The Securities and Exchange Commission recently fined a Philadelphia firm for fraud involving “exchange fees” on packaged loans. It also charged a Minnesota man with using an inactive company to bilk investors.

The Financial Industry Regulatory Authority, meanwhile, fined a Georgia firm for failing to notice that one of its brokers was receiving wire transfers “authorized” by a dead client.

Philly Advisory Firm to Pay $21 Million Over CDO Fees

Philadelphia-based Taberna Capital Management has agreed to settle fraud charges with the SEC by paying more than $21 million.

According to the agency, Taberna fraudulently retained fees belonging to collateralized debt obligation (CDO) clients. Instead of telling those clients that it was retaining payments known as “exchange fees” in connection with restructuring transactions, the company kept quiet and also kept the fees — which was neither permitted by the CDOs’ governing documents nor disclosed to investors in the CDOs. The fees rightfully belonged to the CDOs and created conflicts of interest that Taberna also failed to disclose.

Also charged in the case were Taberna’s former managing director Michael Fralin and former chief operating officer Raphael Licht, for their roles in some aspects of Taberna’s misconduct.

From 2009 to 2012, Taberna sought and retained millions of dollars in exchange fees paid by issuers of securities held by the CDOs when Taberna recommended exchange transactions to CDO clients. The firm hid its misconduct by labeling the exchange fees as “third-party costs incurred” in various documents, but such costs only accounted for a minimal portion of the overall exchange fees.

In its quarterly reports, Taberna omitted any mention of exchange fees in detailed descriptions of the exchange transactions. It also left the fees off its Forms ADV.

Conflicts of interest arose because Taberna retained fees paid in connection with exchanges but no other types of restructuring transactions, so it had an incentive to steer issuers toward doing an exchange regardless of what form of restructuring might be most advantageous to the CDOs.

Fralin was responsible for exchange negotiations and transaction documents that mischaracterized the exchange fees as compensation for third-party costs. Licht helped approve and supervise Taberna’s collection of exchange fees. He played a role in the drafting and review of the materially inaccurate Forms ADV.

Taberna agreed to pay disgorgement of $13 million, prejudgment interest of $2 million and a penalty of $6.5 million, and will not act as an investment advisor for three years. Fralin agreed to pay a $100,000 penalty and is barred from the securities industry for at least five years. Licht agreed to pay a $75,000 penalty and is barred from the securities industry for at least two years. All three settled without admitting or denying the findings.

Firm Fined After Broker Took Money From Dead Client

FINRA has censured Cape Securities Inc. of McDonough, Georgia, and fined it $125,000 after it found that the firm failed to create and have in place supervisory systems that were capable of catching its own registered representative’s efforts at fraudulent wire activity.

According to the agency, the firm’s supervisory system and written supervisory procedures failed to address reviewing and monitoring the transmittal of funds from multiple customer accounts to a common outside bank account or a third-party account.

One of the firm’s registered reps took money from the brokerage accounts of seven customers for his own use. The representative submitted separate wire transfer requests totaling $690,152.90 to the firm, ostensibly on behalf of the customers, none of whom had authorized him to make any such transfers. The funds were actually wired into the operating account for the representative’s branch office.

The firm didn’t use exception reports or any other means that would have allowed it to detect suspicious wire transfer behavior patterns, and also failed to detect that the wires in question were third-party wires and were unauthorized. What made it so egregious was that in two instances, the customer had died before the date on the forged wire transfer request, so could hardly have signed it.

But, after the representative admitted that he submitted a forged signature on a wire transfer request for one of the deceased customers, the firm made no effort to check up on any other third-party wire transfer requests his office might have made. Neither did it place any restrictions on his ability to submit additional wire-transfer requests or increase supervision over his activities. The firm and its insurer have repaid the customers the funds the representative had converted.

FINRA also found additional failures in the firm’s WSPs, including failure to explore suitability of some registered representatives’ recommendations and failure to warn clients or even contact them, despite reports of unsuitable excessive trading and churning in customer accounts by registered representatives in one of the firm’s branch offices.

A lower fine was imposed after considering, among other things, the firm’s revenues and financial resources.

SEC: Minnesota Man Used Inactive Fiber Optic Company to Fleece Investors

James Louks of Owatonna, Minnesota, and his company FiberPoP Solutions Inc. were charged with fraud by the SEC after the agency determined they defrauded nearly 100 investors by convincing them to invest in notes that would theoretically help fund the company’s operations.

According to the SEC, FiberPoP was founded in 2003 to build and operate fiber optic networks and data centers, but still has no operations or employees. Louks and FiberPoP promised massive returns on the investments — as much as 100% — within a very short period of time. The investments they’ve pushed have mimicked prime bank schemes, encouraging secrecy and promising massive returns in supposedly complex financial instruments that turn out to be phony.

Despite the fact that Louks knew perfectly well that none of the supposed financing opportunities FiberPoP offered during the 12 years of its existence ever brought in either funding for the company or returns for investors, he has continued to court investors to put more money into the scheme. The SEC filed its complaint on Tuesday, and on Wednesday the court ordered Louks and FiberPoP to stop fundraising efforts during the case.

Louks and FiberPoP agreed to the order without admitting or denying the SEC’s allegations; the SEC’s investigation is continuing.

— Check out DOL, SEC Enforcement: DOL Wins Settlement for Whistleblowers on ThinkAdvisor.