Fun with hedge funds: And by “enhanced” cash, we mean…

[For those of you who read this blog for startup and high-tech topics, I apologize again for my fixation on the financial markets over the last few weeks. But this is all simply too entertaining to pass up.]

The Securities and Exchange Commission filed civil-fraud charges against investment adviser Sentinel…

Early last week, Sentinel, a company that manages short-term cash for hedge funds and futures brokers, told clients it was halting redemptions because of the “liquidity crisis” in the credit markets…

In a complaint filed yesterday in U.S. District Court in Chicago, the SEC alleged that Sentinel suffered losses for several months leading up to the Aug. 13 letter to clients, because of “undisclosed use of leverage, commingling and misappropriation of clients’ securities.” [Whoops!]

In essence, according to a person familiar with the investigation, the SEC claims Sentinel’s woes are a case of fraud disguised as a casualty of the markets.

…The SEC alleged the Northbrook, Ill., firm mixed at least $460 million of securities from client accounts into one of its own accounts without clients’ knowledge, according to the complaint. Some of the clients’ securities also were used as collateral for Sentinel to obtain a $321 million credit line, on which Sentinel is now in default. Sentinel hid those losses from clients by providing them with misleading account statements, the SEC alleged.

From the Wall Street Journal.

Now, luckily, everyone else on Wall Street is scrupulously honest.