[ by Howard Haykin ]

On June 21, 2010, a New York investment advisory firm and its founder/president where charged with defrauding several collateralized debt obligations (CDOs) they managed.  [SEC PR 10-105, 6/21/10].  More than 2 years later, on Friday, 9/7/12, the SEC had in hand a a long-awaited, hard-earned final settlement agreement that will require the defendants to pay more than $23 miillion in monetary sanctions. 

Backgrounds of the Four Defendants. (i) ICP Asset Management, LLC; (ii) ICP Securities, LLC; (iii) Institutional Credit Partners, LLC, and (iv) Thomas Priore were named in the SEC case. 

• ICP Asset Mgmt  (ICPAM) had been engaged in providing investment and trading advice relating to various structured fixed income instruments, including mortgage-backed bonds and other asset-backed securities.  ICP had been an SEC-registered advisor since 2006 and a wholly-owned subsidiary of ICP Holdco.

• ICP Securities (ICPS) was a registered broker-dealer and FINRA member, engaged in the structuring, origination, trading, and distribution of leveraged credit instruments and primarily conducted riskless principal transactions. ICPS also is a wholly-owned subsidiary of ICP Holdco.

• Institutional Credit Partners, LLC (ICP Holdco) is majority-owned by Defendant Thomas Priore - through an entity he wholly owns, Founders, LLC,  and is the owner of ICPAM and ICPS.  In addition, ICP Holdco is the sole owner of several other ICP affiliates: (a) ICP Strategic Credit Income GP, LLC; (b) ICP (Capital) London LLP, a broker-dealer registered with the United Kingdom’s Financial Services Authority; and (c) ICP Consulting, LLC, a firm that provides portfolio analytic services.

• Thomas Priore, 41, a resident of Chappaqua, NY, is the founder, president, and CIO of ICP and a 76% owner of ICP Holdco (through Founders, LLC).  He served a ICPS’s president and was registered with FINRA as ICPS’s General Securities (Series 24) principal and General Securities (Series 7) Representative.
   

Summary of Allegations. Overcharging on Bond Purchases. Since 2006, ICPAM had managed several investment vehicles, including 4 multi-billion-dollar collateralized debt obligations, known as the Triaxx CDOs, whose assets primarily consisted of mortgage-backed bonds.  Starting in 2007, as the mortgage markets increasingly deteriorated, ICPAM and the other Defendants engaged in a range of improper transactions that defrauded the Triaxx CDOs of tens of millions of dollars and placed them at risk of substantial additional losses in the future.  As the markets declined, ICPAM and the other Defendants repeatedly caused the Triaxx CDOs, their advisory clients, to overpay for bonds - often in order to protect another ICPAM client from realizing losses or to make money for ICPAM.

-  Examples  --  (i)  ICPAM caused a CDO to purchase about $22 million of mortgage bonds from another client account at a price of $75 per bond, even though ICP had purchased the same bonds into that client account, earlier in the day, at only $63.50 per bond.  This trade defrauded the CDO of approximately $2.5 million.   (ii) Another time, ICPAM caused 2 Triaxx CDOs to purchase from another ICP client about $9 million of bonds at a price of $99.22 per bond, just days after ICP had purchased the same bonds in the open market at only $78.63 per bond.  (iii) ICPAM also caused several Triaxx CDOs to purchase bonds from another CDO at artificially-inflated prices to help the latter meet the margin calls of one of its creditors. In total, ICPAM and Priore directed more than a billion dollars of trades by the Triaxx CDOs at what they knew were inflated prices.

ICPAM also defrauded the Triaxx CDOs by structuring trades in ways that disadvantaged the CDOs and allowed ICPAM and its affiliates to reap massive, risk-free, and undisclosed profits at the CDOs’ expense.  Example -- in mid-2007, after the CDOs had purchased a large portfolio of mortgage bonds, ICPAM fraudulently altered the trade to pocket a $14mn profit for itself.  ICP did so by directing the brokers from whom the CDOs had purchased the bonds - weeks after the trade had taken place - to cancel the transaction  and rebook it, only this time replacing affiliates of ICPAM for the CDOs as the purchasers.  ICPAM enriched itself and its affiliates with undisclosed marketups in various other transactions it made on behalf of the CDOs.

Agreed Upon Sanctions.   The court approved the settlement terms on 9/6/12, which ordered Priore to pay $1.5 million in disgorgement, prejudgment interest, and a penalty.  ICPAM and its holding company are ordered, on a joint and several basis, to pay nearly $18.3 million in disgorgement, prejudgment interest, and a penalty.  Broker dealer ICPS is ordered to pay broker-dealer ICP Securities LLC is ordered to pay nearly $3.9 million in disgorgement, prejudgment interest, and a penalty.  Priore also agreed to settle an administrative proceeding against him and be barred from the industry for at least 5 years. 

SEC Staff Credits. Investigation by Celeste Chase, Joseph Boryshansky, Joshua Pater, Susannah Dunn, and Kenneth Gottlieb of the NYRO.  Mr. Boryshansky led the litigation, assisted by Jack Kaufman, Mark Germann, Mr. Pater, and Ms. Dunn.
 

For further details, go to:   [SEC PR 12-184, 9/7/12].