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2820

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

UNITED STATES OF AMERICA, )

)

Plaintiff, )

)

v. ) No. 12 CR 409

)

ERIC A. BLOOM, ) Chicago, Illinois

) March 25, 2014

Defendant. ) 9:00 a.m.

VOLUME 18

EXCERPT OF TRIAL PROCEEDINGS

BEFORE THE HONORABLE RONALD A. GUZMAN AND A JURY

APPEARANCES:

For the Plaintiff: HON. ZACHARY T. FARDON

United States Attorney

BY: MR. CLIFFORD CHARLES HISTED

MR. PATRICK MARK OTLEWSKI

Assistant United States Attorneys

219 South Dearborn Street

Suite 500

Chicago, Illinois 60604

(312) 353-5300

For the Defendant: COTSIRILOS, TIGHE, STREICKER,

POULOS & CAMPBELL, LTD.

BY: MR. THEODORE THOMAS POULOS

MR. TERENCE H. CAMPBELL

33 North Dearborn Street

Suite 600

Chicago, Illinois 60602

(312) 263-0345

RYAN & SWYGERT, LLC

BY: MR. MATTHEW S. RYAN

33 North Dearborn Street

Suite 600

Chicago, Illinois 60602

(312) 332-5675

Court Reporter: Nancy C. LaBella, CSR, RMR, CRR

Official Court Reporter

219 S. Dearborn Street, Room 1222

Chicago, Illinois 60604

(312) 435-6890

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2821

(The following is an excerpt of report of proceedings:)

THE CLERK: 12 CR 409, United States of America v.

Bloom.

MR. HISTED: Good morning, your Honor. Cliff Histed

and Patrick Otlewski for the government.

MR. POULOS: Good morning, your Honor.

THE COURT: Good morning.

How long do you think you'll be?

MR. HISTED: I'm hoping not to exceed an hour, Judge,

probably less.

THE COURT: Okay.

The exhibits, are we all squared?

MR. POULOS: I think we're all squared away.

MR. OTLEWSKI: Yes, your Honor.

THE COURT: Okay. And the last thing is the

transcripts.

MR. POULOS: Your Honor, we object to the transcripts

going back --

THE COURT: Okay.

MR. POULOS: -- at this time. The instruction has

been prepared. If they want them, obviously they'll get them.

THE COURT: All right. Then we'll be out at 9:30,

bring the jury out, commence the final closing.

MR. HISTED: Thank you, Judge.

THE COURT: Thank you.

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(Recess taken.)

THE COURT: Will you be using the prompter?

MR. HISTED: I'll be using the document camera here,

your Honor, the Elmo.

THE COURT: I think that's where we're at.

Ready for the jury?

MR. HISTED: Yes.

MR. POULOS: Yes.

THE COURT: Let's bring them out.

(Jury in.)

THE COURT: Good morning, ladies and gentlemen.

Welcome back.

The Court recognizes the government for its closing

rebuttal.

MR. HISTED: Thank you, Judge.

REBUTTAL ARGUMENT ON BEHALF OF THE GOVERNMENT

BY MR. HISTED:

Ladies and gentlemen, make no mistake, the way that

man ran Sentinel Management Group during the last few years of

its existence was an outrageous scam. This defendant betrayed

and lied to his customers, and he lied about protecting the

money that they had entrusted in his care. He lied on the

Sentinel Web site. He lied in the investment management

agreement. He lied in the so-called segregation letters. He

lied on a daily basis in the daily account statements that

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2823

were sent to the customers. And, yes, folks, he lied directly

to their face when he met some of these customers in person.

This is not a case about mismanagement. This is not

a case about hindsight scrutiny of business decisions made

under tough circumstances. This is a case about the

defendant's long-running scam and his scheme to defraud his

customers, a scam that started years before the financial

crisis.

Let me just be blunt. That man ripped off his

customers. And we have absolutely proven that beyond a

reasonable doubt in this case.

Before I go any further discussing some of the

evidence with you, I want to share with you some of the jury

instructions that we anticipate Judge Guzman will give to you.

Yesterday some of the -- some of the instructions were shown

to you by defense counsel, but I'm going to show you some

right now to sort of frame the way we should be thinking about

the evidence that we see in this case.

Ladies and gentlemen, you've heard a lot about good

faith yesterday. And you were shown portions of the good

faith jury instruction that we anticipate you'll get. I

believe Mr. Campbell read the first and second paragraphs to

you yesterday.

I want to call your attention to the third paragraph,

which says, A defendant's honest and genuine belief that he

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will be able to perform what he promised is not a defense to

fraud if the defendant also knowingly made false and

fraudulent representations.

Do you understand, there can be no good faith defense

for a defendant who knowingly lies. Those two are

incompatible ideas. And I'm going to talk to you about some

of the defendant's lies as we go on a little bit later this

morning.

It's important also for your consideration that in

considering whether the defendant has proven a scheme to

defraud -- and that, folks, is what we have alleged here --

the government must prove that one or more of the false

pretenses, representations or promises or omissions or

concealment of material facts charged in the indictment, we

must prove them beyond a reasonable doubt. But the government

is not required to prove them all. This is an important

point.

Give the weight -- give the evidence whatever weight

you think it deserves, but use your common sense. I'm going

to be calling on you to use your common sense. You should use

your common sense. And you should bring to bear your everyday

experience when considering the evidence.

People sometimes look at one fact and conclude from

it that another fact exists. This is called an inference.

You are allowed to make reasonable inferences so long as they

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are based on the evidence. And I raise that point because

yesterday I think Mr. Campbell might have left you with the

misimpression about the things that the government does and

does not have to prove in this case.

You may recall comments such as, if there's a tiny

little hole somewhere over here, the government has utterly

failed to prove its case. That is wrong. That is misleading.

We must prove one of the false representations in this case.

We need not prove them all. And you are allowed to make

reasonable inferences. You are allowed to look at the

evidence in the context of your own day-to-day life and make

reasonable inferences from that evidence.

I will read this one for you: An offense may be

committed by more than one person. A defendant's guilt may be

established without proof that the defendant personally

performed every act constituting the crime.

Keep that in mind when we talk about who gave

directions to whom. Yesterday you may have been left with the

misimpression that if the defendant did not personally do

every single act that constitutes a crime, he can't be guilty.

That is not true. It is not required that the defendant

personally sat down and typed in false account rates on the

account statements. Though, certainly he did. It is not

required that he personally do every single thing if he

directs others to act on his behalf.

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Any person who knowingly aids, counsels, commands,

induces or procures the commission of an offense may be found

guilty of that offense if he knowingly participated in the

criminal activity and tried to make it succeed.

In other words, if you induce others to commit a

crime and you do so knowingly, you can be convicted of that

crime.

If the defendant knowingly causes the acts of

another, as I said, the defendant is responsible for those

acts as though he personally committed them. But the

instruction goes on to say that, of course, you can't be found

guilty if you have no knowledge of the crime.

Just a few more of these, folks. They'll be

important as we go forward.

