Money & Company

Tracking the market and economic trends
that shape your finances.

« Previous Post | Money & Company Home | Next Post »

SEC accuses CDO manager of fraud in new thrust of mortgage-meltdown probe

June 21, 2010 |  1:24 pm

Opening a new front in the search for mortgage-related fraud, the Securities and Exchange Commission on Monday accused a manager of so-called collateralized debt obligations of cheating clients as the market for those securities began to unravel in 2007.

The case, filed against New York-based ICP Asset Management and its principal, Thomas C. Priore, is the SEC’s first against a manager of complex CDOs -- investment pools that were the receptacles of many of the bonds backed by garbage mortgages issued at the height of the housing boom.

ICP and other CDO managers were supposed to be the gatekeepers, managing the CDO collateral on behalf of investors. ICP managed four multibillion-dollar CDOs known as the Triaxx series, created in 2006 and 2007.

But SEC enforcement chief Robert Khuzami said ICP and Priore “repeatedly put themselves ahead of their clients. Instead of acting as fiduciaries, they took advantage of a distressed market to line their own pockets.”

The agency essentially accused Priore of running a shell game, moving mortgage securities around at phony prices to benefit ICP.

Some of the deals were insured by American International Group, the insurer bailed out by the federal government in September 2008 as the credit crisis exploded.

Priore could not be reached for comment, but he earlier told Reuters that, "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."

From the SEC’s statement on the case:

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 ICP clients from realizing losses. The prices for such trades often exceeded market prices by substantial margins. In some trades, ICP caused the CDOs to pay a price that was substantially higher than the price another ICP client paid for the security earlier the same day.

ICP and Priore caused the CDOs to make numerous prohibited investments without obtaining necessary approvals, and they later misrepresented those investments to the trustee of the CDOs and to investors. The prices of many of these investments were intentionally inflated to allow ICP to collect millions of dollars in advisory fees from the CDOs. The SEC further alleges that ICP and Priore executed undisclosed cash transfers from a hedge fund they managed in order to allow another ICP client to meet the margin calls of one of its creditors.

George Canellos, director of the SEC’s New York office, said the case stemmed from a sweep the SEC launched of more than 50 managers of so-called structured investment products including CDOs. He said the agency was interested in how the managers handled "conflicts of interest under the stress of the market," as the mortgage market crashed.

“We’re looking at similar issues at a number  of other shops,” Canellos said, while declining to get more specific.

-- Tom Petruno