SEC files civil fraud charges against investment adviser, firm over mortgage-tied securities

SEC accuses money manager of fraud

WASHINGTON — The government opened a new front in its probe of financial firms’ dealings in the mortgage market, filing civil fraud charges Monday against an investment adviser and his firm in connection with complex securities during the 2007 housing bust.

The Securities and Exchange Commission accused Thomas Priore and ICP Asset Management of fraudulently managing the securities in a way that cost investors tens of millions of dollars. The SEC also said Priore and the New York firm he owns and heads as president improperly reaped millions in fees and undisclosed profits at the expense of clients.

The SEC is seeking injunctions, and unspecified restitution and fines.

Priore and ICP denied the SEC’s charges and said they would contest them in court. In a statement, Priore and the firm said they “at all times acted in the best interests of their clients and intend to vigorously defend themselves against the SEC’s allegations.”

The allegations involve four multibillion-dollar collateralized debt obligations, the type of pooled securities that are the focus of the SEC’s civil fraud charges against Wall Street titan Goldman Sachs Group Inc.

CDOs combine slices of debt with varying levels of risk. Wall Street banks packaged and sold CDOs tied to mortgages to investors at the height of the housing boom. Buyers of CDOs, mostly banks, pension funds and other big investors, made money from the investments if the underlying debt was paid off. But as U.S. homeowners started falling behind on their mortgages and defaulted in droves in 2007, CDO buyers lost billions.

The SEC has been carrying out a wide-ranging investigation of financial firms’ conduct in the run-up to the financial crisis of 2008, and CDO transactions have been a focus. In the high-profile Goldman Sachs case, the firm is accused of misleading investors by failing to tell them the mortgage securities had been chosen with help from a Goldman hedge fund client, Paulson & Co., that was betting the investments would fail. Goldman has denied wrongdoing and said it will contest the allegations in court.

The big banks that put together and sold CDOs retained investment firms like ICP to manage the transactions as third parties.

The SEC has been conducting “a broad examination sweep” of more than 50 investment firms that act in that capacity, focusing on how they met their legal obligations to investors amid the stress of the housing crisis, New York Regional Director George Canellos told reporters in a conference call Monday.

The move is part of the agency’s broader investigative efforts digging into the financial meltdown, designed “to hold accountable those whose misconduct contributed to the pain and loss suffered in the recent crisis,” Canellos said.

While the SEC accused Goldman Sachs of fraud in connection with the sale of mortgage-related securities to investors, the ICP case is the agency’s first against a manager of a CDO after the investments had been sold, said Canellos.

In its civil lawsuit against Priore and ICP Asset Management, filed in federal court in New York City, the SEC alleged that the defendants channeled more than $1 billion of trades into the so-called Triaxx CDOs at what they knew were inflated prices. They repeatedly caused investors in the CDOs to overpay for securities with an eye to making money for ICP Asset Management and shielding certain ICP clients from losses, the SEC said.

ICP repeatedly made CDO investments without the required approvals from investors, the agency said.

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

Also named in the suit were the affiliated brokerage firm ICP Securities and its parent Institutional Credit Partners.