SEC Sues Triaxx CDO Managers for Fraud
Starting in 2007, Priore and his companies -- ICP Asset Management LLP, ICP Securities LLC, and International Credit Partners LLC -- allegedly used the four multibillion-dollar CDOs like their own private piggy banks to generate tens of millions of dollars in fees and profits for themselves at the expense of the CDO owners and other ICP clients, and sometimes, to protect some select ICP clients from losses.
As the "collateral manager," Priore and ICP controlled which mortgage-backed securities were in the CDO and at what prices they were purchased and sold. In that role, Priore and ICP allegedly directed over $1 billion in trades in which the CDO paid inflated prices for securities, invested in prohibited securities without approvals and misled the CDO's trustee and investors.
For example, the SEC alleges that ICP had the CDOs purchase $22 million in bonds at $75 per bond, even though it had purchased the same bonds for $63.50 each for a client earlier that day. As a result, the CDO lost about $2.5 million on the trade. The SEC notes that example is just one of "many dozens" of similar cases of malfeasance.
"These Investigtions Are a Priority"
The agreements governing the Triaxx CDOs also required AIG Financial Products Group or Financial Guaranty Insurance Company to review and sign off on certain trades: It was prohibited from making a variety of types of investments without those approvals. On numerous occasions, the SEC charges, when ICP submitted the signed trade tickets to the CDO trustee, it represented that it had obtained the required approvals, when it had not.
Through the suit, the SEC is seeking to recover all of the profits and fees Priore and his companies acquired through the fraudulent practices, along with interest and penalties. According to Andrew M. Calamari, associate director of the SEC's New York office, this ICP suit is "one of the first cases in the structured products area. The Goldman Sachs case is another one in this line. The SEC is actively investigating this area, and these investigations are a priority." Calamari declined to say if there would be any further complaints, much less suggest when such complaints might be filed.
Whether more suits in the structured-products area follow or not, expect a more productive SEC going forward. A source at the commission notes that the recent reorganization there -- which involved the hiring of a chief operating officer, among other measures -- are having a positive impact. Case management has been streamlined, which frees staff attorney time and generally makes the SEC more efficient.
The detailed nature of the SEC's ICP complaint suggests it has a great deal of evidence to support its allegations. Nonetheless, a source at the SEC notes that the investigation had taken a relatively short period of time. That's not surprising since the allegations, if true, describe obviously fraudulent activity.
If there's truth to the allegations, the SEC's action will not be the only lawsuit Priore and ICP face. I wonder if they'll have enough assets to pay everybody.