A person acts with the intent to defraud when he acts

with the intent to deceive or cheat another person in order to

cause a gain of money or property to the defendant or another

or to cause the potential loss of money or property to another

or to expose another person to a substantial risk of loss of

which that other person is not aware.

And, finally, I'll direct your attention simply to

the highlighted portions. Investment advisers owe fiduciary

duties to their customers. These duties include an

affirmative duty of utmost good faith and full and fair

disclosure of material facts, although simply failing to carry

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2827

out your duty does not in and of itself constitute a criminal

offense.

All right. Now that we've got some of these bedrock

principles, I want to point out to you that every time you

heard the word "good faith" yesterday -- that's good faith;

that's good faith. Over and over you heard that -- that drum

beat upon. It was not made clear to you that that is not

available to somebody who lies. And in this case, that's what

happened.

Yesterday you were shown portions probably for the

first time of the indictment. I want to call your attention

to two paragraphs of this indictment because they'll be very

important to your consideration.

Paragraph four says, It was further part of the

scheme that the defendants Bloom and Mosley misappropriated

securities belonging to customer portfolios by using them as

collateral for a loan that Sentinel obtained from the Bank of

New York to purchase millions of dollars worth of high-risk,

illiquid CDOs from Firm 1 and Firm 2 for the benefit of

Sentinel's House Portfolio -- for the benefit of Sentinel's

House Portfolio -- without disclosing to Sentinel customers

that the securities were being used in this manner.

Then later on, down in paragraph five, The defendants

employed an undisclosed trading strategy for the House

Portfolio that included extensive leverage and a high

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concentration of illiquid and high-risk securities that was

inconsistent with the representations made to customers.

Why have I pointed that out to you? All throughout

this trial, including yesterday afternoon, you heard

constantly this argument made, There is no evidence whatsoever

that Sentinel bought inappropriate securities for customer

portfolios.

Folks, we never took that on. That has never been a

part of the case. Every minute of time we spent on

cross-examining witnesses about that issue, about whether

securities were suitable for customer portfolios, every minute

of time we heard arguing that point was a complete and utter

waste of your time and it misdirected your attention and your

energy. It is one of the many ways that the defendant has put

up a smoke screen in this case, hoping that you would get

lost.

MR. POULOS: Your Honor, I object to that. It's an

improper attack on defense counsel.

THE COURT: No, it's not an attack on defense

counsel. It's an attack on defense strategy, which is

allowed. Overruled.

MR. HISTED: Thank you, Judge.

THE COURT: And let me assure the jury that you

should not take anything said by the attorneys as an attack on

each other. That is not allowed.

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MR. HISTED: Thank you, Judge.

BY MR. HISTED:

Let's talk about some of the defendant's lies, the

lies that completely gut his so-called good faith defense.

The defendant did not act in good faith, and we ask that you

give no weight and no credit to those assertions.

First of all, he lied on the Web site. Do you

remember the part of the Web site where it says, How can we

deliver investment gains without taking excessive risk? And

then there were four different points, bullet points, beneath

that where the defendant purported to tell people how they

could generate that investment return without risk -- without

excessive risk.

What is not found on that Web site is the discussion

of leverage. Leverage is the way that they delivered the

investment returns, not the other four ways.

Now, we're not here to say that they were required to

disclose the use of leverage on the Web site itself. But

where you tell somebody a half-truth, pretending to tell them

the entire truth, that is a lie. The defendant could have

remained silent on the Web site about leverage, but instead he

chose to take on the issue. He answered the question that

people wanted to know: How can you deliver these investment

returns without taking excessive risk? And by not saying

leverage, which was the truth, when posing that question, he

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was telling a half-truth. And a half-truth that masquerades

as the full truth is a lie.

And I think that's a matter of common sense. Right?

If you want to know something from somebody and you ask them

to tell you the full truth and they tell you only half of the

truth, knowing that you need the truth, I think we all know

that we feel as though we've been deceived. And that's

certainly the case that happened here.

And while I'm on the subject of telling the truth,

just remember -- taking you back to that jury instruction that

I just showed you -- the defendant was an investment adviser.

Right? That's a role he took upon himself. He chose to

become an investment adviser to take advantage of the status

and the business opportunities that come along with that. So

he decided to register with the Securities and Exchange

Commission. And when he took on the role and the

responsibility and the benefit of becoming an investment

adviser, he took on this fiduciary duty.

And fiduciaries like the defendant, as you saw from

the jury instruction, have an utmost duty of good faith, an

affirmative duty to give full and fair disclosure. Right?

Fiduciaries are not allowed to hide behind fine print is the

point I'm trying to make. Fiduciaries like the defendant are

supposed to go out of their way to tell the truth to people

when those people entrust their money to them in their role as

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a fiduciary.

So with that idea, let's go back to the Web site.

Also on the Web site, we saw documents called portfolio

attributes. You've seen these documents many times in this

case.

This portfolio attributes document happens to be

dated June 30th, 2007, but you saw many iterations of this

throughout the trial. You've seen some from 2005, 2006 that

the defendant e-mailed to some of his customers. This

document, folks, is another lie. It is an affirmative lie

because by now you've heard the evidence that they manipulated

the interest rates, Mr. Bloom and Mr. Mosley, that they

reported on a daily basis to their customers. That has been

clearly established. And I'm going to talk more about that

later.

But you heard Jeff Logan testify that the same data,

the same information that was used to create those phony and

false -- those fake account statements was then imported into

documents like this. So anybody who went to the Sentinel Web

site and looked at these graphs would be falsely led to

believe that Sentinel's 125 Portfolio had outperformed the

competition. You didn't have to be a customer to be exposed

to this falsehood. Anybody who went to the Web site would see

it. And then, additionally, when they e-mailed these to the

customers, that was just one of the many sorts of lies that

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I'm talking about here.

The defendant lied on the investment agreements

themselves. I'm not going to pull out one. You've seen

dozens and dozens of those. But you've by now become familiar

with this language. Sentinel shall not own nor have any

interest in funds or securities in the account or of any other

funds or securities in which the client has a beneficial

interest. In this important pledge that was made to every

single customer, on every single investment agreement going

back at least to the '90s and probably before, this false

statement was made. And it is false because, as we know, the

defendant pledged his customers' securities as collateral for

a loan that the House Portfolio, that his portfolio, used for

his benefit. And when you pledge your customers' securities

as collateral for your own benefit, you cannot say to them,

Sentinel shall not own or have any interest in your funds or

in your securities. That's just one of the lies that thread

sort of throughout this entire case.

He lied on the Form ADV. Do you remember that Form

ADV? We've seen multiple, multiple iterations of that. You

may remember this familiar language, The registrant may use

repurchase/reverse repurchase agreements and/or bank loans as

part of its investment strategy or for liquidity purposes.

No. No. Sentinel may not use it. Sentinel was

using leverage. And this is one of those half-truths that I

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was telling you about before. When you pretend to disclose

facts to somebody and you disclose only half of the truth or

suggest the possibility of a truth, you are lying. The Form

ADV that you saw over and over was a half-truth designed to

mislead. There is nothing in that form that tells customers

in the 125 Portfolio, hey, folks, we are using leverage; we

are. It doesn't say how much or how often or in what manner.

