SEC CHARGED BROKERAGE FIRM AND CEO OF FRAUD INVOLVING CDO AUCTIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

02/19/2015 11:00 AM EST

The Securities and Exchange Commission charged a New York City-based brokerage firm and its CEO with fraudulently deceiving other market participants while conducting auctions to liquidate collateralized debt obligations (CDOs).

An SEC investigation found that VCAP Securities and Brett Thomas Graham improperly arranged for a third-party broker-dealer to secretly bid at these same auctions on behalf of their affiliated investment adviser in order to acquire certain bonds to benefit the funds it managed.  Under engagement agreements with the CDO trustees, VCAP and its affiliates were prohibited from bidding while serving as liquidation agent for these auctions.  VCAP had access to all of the confidential bidding information as the liquidation agent, and Graham exploited it to ensure their third-party bidder won the coveted bonds at prices only slightly higher than other bidders.  VCAP’s investment adviser affiliate then immediately bought the bonds from its secret bidder.

VCAP and Graham agreed to pay nearly $1.5 million combined to settle the SEC’s charges, and Graham is barred from the securities industry for at least three years.

“Graham abused a position of trust by playing the roles of both conductor and bidder during CDO liquidation auctions to the detriment of other participants,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “The settlement requires Graham and VCAP to give up fees they obtained while conducting these unfair liquidations that landed certain bonds in their fund manager’s portfolio.”

According to the SEC’s order instituting a settled administrative proceeding, Graham and VCAP made material misrepresentations to the trustees of the various CDOs for which VCAP served as liquidation agent.  After Graham had discussed bidding arrangements with the third-party broker-dealer, VCAP and Graham falsely represented in engagement agreements that they and their affiliates would not bid in the auctions or misuse confidential bidding information.  VCAP provided the various trustees with documents that did not disclose that its investment adviser affiliate was actually the winning bidder.  VCAP’s scheme enabled the investment adviser affiliate to obtain a total of 23 bonds during five auctions.

The SEC’s order finds that VCAP and Graham violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  VCAP agreed to pay disgorgement and prejudgment interest of $1,149,599 while Graham agreed to pay disgorgement and prejudgment interest of $127,733 plus a penalty of $200,000.  The SEC’s order censures VCAP and requires the firm and Graham to cease and desist from committing or causing any future violations of Section 10(b) of the Exchange Act and Rule 10b-5.  VCAP and Graham consented to the SEC’s order without admitting or denying the findings.

The SEC’s investigation was conducted by the Complex Financial Instruments Unit and led by Sarra Cho and Christopher Nee with assistance from Kapil Agrawal and Alfred Day.  The case was supervised by Andrew Sporkin and Mr. Osnato.

SEC ANNOUNCES PRISON SENTENCE FOR JEREMY FISHER FOR MISAPPROPRIATING INVESTOR FUNDS

U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23139 / November 24, 2014

Securities and Exchange Commission v. Jeremy Fisher, The Good Life Financial Group, Inc., and The Good Life Global, LLC, Civil Action No. 3:13-cv-00683

Jeremy Fisher Sentenced to 30 Months for Offering Fraud

The Securities and Exchange Commission announced today that on October 27, 2014, the Honorable John E. Steele of the United States District Court for the Middle District of Florida sentenced Jeremy S. Fisher to 30 months in prison, followed by 3years of supervised release and ordered him to forfeit $500,000. The Court has scheduled a hearing to set the amount of restitution to be ordered on December 15, 2014. Fisher, 44, of La Crescent, Minnesota, had previously pled guilty to two counts of wire fraud for his role in stealing over $1 million from 18 victims in an investment scam. The U.S. Attorney's Office for the Central District of Florida filed criminal charges against Fisher on January 14, 2014. Fisher was ordered to surrender on December 1, 2014, to begin serving his prison sentence.

The criminal charges arose out of the same facts that were the subject of a settled civil enforcement action that the Commission filed against Fisher on September 30, 2013. The Commission's complaint alleges that from at least August 2009 through December 2012, Fisher raised approximately $1.04 million from approximately 18 investors who invested in unregistered securities offerings conducted by Fisher through his two companies. Fisher offered investors the opportunity to invest their money through a "special trading platform" that supposedly generated significant returns. Fisher told investors that their money would be deposited in an overseas bank account and used as collateral for the purchase and sale of collateralized debt obligations and medium term notes on the trading platform. However, Fisher instead fraudulently misappropriated and converted investors' funds for his personal use to pay previous investors, to purchase a house and car and to pay his daughter's tuition and other personal and business expenses. Fisher also provided quarterly statements to investors which falsely represented that investors were earning money on their investments. The Commission's complaint alleged that Fisher and his companies violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also alleged Fisher violated Section 15(a) of the Exchange Act.

