SEC Orders Investment Advisory Firm to pay $21M For Allegedly Retaining Clients’ CDO Fees

Taberna Capital Management has consented to pay $21 million to resolve Securities and Exchange Commission charges alleging that it fraudulently kept fees that belonged to collateralized debt obligation clients. According to the regulator, the investment advisor retained “exchange fees” related to restructuring transactions, which was not allowed under the CDOs governing documents. The retention of the fees was purportedly not disclosed to investors.

The SEC maintains that these fees belonged to the CDOs and became a conflict interest that was not revealed. According to the agency’s order instituting administrative proceedings, for three years, from ’09 to ’12, the Pennsylvania-based investment advisory firm sought and kept millions of dollars in exchange fees paid by issuers of the securities that the CDOs held when Taberna recommended exchange transactions to clients. The SEC said that those fees actually belonged to the CDOs and that the firm made its misconduct difficult to identify by improperly labeling the fees as third party costs in documents even though these costs were only a small portion of the total exchange fees.

Also, said the SEC, Taberna did not mention these fees in quarterly reports to investors nor did it identify them in Forms ADV even though they should have been noted. The regulator said the retention of the fees set up a conflict of interest between the firm and investors and CDO clients, even at times giving Taberna incentive to steer issuers toward a particular exchange regardless of what restructuring might benefit it the most.

Also facing SEC charges are ex-Taberna managing director Michael Fralin and ex-COO Raphael Licht. Fralin is charged because of his purported responsibility for the exchange negotiations and transaction documents that the agency says did not properly characterize exchange fees as compensation for third-party costs. Licht is accused of helping supervise and approve the firm’s collection of exchange fees and playing a part in putting together and reviewing the Forms ADV that the SEC says were not materially accurate.

Taberna consented to pay $13 million of disgorgement, $2 million of prejudgment interest, and a $6.5 million penalty. The investment advisory firm agreed to refrain from acting as an adviser for three years. Fralin consented to a 5-year industry bar and will pay a $100,000 penalty. Licht’s bar is two years and he will pay a $75 penalty. All three are settling without denying or admitting to the SEC’s order.

Addressing the case, SEC Enforcement Division’s Complex Financial Instruments Unit Chief Michael J. Osnato Jr. said that CDO managers have a duty to act in their clients’ best interests and ensure fair and proper communication with them.

A brokerage firm or broker who charges improper or excessive or unnecessary fees to a client is not acting in said client’s best interest. Such misconduct may create a conflict of interest or create profit for the firm or registered representative while negatively impacting an investor’s money. At Shepherd Smith Edwards and Kantas, LTD LLP, our investment advisor fraud law firm is here to help investors recoup their losses brought about by the negligence, carelessness, or wrongdoing of securities industry members.

Read the SEC Order (PDF)