And that's what the people wanted to know. That was business

critical information for the customers of Sentinel; are you

using leverage and, if so, how.

The financial statements. Time and time again, your

attention has been directed to these audited financial

statements that Sentinel put out; and they held them up as

examples of disclosure of leverage. Folks, you can scour

these audited financial statements to your heart's content and

you're never going to see any disclosure to a customer in the

125 Portfolio that their securities are being used as

collateral for the loan. You're never going to see a

disclosure that their money is put at risk. You're never

going to see a disclosure that talks about the 125 Portfolio.

And not all customers saw that. Right? Some of the

customers routinely requested the financial statements and

they got them and they looked at them and were still confused.

And I'll talk about that in a minute. Others never got them

at all. You can't hold out a document as a disclosure that

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you've made to your customers if you don't give it to the

customers. The response might be, well, some customers asked

for them and others didn't. But just -- you can't just not

give a document as a disclosure to a customer and then later

say it was available there if they had asked for it.

Another lie that the defendant told was in these

so-called segregation letters. You've seen several copies of

these, several different versions.

This is Government Exhibit 706. This is a letter

that the defendant signed in the fall of 2006 for a customer

called Fortis. And in this letter, the defendant said, I

acknowledge that the funds -- customer, Fortis -- that you are

giving me are segregated futures customers' funds. And I

promise to treat these funds separately, to treat them in

accordance with the CFTC rules and regulations of the

Commodity Exchange Act. And then the defendant signed that.

Again, it's dated up at the top August 2006. But I believe it

was actually effectuated in September, according to the fax

heading.

Why is -- why does this matter? Why do we care about

the seg letter? Do you remember what else was happening in

the fall of 2006? During the time that the defendant signs

this letter and says to Fortis, I will keep your money

separate, I understand what the rules are, I understand what

the regulations are, the defendant was, in fact, already using

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customer funds as collateral for his own trading loan. He

just was.

Let me show you Government Exhibit 603. You saw this

during the trial. This is around the same time period that

the chief financial officer, T.C. Arana, was discussing this

issue with the defendant. This e-mail is dated October 19th,

2006. And in the e-mail, T.C. says, Specifically to reiterate

that we do not want to be using customer assets to secure the

house loan and that perhaps hypothecating -- or pledging --

customer SEG 1 securities for the loan may not be something

that we want to be doing.

Okay. This was happening at Sentinel at the same

time the defendant signed that segregation letter promising to

keep those funds safe.

What else was happening? You saw the analysis done

by the litigation consultant from Mesirow Financial. Sentinel

had, as you know, an enormous loan from the Bank of New York.

And according to this chart, Government Exhibit 1505, you can

see that the house portion of the loan, the portion of the

loan that Sentinel itself allocated to its own personal

trading, was gigantic. Folks, look at this. In January

of 2006, that loan was more than $100 million. $100 million

that the defendant was using of its business loan secured at

all times by the customer securities.

MR. CAMPBELL: Objection, Judge. That's false. That

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is just false.

THE COURT: The objection will be overruled. And I

will reiterate to the jury that they are to rely upon their

own recollection of what the evidence was.

BY MR. HISTED:

Starting out at more than $100 million, going up,

continuing on. You've seen the chart before. You'll have a

chance to examine this in the back.

There was a portion of the Bank of New York loan

allocated to the house. The defendant's own documents, the

daily yield allocation sheet, showed that over and over and

over again. I show you this document just to point out -- and

this covers the time period that I was just talking about in

the segregation letter. At the time the defendant signed this

pledge, this promise to Fortis, an FC- -- an FCM, he knew at

that time that he already was using funds belonging to

customers like that for his own loan.

Putting aside these documents that I've shared with

you, the defendant also looked some of these customers dead in

the eye and lied right to their face.

Do you remember Rotchford Barker? He was the

gentleman from Wyoming, the rancher who came out here. He met

face-to-face with the defendant, looked him dead in the eye

and told him, I want the most conservative investments you

have, Mr. Bloom. I don't want any bonds that have a duration

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Histed - Rebuttal Argument

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longer than 90 days. Can you help me? And the defendant

said, yes, we can do that. I will put you in a portfolio

where that is the -- where those are the parameters. And we

know that's not what happened.

You saw the account statement dated August 13th,

2007, for Mr. Barker. First of all, the bonds shown on that

statement didn't have a duration of 90 days or 90 weeks or

90 months. They went out for years. They were these PreTSLs,

CDOs, and other sorts of CDOs. And you also saw from the

August 13th, 2007, account statement that 14 of the 16

securities on Mr. Barker's statement were pledged as

collateral for the loan. That is not what Mr. Barker

bargained for. And the defendant looked him in dead in the

face and told him he would give him the most conservative

investment possible. And we know that Mr. Barker didn't just

misremember that when he was testifying. He had a very clear

memory of it. And there is independent, contemporaneous,

objective documentation that that's the case.

You may recall Government Exhibit 1203, which is an

e-mail from the defendant to Mr. Barker where the defendant

says on the second page, Rotchy, you had said you would like

to stay inside 90 days, so I looked into municipal money funds

and other short-term investments.

Mr. Barker knew exactly what he needed. This is

documentation that he got what he bargained for or at least

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that he was clear on what the defendant had promised him,

although the defendant did not deliver on that.

MR. CAMPBELL: Judge, I have to object. That

entirely misstates that document. That document says here's

what you would get if --

THE COURT: No, no.

MR. CAMPBELL: -- you --

THE COURT: No, just make an objection. The

objection --

MR. CAMPBELL: Misstates the evidence.

THE COURT: The objection is overruled. Again I

instruct the jury that they are to rely upon their own

recollection of what the evidence actually was and is and not

on what the attorneys may say.

Proceed.

MR. HISTED: Thank you, Judge.

BY MR. HISTED:

Speaking of lying directly to victims' faces, do you

remember Mike Maher? Mr. Maher was the chief financial

officer of a company called Kottke Associates, which at the

time was an FCM. Mr. Maher was one of the last witnesses who

we called in our case. Do you remember he told you that he

and his accountants drove out to see the defendant in December

of 2005 at Sentinel's office. Mr. Maher was the CFO of the

company; and it was the year-end, and he had his own

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accountants with him. And he wanted to make sure that their

own -- Kottke's own audited financial statements were in

order. And a lot of Kottke's money was held at Sentinel, so

the accountants wanted to kick the tires. They wanted to go

see what Sentinel was all about.

They drove out to see the defendant in December

of 2005 and sat down with him. And Mr. Maher and the

accountants had a copy of the financial statements with them,

and they asked the defendant questions. They said, Tell me

how you keep our funds segregated. Tell me how you manage our

cash. Tell me about this Bank of New York loan. And keeping

in mind that in December of 2005, the defendant was already

setting interest rates. And I'm going to pause here to show

you some documentation as to that.

