Bond Firm Charged by SEC with Defrauding Investors

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Jim Bourg / Reuters / Corbis

The Securities and Exchange Commission in Washington

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In the case against ICP, the SEC alleges that the bond firm used its role as CDO manager to generate profits for the firm and its higher-paying brokerage clients at the expense of its CDOs, which generated lower fees for the firm. In one instance, according to the SEC, ICP purchased a troubled mortgage bond for one of its brokerage clients at 63.5% of the bond's original value. That same day, ICP turned around and sold the bond to one of its Triaxx CDOs at 75% of the bond's face value, booking a $2.5 million profit for its brokerage client. The SEC alleges that Priore and Triaxx executed more than a billion dollars' worth of trades for its Triaxx deals at what the firm knew were inflated prices.

Adding to Triaxx's troubles is the fact that, unlike with most other deals, ICP was both the underwriter and manager of the CDO. Because of the duel roles, ICP told investors that AIG, which insured the deal, would monitor its trades. But the SEC alleges that ICP failed to report the moves it made for its CDOs to AIG and took advantage of the fact that in general, the prices of CDOs and mortgage bonds, unlike that of stocks, are not widely known.

"The [ICP] case shows the highly troubling conflicts of interest in the structured finance market," says the SEC's Canellos. "When an asset price is not transparent, it creates the ability for managers like ICP to take advantage of that."

Priore, 41, founded ICP in 2004 as a division of Bank of New York, before buying the firm with other partners in 2006. That year the firm was sued along with other investors by Fairfax Financial Holdings, Canada's largest publicly traded insurer, for conspiring to illegally drive down the price of the company's stock. The case is still pending. In 2007, a former employee of ICP was charged with stealing computer files from the firm. During the trial it was disclosed that Priore had donated $5,000 to a charity on Long Island tied to the son of the detective who was investigating the case. All criminal charges against the former employee were eventually dismissed.

According to marketing materials from ICP dated August 2008, the firm had more than 40 employees. In the first half of that year, it was the eighth largest underwriter of mortgage-backed securities in the U.S. But the financial crisis and the SEC's investigation have put a strain on ICP. In March, Priore and one of his top lieutenants, Carlos Menedez, reportedly got into a shouting match at the firm's headquarters, according to Asset-Backed Alert. Menedez quit shortly thereafter. Others have left as well. The firm now has 13 employees.

In the normally private world of structured finance, Priore was a relatively public up and comer. In 2008, Investment Dealers Digest named Priore one of Wall Street's rising stars on its annual 40 Under 40 list. Priore regularly talked to reporters that covered his industry. Following a February 2009 speech by Treasury Secretary Timothy Geithner, which was roundly criticized for lacking in specifics, Priore told a reporter that he thought Geithner did a good job. A few months later, Priore criticized a government plan to restart the market for troubled mortgage bonds. He said banks would game the plan by setting up funds that would buy troubled deals at inflated prices with government money from their own books — a bit of self-dealing that is not too dissimilar from what the SEC is now accusing Priore of. In a 2009 article by Mergers & Acquisitions, Priore said he didn't miss the Lucite deal trophies that were just one more casualty of the financial crisis. "You know what the ultimate scorecard is? It's your profitability and the respect of your clients," Priore told the trade publication.

For Priore, those things are likely gone now too.

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