Securities Law Blog

The Securities and Exchange Commission (SEC) has filed its first complaint since the credit crisis that an asset manager overseeing CDOs took advantage of investors and permitted conflicts of interest to drive decision-making. Thomas Priore and his three affiliated firms have been charged with fraudulently managing investment products tied to the mortgage markets when they came under stress in 2007.

In 2006, ICP Asset Management LLC began serving as the collateral manager for what was known as the Triaxx CDOs, which invested primarily in mortgage-backed securities.

Priore, the owner and president of ICP, allegedly repeatedly caused the Triaxx CDOs to overpay for securities in order to take money for ICP and protect other ICP clients from realizing losses, while causing the CDOs to lose millions of dollars. He reportedly directed more than $1 billion of trades for Triaxx CDOs at what he knew were inflated prices, which allowed ICP to collect millions of dollars in advisory fees from the CDOs.

Director of the SEC’s New York office, George Canellos said, “When asset pricing is not transparent it creates significant opportunities for managers like ICP to manipulate prices to keep vehicles afloat, to influence fees, and favor themselves or clients over other clients.”

According to the SEC’s complaint, Priore and ICP made numerous prohibited investments without necessary approvals and later misrepresented those investments to the trustees of the CDOs and to investors. Large portions of two of the CDOs were insured by American International Group Inc. (AIG), which had complained about unauthorized trades by ICP.

In June 2007, Priore allegedly bought $1.3 billion in bonds from Bear Stearns Cos. by using a forward agreement because ICP didn’t have enough funds for the purchase. A forward agreement was a forbidden contract in the Triaxx investment guidelines because of the potential of increased risk. The SEC claims that two weeks later Priore sold some of the bonds to another ICP client at higher prices. The sale purportedly netted $14 million in profits diverted to ICP instead of the CDOs.

Also being charged in the complaint are ICP’s affiliated broker-dealer ICP Securities LLC and its parent company Institutional Credit Partners LLC. The SEC is seeking permanent injunctions barring future violations of federal securities laws, disgorgement of the defendant’s ill-gotten gains with pre-judgment interest, and monetary penalties.