This is Government Exhibit 165. This is an e-mail

you've seen before where Charles Mosley, in October of 2005,

two months before Mr. Maher goes to see him, Mr. Mosley says,

We raised the rates in Group 7 -- you'll recall that Group 7

is the 125 Portfolio. That's the portfolio where FCMs like

Kottke were. We raised the rates in Group 7 by five basis

points; however, we could only raise the SMG loan fee to .02.

Then he goes on to talk about the rates and setting the rates.

And the defendant responds back, Agreed. Okay.

Just simply establishing that by October of 2005, two

months before the meeting with Mr. Maher, the defendant knows

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he's already allocating the interest rates. In fact, you

heard testimony from Crystal York that going back as far as

when she joined the company, 2003, they had been setting these

interest rates.

So as Mr. Maher and his accountants sat down in the

Sentinel office with the defendant, the defendant said, Your

funds are segregated. We keep your funds segregated. We know

that you're an FCM. And they said, Well, tell us about repos.

And the defendant said, We manage cash by sending out our

excess cash and accepting securities as collateral for that;

and then the next day, we return those securities and we get

the cash back plus interest. And that was allowed. That's

allowed under Rule 1.25, that sort of cash management

technique. That's what the defendant said to Mr. Maher he was

doing with his money.

The defendant did not say, Let me tell you what we

do. We repo out your securities, we get cash, then we use

that cash to buy more securities and create leverage in the

portfolio. That was what was happening, but that's not what

he told Mr. Maher when he was looked directly in the face and

asked to account for how he uses the money. Mr. Maher said --

MR. POULOS: Your Honor, I -- Judge, there is no

evidence that SEG 1 was using any form of leverage at that

time.

THE COURT: Just make an objection. Don't make an

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argument.

MR. POULOS: Judge, I --

THE COURT: Just make an objection as to the

statement.

Your objection is noted. It is overruled. I have

already instructed the jury that if anything the attorneys say

contradicts or conflicts with what they recall the evidence

is, they are to rely on their own collective recollection and

ignore what the attorneys say.

BY MR. HISTED:

Your Honor, I'd like to call our attention here to

Government Exhibit 301.

This is an e-mail dated October 2005 from Crystal

York to Eric Bloom. And in the subject line she says, Here

are the rates for today. And then there's an attachment. The

second page of this document is one of these daily yield

allocation sheets that we've become very familiar with. And

if you look at the daily yield allocation sheet, you can see

down here at the bottom, that, in fact, some of the loan was

allocated to SEG 1, as I said.

Taking us back to the meeting with Mr. Maher.

Mr. Maher asked about the Bank of New York loan and what use

it was put to. According to the financial statements, that

loan was used for liquidity purposes, meaning it was used to

make short-term redemptions to customers who needed their

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2842

money right away and securities could be liquidated later and

used to pay down the loan. In other words, the loan was used

as a short-term financing mechanism. That's what the

financial statements said. But what we know is that the Bank

of New York loan was used for leverage. Right? That's been

fairly well threshed out in this case. And the loan was very

large and was getting very much larger. The defendant did not

tell Mr. Maher, Mike, we're using this for leverage. He said

we're using it for liquidity purposes only.

And you may recall that I asked Mr. Maher, what would

you think if the defendant told you we're repo'ing out

securities and getting cash. Just stopping right there, not

even using the cash to buy more securities. Let's -- just

stopping right there. And Mr. Maher said, I would not even

understand why they would do that. Because repo'ing out my

securities and then getting cash back would mean that they'd

have to pay interest on that the next day, and that doesn't

make any kind of sense, given my understanding about what

Sentinel was doing. Mr. Maher thought stopping there, without

the creation of additional leverage, was something that he was

not comfortable with or didn't understand, let alone what the

defendant was actually doing.

The point here is that when given the opportunity to

come clean with a customer who came to him, who visited him,

who had the financial statements in hand, who had his

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2843

accountants with him, the defendant lied to this person.

People who lie cannot avail themselves of a good faith

defense.

If the defendant had told the truth to Mr. Maher,

this is what the conversation perhaps might have sounded like:

Mike, just so you know, we're using leverage. We're taking

your securities, we're pledging them as collateral for a loan.

Is that all right with you? Maher would have bolted for the

door. That was not what he bargained for with his customer

segregated securities. If he said, you know what, we're

allocating the interest rate. Mike, you know that account

statement you get every day from us, we just decide how much

interest we're going to pay you; and we take some of that

interest from other customers, we take some of that interest

from our House Portfolio and we allocate it to you in the way

we see fit; and the interest may come from securities that

don't comply with Rule 1.25. Mike, is that okay with you?

Maher would have bolted for the door. And the defendant knew

that, and that's why he lied to him.

If the use of leverage at Sentinel was so well

disclosed, as the defendant would have you all believe, why is

it that the customers didn't know? Right? Why didn't they

know? How can you run a business using leverage and none of

your customers know about something that you say is disclosed

to everyone? Folks, use your common sense and your everyday

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2844

experiences. That makes no sense.

And when he says that leverage was fully disclosed to

everybody, when the defense theory is that leverage was fully

disclosed to everybody, how come Steve Stitle, their sales

manager, did not know? How can Sentinel run a business where

their sales manager himself does not know that leverage is

being used in the SEG 1 portfolio? Here's why: Because they

didn't tell anybody. Okay. They didn't tell anybody.

Mr. Stitle testified that at the end of Sentinel when they had

halted redemptions and the customers were clamoring for their

money back, Mr. Stitle went to the defendant and said, you

know, there's some folks out in the lobby who sure would like

their money back; can we give them the securities -- we don't

have the cash; can we give them the securities? And the

defendant said, no, they're levered; they're encumbered; we

can't give them back. And do you remember, Mr. Stitle was

surprised. He said, What? How can that be?

Now, later during the trial, they showed Mr. Stitle

some e-mails where it appeared that he was discussing leverage

in the 125 Portfolio and he just copped to a mistake. He

said, look, these e-mails were being sent to a hedge fund, not

somebody in the 125 Portfolio; and I misspoke when I was

talking about 125. I meant Prime. Okay. So they got him.

But his testimony here was that he had no idea that there was

leverage being used in the SEG 1 portfolio or in the 125

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2845

Portfolio.

Sentinel's customers, it has been pointed out to you,

were sophisticated. They were players in the financial world.

They were used to dealing with contracts, used to dealing with

risky financial transactions; and so, the defense theory goes,

they must have known that there was leverage being used.

But the victims in this case, the investors at

Sentinel, had no way of knowing what was going on inside the

company. Right? They didn't see Sentinel's internal e-mails.

But you have. The people outside Sentinel didn't hear the

recorded telephone calls. You have. Sentinel's investors

didn't know the truth. But you do. Those victims were not

required to forage around in boilerplate disclosures when

their investment adviser was holding millions of dollars of

their money and had important information that they wanted and

to which they were entitled. And he cannot now blame the

victims for not being careful enough, for not reading the

contracts well enough. It was his job under the regulatory

structure that he chose to make full disclosure to these

victims. Eric Bloom did not act in good faith.

