On October 4, 2010, the Securities and Exchange Commission ("SEC") and the Commodities Futures Trading Commission ("CFTC") simultaneously filed and settled two actions against roughly the same set of accounting defendants arising out of their audits and examinations of Sentinel Management Group, Inc. ("Sentinel"). Sentinel, a registered investment advisor, managed investments of short-term cash for various advisory clients, and purported to invest its clients' assets in pooled investment vehicles while holding the underlying securities in certain segregated accounts. In 2007, Sentinel filed for bankruptcy after losing several hundred million dollars.
Altschuler Melvoin & Glasser, LLP ("AM&G") as well as one of the firm's former partners, George Victor Johnson II, agreed to settle charges with the SEC for alleged improper examination practices pursuant to the Investment Advisers Act. AM&G was the independent public accounting firm hired by Sentinel to conduct surprise examinations to verify compliance with "Custody Rule" under the Investment Advisers Act, and Johnson was the engagement partner. AM&G agreed to pay roughly $25,000 in fines, and both defendants agreed to cease-and-desist orders. Johnson also agreed to a Rule 102(e) bar.
As a result of what appears to have been a joint investigation with the SEC, the CFTC filed and settled charges against AM&G and Johnson, along with the accounting firm McGladrey & Pullen LLP ("M&P"), which acquired certain assets relating to AM&G's audit practice in 2006. The CFTC alleged that Sentinel's financial statements were materially misstated, and that the auditing firms and engagement partner failed to conduct their audits of Sentinel in accordance with GAAS and failed to report the material inadequacy in Sentinel's internal controls. AM&G and M&P agreed to pay civil penalties of $500,000 and restitution of $1.2 million. Johnson agreed to the denial of his privilege of appearing or practicing before the CFTC, and to cease and desist orders.