SEC Sues ICP Asset Management and Founder for CDO Fraud

ICP Asset Management LLC and its founder were sued by U.S. regulators for their role in overseeing mortgage-linked investments insured by American International Group Inc. as the housing market declined.

Thomas Priore, 41, and New York-based ICP directed more than $1 billion of trades at artificially high prices on behalf of collateralized debt obligations they managed, the Securities and Exchange Commission said today in a lawsuit filed at federal court in New York. Priore denied wrongdoing and said he would fight the allegations.

The suit, the SEC’s first aimed at a so-called collateral manager, may open a new front for the agency in its examination of firms that dealt with mortgage assets before the U.S. housing market collapsed in 2007. ICP violated its duty to clients by making investments that broke rules limiting risk, and failing to get required approvals for trades from AIG and bond insurer FGIC Corp., another victim, the SEC said.

“The CDOs were complex but the lesson is simple: collateral managers bear the same responsibilities to their clients as every other investment adviser,” George Canellos, director of the SEC’s New York regional office, said in a statement. “When they violate their clients’ trust, we will hold them accountable.”

The CDOs, known as Triaxx, invested primarily in mortgage- backed securities. ICP favored itself and certain clients in its trading, for example, by having one CDO sell assets to another at inflated prices, the SEC said. The firm used the dealings to cover other clients’ losses and to generate higher fees for itself, according to the lawsuit.

SEC Sweep

The lawsuit stems from a sweep of more than 50 investment advisers that manage structured financial products, Canellos said in a call with reporters. The inquiry focuses on the firms’ possible conflicts of interest and whether they appropriately priced assets during times of market stress, he said.

The SEC has already sued other companies and executives for misconduct related the housing crisis. The agency sued Goldman Sachs Group Inc. in April, claiming it didn’t disclose to investors the role played by hedge fund Paulson & Co. in devising and betting against mortgage-linked securities. Goldman Sachs has denied the allegations.

‘Ongoing Approval’

AIG, which partly insured two Triaxx CDOs, needed to consent to any purchases by the vehicles and didn’t get a chance in many cases, according to the complaint. Marketing documents for the CDOs said AIG would provide “ongoing approval on the collateral” and oversight for other investors, the complaint said.

In an attempt to get around those rules, ICP in some cases sold bonds from a client account, bought new securities and then sold them to the CDOs at inflated values, it said.

“We at all times acted in the best interest of our clients and intend to vigorously defend ourselves against these allegations,” Priore said today in an e-mail statement.

Priore bought about $1.3 billion in bonds from Bear Stearns Cos. in June 2007 after two of its hedge funds collapsed, according to the lawsuit. He used a forward agreement -- a contract forbidden in the Triaxx investment guidelines because it could increase risk -- to purchase the bonds because ICP didn’t have enough funds for the deal, the SEC said.

He sold some of the bonds to another ICP client at higher prices about two weeks later, diverting the $14 million profit to ICP instead of the CDOs. Priore didn’t get AIG’s approval, nor did he inform the CDOs’ directors, said the SEC, which is seeking fines and disgorgement of gains.

Mark Herr, an AIG spokesman, declined to comment.

AIG Complained

ICP kept some bonds in one of AIG’s CDOs after the New York-based insurer rejected them in October 2007, the SEC said. “In late 2008, after AIG complained about unauthorized trades, ICP was compelled to stop nearly all reinvestments by the Triaxx CDOs,” the complaint said.

FGIC’s insurance unit was rated AAA before the credit crisis and last year was forced to halt claims payments after losses on mortgage-bond CDOs. A message left on a voicemail for its public-relations department wasn’t returned.

Priore also backdated trades of mortgage-backed bonds in 2008, using prices from a year earlier, causing one of the Triaxx vehicles to overpay by about $3.5 million, the SEC said.

Priore, the majority owner of ICP, founded the firm as an affiliate of Bank of New York in 2004. It became an independent company in 2006.

Guggenheim

Before starting ICP, Priore managed the fixed-income and structured-products group at Guggenheim Capital Markets, and before that was a vice president in PaineWebber Inc.’s fixed- income sales and trading department, bringing the company’s first CDO to market in 1998, according to a Triaxx prospectus. He graduated from Harvard University with a bachelor’s degree in American History and holds a master’s in business from Columbia University.

CDOs package pools of assets such as mortgage bonds, bank capital notes and buyout loans into new securities with varying risks.

After the head of ICP’s capital-market operations left the company following what industry newsletter Asset-Backed Alert described as a “shouting match” with Priore, ICP said in March that the unit would be taken over by PrinceRidge Holdings LP, the investment bank run by former UBS AG executives John Costas and Michael T. Hutchins. At the time, those operations had 60 employees, while ICP’s asset-management business had about a dozen.

PrinceRidge within a week abandoned the planned transaction as it learned about the CDO investigation, a person familiar with the matter said today.

$8.8 Billion

ICP oversaw $8.8 billion of CDOs filled with asset-backed securities as of Sept. 30, 2007, when the market closed, the 15th-most, according to Standard & Poor’s data. The firm’s favored CDO, called Triaxx Funding, borrowed about $2.5 billion from lenders and issued about $280 million in notes, according to its prospectus.

The firm was the second-largest manager of mortgage-bond CDOs insured by New York-based AIG, according to data compiled by Bloomberg. The value of the $5.5 billion of CDO slices insured by AIG had fallen to $3.2 billion by the time the Federal Reserve bought them from the firm in 2008 as part of its bailout, according to the insurer’s disclosures.

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net.

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