Hedge fund ICP Asset Management has been accused of defrauding four collateralized debt obligations it managed.
The Securities and Exchange Commission yesterday said New York-based ICP and its owner, Thomas Priore, directed more than $1 billion in trades for the Triaxx CDOs at inflated prices. The regulator also charged two other Priore-controlled companies, ICP Securities and Institutional Credit Partners, in the fraud.
According to the SEC, Priore systematically used the CDOs to earn a profit for ICP and shield other clients from losses on mortgage-backed securities. In certain cases, ICP had the CDOs buy the same securities as some other clients at substantially higher prices.
“ICP and Priore repeatedly put themselves ahead of their clients,” Robert Khuzami, director of enforcement at the SEC, said. “Instead of acting as fiduciaries, they took advantage of a distressed market to line their own pockets.”
In order to do that, the SEC alleges, ICP had to break the rules, making a whole series of trades without getting the needed approval from AIG, which insured some of the CDOs. In one case, ICP is assuced of transferring cash from a hedge fund it manages to allow another client to meet margin calls, later misrepresenting the transaction to the hedge fund’s investors.
Priore also allegedly used a forward agreement—barred by the Triaxx prospectus—to buy $1.3 billion in MBS from two collapsed Bear Stearns hedge funds three years ago. ICP then allegedly sold some of those bonds two weeks later to another client, keeping the $14million profit for itself rather than turning it over to the CDOs.
Priore has denied any wrongdoing and said he and ICP will fight the SEC charges.
“We at all times acted in the best interest of our clients and intend to vigorously defend ourselves against these allegations,” Priore said.
Complaints from AIG in 2008 forced ICP “to stop nearly all reinvestments by the Triaxx CDOs,” the SEC alleges in its complaint.
The SEC probe also sunk ICP plan to sell its capital markets business to PrinceRidge Holdings, the firm founded last year by John Costas and Michael Hutchins, the former top executives at UBS’ defunct hedge fund unit, Dillon Read Capital Management. According to Bloomberg News, PrinceRidge abandoned the deal with a week of its announcement in March after learning about the investigation.
The lawsuit, the SEC’s first against a collateral manager, follows its fraud case against Goldman Sachs, accused of defrauding investors in a CDO it allegedly structured and marketed on behalf of hedge fund Paulson & Co.