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SEC Accuses Firm of Fraud in Mortgage Deals

Source: NY Times

Posted on 21 Jun 2010

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The Securities and Exchange Commission on Monday accused a New York firm that helped manage complex mortgage securities of defrauding investors as the housing market collapsed.

The firm, ICP Asset Management, used four mortgage deals called Triaxx like a piggy bank to enrich itself by diverting money from investors, the commission said in a complaint filed in the Southern District of New York.

The case involves a new type of target for the SEC, which has been following the mortgage pipeline in an effort to uncover wrongdoing. The commission has filed cases against mortgage companies that originated loans, like Countrywide Financial, and this spring it filed a case against Goldman Sachs over a mortgage bond the bank created. The case against ICP examines the last party in that chain, a firm that managed complex deals known as collateralized debt obligations, or CDOs.

When banks first created CDOs, they worked with outside managers like ICP to reassure investors that there was a third party watching out for their interests and designing the deals to succeed.

But the SEC paints a picture of a firm that was anything but neutral. ICP, the complaint said, set up trades with the Triaxx vehicles that favored the firm’s other funds, in some cases using the CDOs to pump up the market prices they could claim as reasonable for their hedge funds. In addition, two of the Triaxx deals were partially insured by American International Group. The SEC said that ICP broke its agreement to obtain the insurer’s permission for certain investments.

For instance, the complaint said, in the summer of 2007, when two Bear Stearns hedge funds were in trouble, ICP agreed to purchase $1.3 billion in bonds from the Bear funds. ICP did not have the money to accept the bonds immediately, so it entered a forward agreement to accept them later on behalf of Triaxx CDOs. But ICP was supposed to obtain AIG’s permission for such forward agreements, and the firm failed to do so, the complaint said.

Shortly thereafter, ICP resold some of those Bear Stearns bonds to one of its other funds at a $14 million profit. But, the SEC said, ICP canceled the trades with the Triaxx CDOs in such a way as to divert that profit to ICP’s owners, rather than giving it to the investors in the C.D.O.’s.

The firm denied any wrongdoing. “We at all times acted in the best interest of our clients and intend to vigorously defend these allegations,” Thomas Priore, one of ICP’s principals, said in an e-mail message.

Mr. Priore was also charged by the SEC, which said he had breached his duties to Triaxx’s investors in favor of investors in his other vehicles.

For instance, the commission said that in the middle of 2008, one of ICP’s vehicles faced margin calls from its lenders. To raise cash for those calls, ICP sold hundreds of millions of dollars of bonds from that vehicle to the Triaxx CDOs at inflated prices. The CDOs overpaid by about $40 million, the complaint said.

“Priore knew that the prices of sales from Triaxx Funding were substantially above prevailing market levels, yet instructed ICP employees to proceed with the sales,” the complaint said. “After several sales were executed, ICP’s portfolio manager, who felt uncomfortable following Priore’s instructions, directed ICP employees to name Priore as the trader in ICP’s books and records.”

ICP marketed the Triaxx deals when they were created in 2006 and 2007 by using AIG’s name. The firm said in marketing materials that AIG would serve as a “collateral manager,” approving trading by the Triaxx vehicles. But ICP repeatedly misled AIG about its actions, the complaint said, even during 2008 as AIG neared the brink and was rescued by a taxpayer bailout.