You'll recall that some of the victims didn't get any

disclosures at all. It doesn't even matter whether the ADV

was good enough. Some of them didn't get an ADV. Remember

David Oulvey from SMW Trading.

MR. CAMPBELL: Objection, Judge. Objection. That's

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just false, your Honor.

THE COURT: The objection is overruled for the

reasons I've previously stated.

MR. CAMPBELL: Did I mishear? Did he say that

customers didn't --

THE COURT: The objection is overruled for the

reasons I previously stated. If you have an objection to make

during opposing counsel's closing argument, simply make the

objection on the legal basis. Do not reargue your case during

your objection.

Proceed.

MR. HISTED: Thank you, Judge.

BY MR. HISTED:

While it is true that the investment management

agreement contained a little clause in there that says, By

signing this agreement, you agree that you got the ADV, the

testimony from a couple of the witnesses said they didn't see

it. At least they didn't remember seeing it. Right?

SMW had been a customer for years, and it signed up

with Sentinel using the investment advisory agreement. You

may recall that there was an older generation. The investment

advisory agreement had no such disclosure at all. It just

didn't have it. Later they changed it to put in this

so-called disclosure. But when SMW signed up, there was no

such provision in the contract. And Mr. Oulvey did not recall

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2847

ever getting the ADV, nor did he recall getting or asking for

the financial statements. In other words, even if you believe

the defendant, that this shrouded half-truth disclosure was

sufficient -- and it wasn't -- some folks just didn't get it

at all.

Same with Mike Maher. His company, Kottke

Associates, had the older version of the investment advisory

agreement, the one that didn't have the so-called disclosure

language. And Mr. Maher had no recollection of ever seeing

the ADV until it was e-mailed to him blindly on June 22nd,

2007. Right? Two months before Sentinel collapsed, he got

this e-mail. Do you remember they e-mailed the ADV out to

everybody on June 22nd, 2007, for whatever reason.

Even if you believe the defense theory that leverage

was adequately disclosed in these forms and in these

contracts, some customers did not get it. There was no

disclosure as to them. And you can convict, ladies and

gentlemen, you can convict, on the basis of the use of these

folks' money without disclosing their leverage.

I call this next topic throwing people under the bus.

Is there anyone that the defendant will not blame in this

case? During cross-examination or argument, you have seen the

accusing finger pointed at Crystal York; Jeff Logan; Matt

Keel, the compliance officer, right, why didn't my compliance

officer make me comply; T.C. Arana; Charles Mosley; the SEC,

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whose auditors didn't check me well enough or never told me

there was a problem; the CFTC; the NFA; the Bank of New York;

and, yes, even his own customers in. That August 13th

non-redemption letter, which we'll get to in a few minutes,

you'll see the defendant even blamed his own customers for

Sentinel's problems.

The defendant was the president and the CEO of

Sentinel. He at times was its chief financial officer, its

chief compliance officer, its chief trader. The defendant was

Sentinel. For him to shift the blame in this case to anyone

else is desperate and, quite frankly, pathetic.

Let's talk about Mosley. The defendant liked to

blame Charles Mosley. Mosley was hired by this man. Mosley

worked for this man. Mosley was a co-schemer with that man.

And throughout the trial, you've heard this -- this -- about

how Mosley inflated his bonus somehow; how Mosley was trading

in the house account in a way that was advantageous to him.

Do you remember, Charles Mosley got 10 percent of the gains in

the house account as part of his contract, as part of his

agreement with the defendant. This man agreed to pay Charles

Mosley 10 percent of the gains in the house, not in the

customer portfolios, but in the house. And you've heard

evidence throughout the trial, in arguments, cross-examination

and even in the defense case that Mosley was cheating the

defendant; that he manipulated the cost basis of these

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Histed - Rebuttal Argument

2849

securities to get a gain for himself.

But what did the defendant do when he found out?

Right? What did he do? Did he fire Mosley in January 2007 or

February, March, April, May, any time while Sentinel was in

business? No. Did the defendant pay him the bonus, the bonus

of more than $400,000 that Mosley claimed he was entitled to;

that the Sentinel officer said was obtained by fraud? Yeah,

he paid him the bonus and kept him on the payroll. And now to

point the accusing finger at Mosley as being the guy who has

done everything wrong and the defendant has done nothing wrong

here is, as I said before, desperate and pathetic. Every

minute of time we spent in this trial cross-examining people

about what Mosley did or didn't do or about the money he got

in the house account was a waste of your time.

MR. POULOS: Objection.

THE COURT: Overruled.

BY MR. HISTED:

Blaming the auditors. Remember the argument from

yesterday? The defendant acted in good faith because he

relied on the auditors. Well, folks, guess what? There was

no reliance on any auditor in this case. Okay.

As the judge instructed you in the beginning and I

anticipate he'll tell you again, the defendant has no

obligation to present evidence in this case, absolutely not.

We at the government's table bear that burden of proving

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2850

beyond a reasonable doubt his guilt. No question. But the

defendant did put on a case. That was also his right. He did

subpoena witnesses, which was also his right. And he had the

ability to bring people in here from the accounting firms if

he so choose -- chose. Not one witness, not one speck of

evidence has been presented to you -- evidence; I'm not

talking about attorney argument -- that any auditor or any

regulator ever knew of or blessed anything that the defendant

did.

So when a claim is made to you that everything he did

was okay with the regulators, that is 100 percent false,

unsupported by the evidence in this case. And the evidence in

this case is what must guide you, not speculation about what

might have been or what should have been or what could have

been. There is no evidence in this case that anybody from the

government ever blessed the Sentinel business plan in terms of

what's alleged in the indictment. Right? No evidence that

anybody ever said, Your amount of leverage is fine with us.

There's no evidence that anybody said, Your disclosure of

leverage is good enough for us. There's no evidence that

anybody from the government ever said, You know what, it's

okay with us that you're manipulating the interest rates that

you pay to these people, go ahead, we like what you're doing.

Okay. There is none of that in this case. Let's just be very

clear with this. That argument is a smoke screen. See

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Histed - Rebuttal Argument

2851

through the smoke.

Rule 1.25 and leverage. So that's been an issue in

this case. Does Rule 1.25 permit the use of leverage? Four

witnesses, four former investors sat in that chair, said they

thought no. Right? These are folks, each of whom had about

20 years of experience in the field, people who worked for

FCMs, people who currently work for FCMs, people who dealt

with segregated customer funds day in and day out; and they

all said, we did not believe that 1.25 permitted leverage; we

do not use leverage when we deal with 1.25 with our own

customer funds.

Howard Rothman from New York. David Oulvey from

Chicago. Julie Streit from Minneapolis. Mike Maher from

Chicago. Four different people, four different companies,

they all said the same thing. Why is that? Why is that?

Were they all wrong about the same topic?

Now, the defense claims that leverage is permitted

under Rule 1.25 because their witness, Paul Bjarnason, said

so. Do you remember Paul Bjarnason? He came and testified in

the defense case. He's the guy, you might remember him, who

said Rule 1.25 permits leverage because I said so or words to

that effect. He acknowledged on cross-examination that the

main rule, the main driving principle of 1.25 is to preserve

capital, to preserve capital, and to maintain liquidity.