On October 16, 2013 the Court in the Commission's case entered orders of permanent injunction and disgorgement, plus prejudgment, totaling $936,226 to be paid jointly and severally among Fisher and his companies and ordered Fisher to pay a civil penalty of $150,000. Fisher and his companies consented to the entry of the Court's orders.

ALLEGED FUNDS MISAPPROPRIATION GENERATES A GRAND JURY INDICTMENT

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Jeremy Fisher Indicted for Fraud

The Securities and Exchange Commission announced that on February 5, 2014, a Grand Jury in the United States District Court for the Middle District of Florida returned an Indictment charging Jeremy S. Fisher with four counts of wire fraud. The Indictment also seeks forfeiture of property obtained as a result of the alleged criminal violations.

The Indictment alleges that from at least August 2009 through December 2012, Fisher raised approximately $1.04 million from approximately 18 investors who invested in unregistered securities offerings conducted by Fisher through his companies. Fisher offered investors the opportunity to invest their money through a “special trading platform” that supposedly generated significant returns. Fisher told investors that their money would be deposited in an overseas bank account and used as collateral for the purchase and sale of collateralized debt obligations and medium term notes on the trading platform. However, Fisher instead fraudulently misappropriated and converted investors' funds for his personal use to pay previous investors, to purchase a house and car and to pay his daughter's tuition and other personal and business expenses. Fisher also provided quarterly statements to investors which falsely represented that investors were earning money on their investments.

The Indictment's allegations are based on the same conduct underlying the Commission's September 30, 2013 Complaint against Fisher filed in the United States District Court for the Western District of Wisconsin. The Commission charged Fisher and his two companies with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Complaint also charged Fisher with violations of Section 15(a) of the Exchange Act. The defendants entered into consents with the Commission agreeing to the entry by the Court of the relief requested in the complaint, including orders of permanent injunction and disgorgement, plus prejudgment, totaling $936,226 to be paid jointly and severally among the defendants. Fisher has also agreed to pay a civil penalty of $150,000. On October 16, 2013, the Court entered the Final Judgments against Fisher and his companies.

FAQ DOCUMENT ISSUED BY GOVERNMENT REGARDING FINAL RULES THAT IMPLEMENT "VOLCKER RULE"

Agencies Issue FAQ Document Regarding Collateralized Debt Obligations Backed by Trust Preferred Securities under Final Rules Implementing the “Volcker Rule”

Three federal financial institution regulatory agencies today issued a FAQ (Frequently Asked Questions) document to provide clarification and guidance to banking entities regarding investments in “Covered Funds” and whether collateralized debt obligations backed by trust preferred securities (TruPS CDOs) could be determined to be Covered Funds under the final rules to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The FAQs are intended to clarify that banking entities that have holdings in TruPS CDOs are not required to sell these holdings immediately under the final rules, but instead may use the conformance period to determine if they can be brought into conformance by the end of the conformance period, which is July 21, 2015.

The document released by the agencies provides an overview of some of the key legal issues banking entities should consider in determining whether holdings of TruPS CDOs are subject to the provision of the final rules implementing section 619, commonly known as the Volcker Rule. The issues identified and discussed in the document are whether a TruPS CDO qualifies in its current form as a Covered Fund under the final rules; whether it can be restructured or otherwise conformed to the final rules by the end of the conformance period of July 21, 2015; and whether a bank’s investment in the CDO constitutes an ownership interest.

The final rules were approved by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Commodity Futures Trading Commission on December 10, 2013.

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Attachment:
FAQ Regarding Collateralized Debt Obligations Backed by Trust Preferred Securities under the Final Volcker Rule - PDF (PDF Help)

SEC CHARGES MERRILL LYNCH IN CASE INVOLVING CDO BOOKS AND RECORDS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged Merrill Lynch with making faulty disclosures about collateral selection for two collateralized debt obligations (CDO) that it structured and marketed to investors, and maintaining inaccurate books and records for a third CDO.

Merrill Lynch agreed to pay $131.8 million to settle the SEC’s charges.

The SEC’s order instituting settled administrative proceedings finds that Merrill Lynch failed to inform investors that hedge fund firm Magnetar Capital LLC had a third-party role and exercised significant influence over the selection of collateral for the CDOs entitled Octans I CDO Ltd. and Norma CDO I Ltd.  Magnetar bought the equity in the CDOs and its interests were not necessarily aligned with those of other investors because it hedged its equity positions by shorting against the CDOs.

“Merrill Lynch marketed complex CDO investments using misleading materials that portrayed an independent process for collateral selection that was in the best interests of long-term debt investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios.”

