" and that its "objective [was] to
achieve the highest yield consistent with preservation of
principal and daily liquidity, not simply 'the highest
yield.'" Sentinel told customers of the 125
Portfolio that their supporting securities were highly rated
and complied with Rule 1.25.
also promised that client funds would be segregated and thus
thoroughly protected from bankruptcy. For both portfolios,
Sentinel said that it would pool client assets by portfolio
and place them in segregated, bankruptcy-proof custodial
accounts in the client's name in the Bank of New York.
The accounts would be bankruptcy-proof because, even if
Sentinel went bankrupt, the securities remained in segregated
accounts in the client's name and would thus not be
considered Sentinel's assets. And if the Bank of New York
failed, the assets would be transferred to another custodial
were also told that they would know which securities
generated their yields. Marketing materials stated:
"Sentinel sends daily emails ... to each client
reporting the total amount invested, the interest earned, and
supporting securities." In other words, customers would
know not only how much interest they were earning but also
how they were earning it. In a letter to the CFTC, Sentinel
said that customers' profits and losses were based on
their ownership shares of an account's investments; there
was no allocation of profits and losses across the different
also told customers that it used two means to assure same-day
liquidity: repurchase agreements and a loan from the Bank of
New York. A repurchase agreement is a transaction where one
party (the borrower) sells a security to a counterparty (the
lender) with an agreement to repurchase the security later
with interest. Sentinel was involved in both ends of these
transactions: sometimes it used its customers' cash to
purchase securities, earning interest when it resold the
security (lending); other times Sentinel sold securities to
obtain cash quickly, repurchasing the security and paying
interest afterwards (borrowing). Sentinel's website said
that it used "overnight" repurchase agreements to
facilitate its liquidity needs.
second means to assure same-day liquidity was a loan with the
Bank of New York. Sentinel and Bloom told clients that this
loan was specifically for the cash redemptions of clients in
the Prime Portfolio, not the 125 Portfolio. Bloom specified
that it was a one-day transaction that was paid off the next
day. It was purportedly only for liquidity purposes. Bloom
did not tell clients that the loan ...