That's counter -- that's counter to the use of leverage, which

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2852

is using borrowed money to trade. That's the purpose of the

rule. It's written right into the rule. He read it right

here.

He also conceded, as he must, that the word leverage

appears nowhere in the rule. And then we talked about the

sort of transactions that were covered by Rule 1.25; repos,

and reverse repos. And you remember we asked him to explain

that, and he described a repo and a reverse repo and said the

way those transactions are discussed in the rule does not

involve leverage. Now, he said you could create leverage if

you did additional transactions beyond the wording of the

rule, which, of course, you could do a lot of things if you go

beyond the wording of the rule.

MR. CAMPBELL: Objection, Judge.

THE COURT: Overruled.

BY MR. HISTED:

Mr. Bjarnason was not credible. He was not credible.

His testimony is contradicted by other equally knowledgeable

people. He knew the Blooms back when he was working at the

CFTC. He went to work for them and got paid tens of thousands

of dollars as their consultant when he left the CFTC. And now

he came here to say, Rule 1.25 permits leverage. You do not

need to credit the testimony of Paul Bjarnason. And we

respectfully submit that you should not.

There is simply no way for me in the time that I have

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here to chase down all of the things that you heard yesterday

afternoon during the closing argument. But I want to just

pick out a few things and address them head-on.

It was suggested to you, how could the defendant not

have good faith if he went out and hired a compliance

officer -- right -- the fact that he hired a compliance

officer is evidence that he had good faith. The question is

not why did he hire a compliance officer. Okay. Sentinel had

been around for almost 30 years. It was regulated by two

different government bodies and another organization called

the NFA. The question is why didn't he hire a compliance

officer sooner. Right? Sentinel had to have complied with a

variety of rules and regulations, complicated rules and

regulations. Companies in that business have a compliance

officer. The fact that he hired one after 25 years, a year

and a half before the company exploded, is not evidence that

he was operating in good faith. Right? The defendant himself

was the chief financial -- or the chief compliance officer

right up until they hired Matt Keel. Is that a good idea?

Given the evidence we've seen in this case, I think the answer

is clearly no. But the fact -- the mere fact that he hires a

compliance officer is not evidence of his good faith.

Matt Keel did not see what the defendant saw about

the way Sentinel worked. He didn't see the internal e-mails.

He didn't have the ability to listen to the calls, and he

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Histed - Rebuttal Argument

2854

didn't listen to the calls. Matt Keel knew about Sentinel

what he told him. Okay. The mere fact that you've got a

compliance officer does not mean you're not committing a

crime.

Other various topics. You were shown a document

called Defense Exhibit 101-A, a so-called due diligence

document that talks about leverage. Folks, there's been no

evidence in this trial that any customer in the 125 Portfolio

ever saw that document. Okay. Just because the defendant

might have written a document for one guy at one time does not

mean that he was making disclosure that was real, that was

relevant to the people who needed it.

I just feel compelled to clean up another

misimpression that may have occurred yesterday. This is a

part of a transcript that you were shown yesterday, a

transcript of a phone call, Government Exhibit 1412-T, for

transcript.

Yesterday Mr. Otlewski in his presentation to you was

quoting from some -- quoting some words from this telephone

call. And then he was -- he was critiqued by Mr. Campbell

later for not telling you the entire truth. That's what

Mr. Campbell said yesterday; that we hadn't shown you the

entire truth.

Here in the language, right here, which is where we

quoted -- started quoting the call, talking about pulling

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Histed - Rebuttal Argument

2855

rates down slowly, Mr. Campbell said, look, the government

didn't show you the paragraph right above it. Right? As

though the government were hiding something from you. Where

it says, All right. Well, I mean, pull down the other ones.

I mean, get rid of the bank fee and the repo fee.

It was suggested to you that when we were talking

about pulling the rates down, we weren't talking about rates

paid to customers; we were talking about the bank and repo

fees. That was the suggestion that was made.

Folks, just very briefly, I want to direct your

attention to the paragraph directly above that where they

clearly are talking about the rates paid to Group 7 and Group

10. Okay. We accurately quoted from this transcript that

needed to be cleared up.

Customer securities as collateral for the house loan.

Okay. Yesterday the argument was made to you that this

document, Government Exhibit 134-N -- it could have been any

one of these documents -- was evidence that the house part of

the loan was collateralized by house securities.

This document was shown and -- like it was shown to

Crystal York. You may or may not remember this part of it.

But up here under security cost, you see a reference to

$159 million for the house account. Okay. And the suggestion

was made to you that the house had its own securities that was

collateral for this part of the loan. Right? We say customer

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securities were used as collateral for the house part of the

loan. It was suggested to you yesterday that this document is

evidence that the house had its own securities that were

collateral for the loan. Okay? Not true. This says security

cost. Right? All this number says is what those securities

cost.

MR. POULOS: Your Honor, Jeff Logan said the exact

opposite. I have to object. He is plainly misstating the

evidence, Judge. I have to object.

THE COURT: Your objection is overruled for the

reasons I have stated.

BY MR. HISTED:

You may recall that Mr. Poulos asked Crystal York a

series of questions that were very similar and wanted her to

say that this represented collateral for the house part of the

loan. She did not say that. She said, no, that's not what

that means. Let us be clear. The House Portfolio loan was

secured by customer securities, not by house securities.

That is the point that was made to you in that e-mail

that I showed you just a little while ago, the e-mail from

T.C. Arana, where she said, Hey, boss, are you sure we want to

be using customer securities as collateral for the house loan.

Right? You just saw the e-mail. You heard her testify about

that. That's what happened.

Another point that was brought up yesterday, how much

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2857

leverage is too much leverage. Do you remember the house

account had about 20-to-1 leverage. And the defense was

asking questions of the witnesses, well, that's not too much

leverage, is it, the question was. And some of the witnesses

said, no, in the futures world, in the world of futures

trading, leverage of 20-to-1 is not uncommon. I think they

pointed out Mr. Rothman said that. But you may call that on

redirect examination, I said, Mr. Rothman, 20-to-1 leverage is

not too much for the futures industry, correct? He said,

That's right. But what about for a conservative cash manager

whose job it is is to keep those funds safe overnight; is it

too much leverage for that? He said, Yes. Yes. 20-to-1

leverage is too much for a conservative cash manager that

promises safety, security and preservation of capital.

MR. CAMPBELL: Judge, objection. This is the house

account.

THE COURT: Overruled.

MR. POULOS: It's not a customer portfolio.

BY MR. HISTED:

I'm just pointing out the questions that were raised

yesterday.

Securities that were purchased that were unsuitable

for customer -- customer accounts. You may recall that there

was evidence, Government Exhibit 1525, Anne Vanderkamp from

Mesirow explained this to us and pointed out that

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2858

approximately -- conservatively -- $80 million had been spent

by Sentinel for these PreTSL income notes. You remember these

income notes; they're not suitable for any customer portfolio

because they have no rating. Right? These are the securities

that have no rating and can't be put in customer portfolios.

