Under new leadership the Security and Exchange Commission (SEC) charged a Wall Street firm and three affiliated companies with fraudulently managing investments tied to the real estate collapse. The investments were marketed as a way to raise income to insure home mortgages in the risky days before the U.S. economy nearly collapsed.
The asset manager of ICP Asset Management LLC, a New York based firm, Thomas Priore is charged with defrauding investors out of at least $4-billion worth of Collateralized Debt Obligations (CDOs) by engaging in fraudulent practices and misrepresentations that caused the investments to lose millions of dollars in value.
The CDO market is widely blamed in financial circles for artificially inflating the money market, which directly resulted in bankers developing mortgage products that loosely allowed home mortgage borrowers to get mortgages with little or no qualifying standards.
The SEC alleges that Priore and his companies also improperly obtained tens of millions of dollars in advisory fees and other profits in a scandal to defraud clients and other investors. SEC officials say that prices of many of the investments “were intentionally inflated to allow ICP to collect millions of dollars in advisory fees from the CDOs.”
“ICP and Priore repeatedly put themselves ahead of their clients,” said Robert Khuzami, the SEC’s Enforcement Division Director. “Instead of acting as fiduciaries, they took advantage of a distressed market to line their own pockets.”
The SEC complaint filed in the U.S. District Court of New York, alleges that ICP began serving in 2006 as the collateral manager for what were known as the Triaxx CDOs, investing primarily in mortgage-backed securities. ICP’s affiliated broker-dealer ICP Securities LLC and its parent company, Institutional Credit Partners LLC are also charged in the complaint.
The SEC alleges that ICP and Priore directed more than a billion dollars of trades for the Triaxx CDOs “at what they knew were inflated prices.” ICP and Priore repeatedly caused the Triaxx CDOs
to overpay for securities in order to make money for ICP and protect other clients from realizing losses.
The prices for many trades of Priore’s company, a Wall Street investment firm, often exceeded market prices by huge margins. In some instances, ICP caused the clients to pay a price that was higher than another client paid for the security traded on the same day.
“The CDOs were complex but the lesson is simple. Collateral managers bear the same responsibilities to their clients as every other investment adviser. When they violate their clients’ trust, we will hold them accountable,” said George Canellos, Director of the SEC’s New York Office.
ICP and Priore caused the CDOs to make numerous prohibited investments without obtaining necessary approvals, and later misrepresented those investments to the trustee of the CDOs and investors, according to the complaint.
The SEC also alleges that ICP and Priore executed undisclosed cash transfers from a hedge fund they managed in order to allow another client to meet margin calls of one of its creditors prior to the real estate collapse.
The SEC’s complaint charges the defendants with violations of the Securities Act of 1933, the Securities Exchange Act of 1934 and rules under a law enacted in 1940 in fall out of financial hardships suffered during the Great Depression.