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SEC Charges Broker for Assisting Investment Adviser

On December 15, 2011, the Securities and Exchange Commission filed a civil injunctive action against Stephen M. Folan, a former registered representative in the Chicago office of FTN Financial Securities Corp. (“FTN”), for assisting Sentinel Management Group, Inc. (“Sentinel”), a bankrupt former investment adviser, in its fraud against its advisory clients.

The SEC’s complaint alleges that over year-end 2006 and the first few days of 2007, Sentinel and FTN engaged in a five-day reverse repurchase transaction (“Repo Transaction”) involving approximately $35 million of collateralized debt obligations (“CDOs). Folan acted as the primary advocate for the Repo Transaction within FTN and served as the conduit between Sentinel, his best customer, and FTN’s management. The complaint further alleges that recorded telephone calls show that although Folan had information indicating that Sentinel would use the Repo Transaction for an improper purpose, he did not share this information with his superiors at FTN.

According to the SEC complaint, Sentinel used the Repo Transaction to mislead its clients by temporarily reducing the outstanding bank loan balance in its year-end 2006 financial statements by approximately 10% without disclosing that the source of the reduction was an atypical, non-recurring event and by understating its liabilities by failing to record any liability associated with its obligation to repurchase the CDOs when the Repo Transaction was unwound.