And, again, we never said they were. Right? The point here

is simply that Sentinel never had $80 million. Sentinel never

had more than $20 million, according to its own records that

you've seen in this case. How does Sentinel buy $80 million

worth of PreTSL income notes that it allocated to the house?

I think you know the answer. It's a reasonable inference that

they used the customers' money for that or credit secured by

securities belonging to the customers.

This point is emphasized all the more by a defense

exhibit. You may recall a witness named Greg Kyle. Greg Kyle

was called by the defense to explain the quality -- the high

quality of the securities that had been allocated to the

customers. Again, we never had any quarrel with that. We

never said that the customer accounts had improper securities.

But in the course of doing his analysis, Mr. Kyle shared with

us that as of July 11th, 2007 -- July 11th, 2007, a month

before Sentinel went under -- Sentinel had $111 million worth

of non-rated securities. Right? Now, that was sort of

startling given that Mr. Poulos had cross-examined Matt Keel

and had tried to get Matt Keel to acknowledge that all of

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2859

these securities that they had bought had been sold long

before this time. And then Mr. Kyle comes out with this

surprise. A month before Sentinel imploded, it had

$111 million of non-rated securities. More surprising was

that $25 million of those non-rated, unsuitable for customer

securities had, in fact, been allocated by Sentinel to the SEG

3 customer portfolio. This is a defense exhibit. This is his

analysis of the SEG 3 portfolio.

Sentinel used its customers' funds to buy securities

for itself. Why? These income notes, as you heard from the

testimony, threw off a lot of interest. They made a lot of

money for people in the house account, the defendant and his

family.

Setting the interest rates. I think we've covered

this well. I'm not going to spend a lot of time with this.

There is no doubt that this is what happened at Sentinel for

years and years and years. Yesterday it was suggested to you

that you should not base a conviction on ambiguous evidence.

But you can base a conviction on overwhelming evidence.

Folks, there is an avalanche of evidence that this is what

they were doing.

You've got the e-mail from Charles Mosley to the

defendant, which I just showed you, as far back as October

of 2005 telling him where he had set the interest rates for

the FCM group, Group 7. And then if you -- when you go back

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and look at these exhibits, you're going to see, I

respectfully submit, dozens of e-mails from Crystal York to

the defendant telling him where the rates had been set. Okay.

You've heard testimony from T.C. Arana, who said she

was aware -- she became aware that the defendant was taking --

or people who worked for him, people who were under his

authority -- taking money from the SEG 3 customers and from

the house and giving it to SEG 1. She testified to that.

There was an e-mail. She showed -- she showed us an e-mail.

Matt Keel also discussed that -- right -- multiple times with

the defendant.

As if this were not enough -- the e-mails, the

spreadsheets, the testimony from Crystal, from Jeff, from T.C.

and from Matt -- as if that wasn't enough, and most certainly

it is, there are the four telephone calls, the recorded calls.

There are four recorded calls, two between the defendant and

Charles Mosley and two between the defendant and Crystal York.

Now, the defense challenged you to go back and listen to those

calls. We join in that request. Please do. You will hear

Crystal saying, Boss, I set this group here, I set this group

there, is that okay with you. And after some back and forth

and discussion and debate about how Sentinel needed to beat

the competition and the defendant was worried that they

weren't going to beat the competition unless they goosed up

that interest rate, he said Yeah, go ahead and do that.

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2861

Listen to the call, the July 30th, 2007, call. There is an

avalanche of evidence about rate setting. I won't spend any

more time on that.

And, again, if you find that that aspect of the

scheme has been proven -- and it most surely has -- you should

convict. The scheme has been established; the scheme as to

putting customer funds at risk by pledging them as collateral,

the scheme as to setting the interest rates, abundantly

proven. You've got ample evidence to convict right now.

Let's talk about the timing of the events, the

timeline, the sequence of events. The timeline is a powerful

tool. And the timeline is fatal to the defendant's claim of

good faith in this case.

We know that by July 2nd, 2007, Sentinel was

experiencing a lot of financial stress. Right? Couldn't send

the wires out. Repo counterparties had pushed securities back

and demanded hundreds of millions of dollars in cash. True,

the defendant was off in Africa. So what? How many times

have we heard, the defendant was in Africa; he couldn't

possibly have anything to do with this. That's just silly.

First of all, you have recorded calls from the

defendant while he's in Africa. So let's forget about that.

And, secondly, even if he took a vacation from a long-running

fraud, he can still participate in it. So let's just get this

off the table. I was vacationing in Wyoming; I didn't know.

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2862

I was, you know, spending afternoons with my kids; I didn't

know. That's nonsense.

But that's the timeline. July 2nd, we know from the

recorded calls that he knew Sentinel was in dire financial

straits. July 18th, his father takes out his entire stake,

down to the penny, from the company that he founded. Phil

Bloom took out his 5.6 million and his wife's 5.6 million, the

defendant's mother. Took out all their money on July 18th.

Guess what happens on July 24th? A new customer, Man

Financial, sends in $50 million. That's outrageous. That is

outrageous to take $50 million from a brand new customer in

the SEG 1 super protected customer segregated fund portfolio

when the founder has just taken every dime of his money out of

the company. That's a cash grab.

What else happens on July 24th? The defendant asked

for a raise. Right? A raise. Do remember this e-mail,

Government Exhibit 625? Down at the bottom, T.C. is talking

to the defendant on June -- or July 24th, the same day Man

Financial shoves its $50 million in. T.C. is talking about

his bonus. They talk about the bonus. He says, Yeah, yeah,

whatever. And on that note, can you give me a retroactive

raise please to $200,000? It's ridiculous.

Sentinel was sinking like the Titanic. Except

Captain Smith went down with the Titanic. This guy sailed off

leaving the passengers on board and blaming them for

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2863

Sentinel's financial downfall.

Moving ahead in time. Things are getting stressful

and hot. And that takes us to August 3rd. Do you remember

the assertion made yesterday that the financial crisis really

didn't hit until August 9th? That's the exact day,

apparently, that the liquidity crisis started. And it was two

business days later that the defendant voluntarily halted

redemptions. That's the assertion that was made.

First of all, let's pause here and talk about

voluntarily halting redemptions. Okay. How do you

voluntarily not give your customer their money back? Okay.

Is that something you just decide you can do? I mean, the

notion that I voluntarily decided not to return my customers'

funds is offensive.

But let's go back to the timeline. It wasn't

August 9th that they were aware of their financial problems.

They were aware of them long before then. You heard the

calls. Long before August 3rd, which I'm about to discuss

with you, they were discussing incoming customer funds. We

need incoming customer funds just to pay the loan. Right?

They knew they were having problems.

