SEC charges ICP Asset Management in CDO fraud case
U.S. securities regulators on Monday accused New York financial services firm ICP Asset Management and its founder of defrauding investors in a series of complex collateralized debt obligations (CDOs) for their own benefit.
According to a U.S. Securities and Exchange Commission complaint filed in federal court in Manhattan, ICP and its founder, Thomas Priore, fraudulently managed four multibillion-dollar Triaxx CDOs, reaping massive profits for themselves by structuring trades that disadvantaged the CDOs in favor of the company and affiliates.
The improper trades caused ICP's clients and investors millions of dollars in losses as the mortgage markets collapsed in 2007, according to the complaint.
CDOs, investment vehicles that pool securities and other complex mortgage-linked assets, caused billions of dollars in losses to banks and investors over the past few years as the mortgage markets came under pressure.
The case is the first brought by the SEC specifically against a CDO collateral manager and is part of a sweep of broad examinations, targeting about 50 investment advisers related to CDOs, mortgage-backed securities and other vehicles often blamed for the subprime mortgage market's collapse, George Canellos, director of the SEC's New York regional office, said on a call with reporters on Monday.
Priore, a former Harvard football quarterback who founded Institutional Credit Partners and ICP in 2004, said that he and the firm would defend itself against the accusations.
All I can say is that we in all times have acted in the best interests of our clients and we intend to defend ourselves against these allegations, Priore said, reached by telephone at his office.
He said the firm was still operating, despite some recent departures of key employees.
The lack of pricing transparency for investors in markets that froze up during the credit crisis has been an area of grave concern for the SEC and motivated some investigations like this, Canellos said. SEC Chairman Mary Schapiro first announced the sweep of examinations late last year and the SEC sued Goldman Sachs Group Inc in April over a CDO called Abacus created in 2007.
ICP and Priore made trades at intentionally inflated prices and made prohibited investments on behalf of the CDOs without proper approval or disclosure to investors, the SEC claimed. The Triaxx CDOs had required written approval of certain types of investments from American International Group Inc's financial products unit or the Financial Guaranty Insurance Co, which wrote insurance-like derivatives on the CDOS. AIG declined to comment on the case.
The SEC also accused Priore and his firm of reaping tens of millions of dollars in fees and undisclosed profits at the expense of the firm's clients.
Janet Tavakoli, a Chicago-based derivatives and structured finance consultant, said she expects the SEC to pursue charges against other CDO collateral managers. Tavakoli, who wrote a textbook on CDOs that is often referred to in the securities industry, said the allegations of self-dealing involving ICP are not an isolated event in the CDO industry.
For instance, she said it was not uncommon for CDO managers to trade pieces, or tranches, of CDOs between themselves simply to get marks in order to prop up prices.
One of the claims a lot of managers make is that the disclaimers in CDO documents said they may have interest that runs contrary to that of their investors, said Tavakoli. But if a manager has a fiduciary responsibility they can't simply do something in direct opposition to their investors' interests. Boilerplate disclosure can be problematic.
The case is SEC vs. ICP Asset Management, LLC et al. U.S. District Court, Southern District of New York, No. 10-4791.
(Additional reporting by Matthew Goldstein, editing by Matthew Lewis and Gerald E. McCormick)
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