Pa. Firm Must Pay $21.5M for Illegal Fee Retention

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By Antoinette Gartrell

Sept. 2 — A Philadelphia investment advisory firm Sept. 2 agreed to pay $21.5 million to settle Securities and Exchange Commission allegations it fraudulently retained fees belonging to collateralized debt obligation (CDO) clients.

The firm's former managing director and former chief operating officer also settled claims over their alleged roles in the firm's misconduct.

Improper Fee Retention

According to the SEC, from 2009 to 2012, Taberna Capital Mgmt., LLC retained millions of dollars in payments known as “exchange fees” paid by issuers of securities held by the CDOs when it recommended exchange transactions to CDO clients. Taberna’s retention of the exchange fees was neither permitted by the CDOs’ governing documents nor disclosed to investors in the CDOs, the agency said. The fees rightfully belonged to the CDOs and created conflicts of interest that Taberna failed to disclose, the SEC said.

Taberna shielded its misconduct by improperly labeling the exchange fees as “third party costs incurred” in various documents, when in reality such costs comprised only a minimal portion of the overall exchange fees, the SEC said. Additionally, the agency said that Tarberna omitted any mention of exchange fees in its quarterly reports, which included detailed descriptions about the exchange transactions for investors.

The commission alleged that as the former managing director, defendant Michael Fralin was responsible for exchange negotiations and transaction documents that mischaracterized the exchange fees as compensation for third-party costs. Further, the agency alleged that former chief operating officer defendant Raphael Licht helped approve and supervise Taberna’s collection of exchange fees and played a role in the drafting and review of Taberna’s materially inaccurate Forms ADV.

“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,” said Michael J. Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.

Settlements

In settling the allegations, the parties consented to the SEC’s order without admitting or denying misconduct. Taberna agreed to pay $13 million in disgorgement, $2 million in prejudgment interest, and a civil penalty of $6.5 million. It also agreed that it wouldn't act as an investment adviser for three years. Fralin agreed to pay a $100,000 civil penalty and to be barred from the securities industry for at least five years. Licht agreed to pay a $75,000 civil penalty and to be barred from the securities industry for at least two years.

Taberna was represented by Joseph Aronica of Duane Morris, Washington. Fralin was represented by Alan Friedman of Kramer Levin Naftalis & Frankel, New York. Licht was represented by Mary Hansen of Drinker Biddle & Reath, Philadelphia.

To contact the reporter on this story: Antoinette Gartrell in Washington at agartrell@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

To see the SEC's order, visit: http://www.bloomberglaw.com/public/document/SEC_Administrative_Proceeding_In_the_Matter_of_Taberna_Capital_Ma