You were shown this stipulation yesterday. Calling

your attention to the Scott Bakal stipulation,

paragraph three. On August 3rd, Phil Bloom called Bakal to

talk about concerns that Phil had with Sentinel customer Lake

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2864

Shore Asset Management. You may remember that their funds had

been frozen at Sentinel by the government regulators,

unrelated to this matter. Phil called Bakal because he was

concerned about Sentinel's loan from the Bank of New York and

obtaining adequate financing. Okay.

Sentinel was concerned on August 3rd about these

matters. And later that day, Bakal requested and received

Sentinel's financial statements and its Form ADV. Okay. So

even though it was pointed out yesterday that Scott Bakal was

only a tax attorney, he's the attorney the Blooms called when

they wanted help with this problem. Right? What they won't

do now to diminish his involvement and his role and to write

him off only as a tax lawyer. He was the go-to guy, at least

for the Blooms at that time. And he was gathering

information.

The next day, Saturday, August 4th, attorney Bakal

sent an e-mail, You should hold off taking any additional

deposits until we get some of these issues worked out, even

from existing customers. If any redemption requests come in,

let me know. They may need to wait until you can confirm the

NAV, the N-A-V, defined below as net asset value. It is

essential that anything you tell people be 100 percent

accurate. Better to say nothing if you can't give a

100 percent accurate answer.

Later then, that day and all the following days,

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Histed - Rebuttal Argument

2865

Mr. Bakal, the attorney, starts to gather more information.

Right? He's not just shooting from the hip. He's not just

giving unsolicited, unpractical -- impractical advice. He's

gathering financial records, disclosure records, customer

agreements. He has a discussion with the defendant and his

father on the evening of Sunday, August 5th.

And Monday, August 6th, as was pointed out to you

yesterday, the defendant continues to take tens of millions --

maybe more than a hundred million dollars from Sentinel

customers. The wire transfers that are charged in the

indictment in this case, the money coming in, are all

transfers that happened this week, August 6th through the end

of the week. Okay? There can be no doubt, ladies and

gentlemen, that when these wire transfers happened, when these

people were sending in tens of millions of dollars, Sentinel

knew -- he knew -- that their money was at risk, grave risk.

Tuesday, August 7th, the attorney receives a leverage

report, July 27th, 2007, leverage report. He's educating

himself. The attorney is not just shooting from the hip. He

understands the situation that Sentinel is in now. And on

August 7th, recognizing the dire financial straits, he sends a

letter to the defendant and his father and says, I need an

advance retainer if I'm going to keep working for you because

an asset freeze could be in your future. And if there's ever

a danger sign that goes off to a cash manager, it's their

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Histed - Rebuttal Argument

2866

attorney saying your assets could be frozen. And what did the

defendant do? Kept taking money from the customers.

The next day, August 8th, the attorney tells Phil

Bloom, the situation is so bad, you need to shut down. Shut

it down and call the regulators. Phil said no; I want to get

a second opinion. That's okay. That's all right. People are

entitled to second opinions. But what they're not entitled to

do is to keep taking money from their customers, which is what

they did. In the indictment you'll see wire transfers on

August 8th and 9th and 10th. Okay? The defendant took money

from these people knowing that it was not safe anymore.

Sentinel was not a victim of the credit crisis.

Their scam and their scheme had been going on for years prior

to that. The financial crisis did not cause the fraud. It

cannot excuse the fraud. It merely exposed the fraud.

And then the August 13th letter, the non-redemption

letter that the defendant sent out. You can read it for

yourself. It essentially blames Sentinel's customers for

joining in market panic. We had previously thought that the

market would return to some semblance of order and that our

clients would not join in the panic. Unfortunately that's not

been the case. So now we can't meet any significant

redemption requests.

How dare you blame these people whose money you're

holding in trust for causing these problems. And I should

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2867

note that in this letter, the defendant says, We've been

studying the liquidity crisis for the past several weeks.

This is August 13th. The past several weeks. Yesterday it

was suggested to you that this financial crisis came out of

nowhere on the 9th and the defendant immediately shut down.

No. Even according to this letter, they were studying these

events in late July.

Until the inevitable happened: The Bank of New York

called the loan. This is Government Exhibit 219 admitted by

stipulation. August 17th, the bank said, guess what, you

failed to pay the loan, we're taking your securities. And

attached to this letter -- and you'll see it in the exhibits

that you get -- was a list of 80 securities with a face value

of more than $400 million. $400 million. That money didn't

belong to him. It belonged to the customers. And the bank

took it. They had a lawful right to because he put it in

lienable accounts. Right? He had pledged it as security.

There's nothing --

MR. CAMPBELL: I have to object. That's not what the

stipulation said. They were not allowed to take it.

THE COURT: The objection is overruled. The jury

will have the stipulation.

BY MR. HISTED:

This is not a hypothetical loss. We're not asking

anybody to second-guess somebody else's judgment. The

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Histed - Rebuttal Argument

2868

defendant put this money at risk. Not a metaphysical risk. A

real risk. And it's gone.

The defendant held Sentinel out as a fortress.

Sentinel was a house of cards in a hurricane. That's what it

was. And when things got hard, it blew away.

This case is very simple. A lot of the jargon has

been hard to understand, but it's very simple. The wires, the

wire transmissions that effectuated this scheme, that carried

it out, are from July 30th, when the defendant got on the

phone with Crystal York and set the rates. Okay. You have

the call. Easy to understand. Once you -- if you come to the

conclusion that they set the rates that day, all of the

account statements dated July 30th are false. And they are

false. That dispenses with the whole section of the wires.

The August 13th wires. Again, account statements.

Again, false. The evidence has been that Sentinel on a daily

basis every day, each and every day, set the account -- set

the interest rates for its customers. And that's true for

August 13th. And also on this day, customer securities were

in lienable accounts. That was not disclosed to the

customers. Okay. All those August 13th account statements,

they are wires in furtherance of the scheme.

The scheme has been established; the scheme to impair

and put their money at risk, the scheme to set the interest

rates and the scheme to keep taking money in and to keep lying

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2869

to customers when you knew they couldn't keep it safe. That's

the scheme. Find any one of those things and the scheme is

established.

And the third section of wires are incoming wire

transfers that came into Sentinel during that last week of its

existence when it knew or should have known -- did know --

that it could not keep their customer funds safe.

And there's also one other count, which is a wire

that was sent in from -- from a European customer.

Ladies and gentlemen, I'm done talking. We have

proven this case beyond a reasonable doubt. It's in black and

white in the documents. It's in the recordings. It's in the

testimony. The recordings that are in the voice and in the

words of that man sitting right there.

You're going to get a verdict form. And we're going

to ask you to look at the documents, look at the evidence,

examine it, examine the evidence with confidence because the

evidence is there and it is sufficient and we want you to talk

about it and study it and examine it and hold us to our

burden, the burden that we've met. And then I'm asking you,

each of you, to sign the verdict form and to come back in and

let this man right here know that you have seen through the

smoke. You know what he did. We're asking you to find him

guilty.

(End of excerpt.)

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2870

* * * * *

I certify that the foregoing is a correct excerpt from the

record of proceedings in the above-entitled matter.

/s/ Nancy C. LaBella April 21, 2014

Official Court Reporter

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