According to the SEC’s order, Merrill Lynch engaged in the misconduct in 2006 and 2007, when its CDO group was a leading arranger of structured product CDOs.  After four Merrill Lynch representatives met with a Magnetar representative in May 2006, an internal email explained the arrangement as “we pick mutually agreeable [collateral] managers to work with, Magnetar plays a significant role in the structure and composition of the portfolio ... and in return [Magnetar] retain[s] the equity class and we distribute the debt.”  The email noted they agreed in principle to do a series of deals with largely synthetic collateral and a short list of collateral managers.  The equity piece of a CDO transaction is typically the hardest to sell and the greatest impediment to closing a CDO.  Magnetar’s willingness to buy the equity in a series of CDOs therefore gave the firm substantial leverage to influence portfolio composition.

According to the SEC’s order, Magnetar had a contractual right to object to the inclusion of collateral in the Octans I CDO selected by the supposedly independent collateral manager Harding Advisory LLC during the warehouse phase that precedes the closing of a CDO.  Merrill Lynch, Harding, and Magnetar had finalized a tri-party warehouse agreement that was sent to outside counsel, yet the disclosure that Merrill Lynch provided to investors incorrectly stated that the warehouse agreement was only between Merrill Lynch and Harding.  The SEC has charged Harding and its owner with fraud for accommodating trades requested by Magnetar despite its interests not necessarily aligning with the debt investors.

The SEC’s order finds that one-third of the assets for the portfolio underlying the Norma CDO were acquired during the warehouse phase by Magnetar rather than by the designated collateral manager NIR Capital Management LLC.  NIR initially was unaware of Magnetar’s purchases, but eventually accepted them and allowed Magnetar to exercise approval rights over certain other assets for the Norma CDO.  The disclosure that Merrill Lynch provided to investors incorrectly stated that the collateral would consist of a portfolio selected by NIR.  Merrill Lynch also failed to disclose in marketing materials that the CDO gave Magnetar a $35.5 million discount on its equity investment and separately made a $4.5 million payment to the firm that was referred to as a “sourcing fee.”  The SEC also today announced charges against two managing partners of NIR.

According to the SEC’s order, Merrill Lynch violated books-and-records requirements in another CDO called Auriga CDO Ltd., which was managed by one of its affiliates.  As it did in the Octans I and Norma CDO deals, Merrill Lynch agreed to pay Magnetar interest or returns accumulated on the warehoused assets of the Auriga CDO, a type of payment known as “carry.”  To benefit itself, however, Merrill Lynch improperly avoided recording many of the warehoused trades at the time they occurred, and delayed recording those trades.  Therefore, Merrill Lynch’s obligation to pay carry was delayed until after the pricing of the Auriga CDO when it became reasonably clear that the trades would be included in the portfolio.

“Keeping adequate books and records is not an elective requirement of the federal securities laws, and broker-dealers who fail to properly record transactions will be held accountable for their violations,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.

Merrill Lynch consented to the entry of the order finding that it willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(2).  The firm agreed to pay disgorgement of $56,286,000, prejudgment interest of $19,228,027, and a penalty of $56,286,000.  Without admitting or denying the SEC’s findings, Merrill Lynch agreed to a censure and is required to cease and desist from future violations of these sections of the Securities Act and Securities Exchange Act.

The SEC’s investigation was conducted by staff in the New York Regional Office and the Complex Financial Instruments Unit, including Steven Rawlings, Gerald Gross, Tony Frouge, Elisabeth Goot, Brenda Chang, John Murray, Sharon Bryant, Kapil Agrawal, Douglas Smith, Howard Fischer, Daniel Walfish, and Joshua Pater.  Several examiners in the New York office assisted, including Edward Moy, Luis Casais, Thomas Shupe, William Delmage, George DeAngelis, Syed Husain, and James Sawicki.

COLLATERALIZED DEBT OBLIGATIONS CASE SETTLED FOR $23 MILLION

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Sept. 7, 2012 – The Securities and Exchange Commission today announced that New York-based investment advisory firm ICP Asset Management and its founder and president Thomas C. Priore have agreed to settle the agency’s charges that they defrauded several collateralized debt obligations (CDOs) they managed.

ICP, Priore, and related entities have agreed to pay more than $23 million to settle the case the SEC filed against them in June 2010 in federal court in Manhattan. The SEC alleged they engaged in fraudulent practices and misrepresentations that caused the CDOs to overpay for securities and lose millions of

dollars. Priore and the ICP companies also improperly obtained fees and undisclosed profits at the expense of the CDOs and their investors.

"The settlement with Priore and ICP sends a clear message that investment advisers must always act in the best interests of their advisory clients, even if those clients are sophisticated investors," said George S. Canellos, Deputy Director of the SEC’s Division of Enforcement. "When advisers put their own interests ahead of their clients’ interests, the SEC will seek to hold them accountable."

