The Securities and Exchange Commission (SEC) has charged Taberna Capital Management, an investment advisory firm in Philadelphia, for fraudulently retaining fees belonging to collateralized debt obligation (CDO) clients.
Taberna has agreed to settle the charges and pay a penalty of more than $21m.
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The SEC alleged that the firm did not inform CDO clients it was retaining payments known as exchange fees related to restructuring transactions.
Taberna’s decision to retain exchange fees was neither permitted by the CDOs’ governing documents nor disclosed to investors in the CDOs.
Additionally, Taberna’s former managing director Michael Fralin and former COO Raphael Licht were also charged by SEC for their roles in certain aspects of Taberna’s misconduct.
Fralin was liable for exchange negotiations and transaction documents, while Licht helped approve and supervise Taberna’s collection of exchange fees, SEC said in a statement.
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By GlobalDataSEC investigation found that the company concealed its misconduct by improperly labelling the exchange fees as third party costs incurred in various documents, which comprised only a minimal portion of the overall exchange fees.
According to the SEC, Taberna failed to identify the fees in Forms ADV despite an obligation to do so and did not mention about the exchange fees in its quarterly reports provided to investors.
Under the settlement, Taberna agreed to pay a $6.5m penalty, $13m of disgorged profit and $2m interest, and accept a three-year investment adviser ban, while Fralin will pay a $100,000 penalty and is banned from the securities industry for at least five years and Licht will pay $75,000 penalty and accept a two year ban.
SEC Enforcement Division’s complex financial instruments unit Chief Michael Osnato Jr said: "CDO managers have an obligation to act in the best interests of their CDO clients and communicate fairly with them. Taberna secretly diverted funds owed to CDO clients, and concealed that diversion and the conflicts it created."
