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.