The Securities and Exchange Commission also filed to get a temporary restraining order to freeze the proceeds from Sentinel's sale of assets to hedge-fund giant Citadel Investment Group.

Sentinel, which manages short-term cash for hedge funds and futures brokers, filed for bankruptcy-court protection Friday. The move came four days after the firm told clients in a letter it was halting redemptions due to a "liquidity crisis" in the credit markets.

The SEC said in a court filing Monday the firm lied in its explanation to clients.

The regulator said that for several months, the Northbrook, Ill., firm suffered losses due to its ''undisclosed use of leverage, commingling and misappropriation of clients' securities,'' The Wall Street Journal reported.

Regulators allege Sentinel misappropriated investors' funds by mixing their assets into a house account without alerting them, a complaint filed in federal court in Chicago said.

Sentinel then hid those losses from clients by providing them with misleading account statements, the SEC filing alleged.

The SEC is asking the judge overseeing the bankruptcy filing to freeze the assets until it has a chance to look over Sentinel's accounts.