The court approved the settlement terms on September 6. The final judgment orders Priore to pay disgorgement of $797,337, prejudgment interest of $215,045, and a penalty of $487,618. ICP and its holding company Institutional Credit Partners LLC are required, on a joint and several basis, to pay disgorgement of $13,916,005 and prejudgment interest of $3,709,028. ICP also must pay a penalty of $650,000. An affiliated broker-dealer ICP Securities LLC is ordered to pay disgorgement of $1,637,581, prejudgment interest of $301,893, and a penalty of $1,939,474. Priore also agreed to settle an administrative proceeding against him and be barred from association with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent, and from participating in any offering of a penny stock. He has a right to reapply for association or participation after a period of five years.

Priore and the ICP companies also consented, without admitting or denying the SEC’s allegations, to permanent injunctions enjoining them from future violations of the securities laws that they were alleged to have violated, which include Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(c)(1)(A) of the Securities Exchange Act of 1934 and Rules 10b-3 and 10b-5, and Sections 206(1), (2), (3), and (4) of the Investment Advisers Act of 1940 and Rules 204-2, 206(4)-7 and 206(4)-8.

The SEC’s investigation was conducted by Celeste A. Chase, Joseph Boryshansky, Joshua Pater, Susannah Dunn, and Kenneth Gottlieb of the New York Regional Office. Joseph Boryshansky led the litigation with assistance from Jack Kaufman, Mark Germann, Joshua Pater, and Susannah Dunn.

SEC COMMISSIONER LUIS A. AGUILAR SPEAKS AGAIN

The following is an excerpt from the SEC website: Commissioner Luis A. Aguilar U.S. Securities and Exchange Commission Washington, D.C. July 26, 2011 Poorly designed collateralized debt obligations and other asset-backed securities (“ABS”) contributed significantly to the collapse of the credit markets of 2008 and the subsequent financial crisis. These effects are still being felt by American families and businesses. It was demonstrated that the creation and distribution of these instruments significantly increased the degree of risk in our financial system, and caused great harm to investors and to the real economy.1 In response to the problems laid bare by the crisis, in 2010 the SEC proposed amendments to its ABS regulations. Shortly thereafter, Congress, sharing many of the SEC’s concerns, included significant reforms to asset-backed securities in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). As you have heard this morning, in light of the ABS requirements in the Dodd-Frank Act and the comments received on the 2010 proposal,2 the Commission is re-proposing a subset of its amendments to the ABS regulations primarily regarding shelf eligibility. I would like to highlight that today’s proposals include transactional standards that I hope will better empower investors and begin to level the playing field between investors and ABS sponsors. The proposed rules would require securitization agreements to require that a credit risk manager, an independent third party, scrutinize underlying assets in certain circumstances. We also anticipate these new requirements will facilitate communication between ABS investors, as well as require the adoption of procedures to resolve disputes between the issuer and investors. We are requesting comment on today’s proposals, and I am interested to hear if the rules proposed today, in conjunction with the rules already under consideration, establish greater integrity in the securitization process. I look forward to the comments we will receive. I join with my colleagues to thank the staff for their hard work on this re-proposal. 1 See, e.g., “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” Majority and Minority Staff Report of the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs (April 13, 2011), p. 12. 2 Although the focus of the release being considered today is improvements to the regulation of asset-backed securities (ABS) in light of the Dodd-Frank Act and the financial crisis, the package of proposed reforms also would repeal the transactional eligibility condition for ABS shelf registration based on credit ratings, and replace it with conditions to such eligibility that the SEC preliminarily believes would be appropriate under the circumstances, as substitute indicators of credit quality. It is important to recognize that the approach to credit ratings in this release (the “Re-proposal of Shelf Eligibility Conditions for Asset-Backed Securities and Other Additional Requests for Comment”) differs from the approach to credit ratings in another release being considered today that would adopt amendments to the eligibility standards for shelf registration of non-convertible debt securities (the “Security Ratings” release). These approaches differ notwithstanding that Section 939A of the Dodd-Frank Act encourages the SEC “to establish, to the extent feasible, uniform standards of credit-worthiness.” There are several reasons for these differences, I will highlight a few. Asset-backed securities are different from traditional debt securities. Traditional debt securities are issued by operating companies, and the investment analysis of such debt differs from ABS, which are [often] structured and require analysis of underlying assets and that structure (among other things) rather than an issuer’s operations. The differences between ABS and traditional securities has resulted in longstanding differences in treatment under the securities laws, including separate regulations for asset-backed securities offerings and separate eligibility conditions for different types of offering registrations. The purposes of the eligibility conditions that apply to shelf registrations of ABS, on the one hand, and to traditional non-convertible debt securities, on the other hand, differ. In the context of non-convertible debt securities offerings, which are the subject of the Security Ratings release, the purpose of the eligibility conditions is to permit issuers whose securities are “widely followed” to perform shelf registered offerings; the SEC does not believe the credit-worthiness of non-convertible debt securities is the appropriate criterion for whether such securities should be eligible to use registered shelf offerings."