S.E.C. Cites Asset Firm in a Fraud

when two hedge funds run by the now-defunct Bear Stearns investment bank were in trouble, ICP agreed to buy $1.3 billion in bonds from the Bear funds. ICP did not have the money to accept the bonds immediately, so it agreed to accept them later on behalf of Triaxx C.D.O.’s. ICP was supposed to obtain A.I.G.’s permission before making such an agreement, but did not do so, the complaint said.

June 21, 2010

S.E.C. Cites Asset Firm in a Fraud


Beginning a new stage in the government’s investigations of the mortgage industry, the Securities and Exchange Commission on Monday accused a New York firm that managed complex mortgage securities of defrauding investors and misleading the American International Group, the government-controlled company that insured some of the firm’s deals.

Two of the four mortgage deals in the S.E.C. complaint were bought by the New York Federal Reserve in 2008, in its bailout of A.I.G. Goldman Sachs and UBS, which were not named in the complaint, received payouts from the Fed for those deals.

The case involves a new type of target for the S.E.C., which has been tracing the mortgage pipeline to try to uncover wrongdoing. The commission has filed cases against mortgage companies that originated loans, like Countrywide Financial, and this spring it filed a case against Goldman Sachs over a mortgage bond the bank had created.

This latest case examines the last party in that chain, a firm that managed complex deals known as collateralized debt obligations (C.D.O.’s) after they were created by banks. The firm, ICP Asset Management, used the four C.D.O.’s, sold under the name Triaxx, like a piggy bank to enrich itself by diverting millions of dollars from investors, the commission said in the complaint, which was filed in the Southern District of New York.

In a conference call with reporters, George S. Canellos, the director of the S.E.C.’s regional office in New York, said that ICP was one of about 50 C.D.O. managers that were targets of the commission’s continuing investigation. Mr. Canellos said the agency was focusing on conflicts of interest in the mortgage C.D.O. market that sometimes pitted managers against their own clients.

“The case makes plain to investment advisers that the S.E.C. does not shy away from the most complicated corner of the financial industry,” Mr. Canellos said.

When banks created C.D.O.’s, they worked with outside managers like ICP to reassure investors that a third party was watching out for clients’ interests and not putting itself or others first.

But the commission paints a picture of a firm that was anything but neutral. The complaint said that ICP set up trades with the Triaxx vehicles that favored the firm’s other funds, in some cases using the C.D.O.’s to pump up the market prices the other funds could claim as reasonable.

In addition, two of the Triaxx deals were partly insured by A.I.G., and one was insured by the Financial Guaranty Insurance Company, a bond guarantor. The commission said that ICP broke its agreement to obtain the insurers’ permission for certain investments and misled A.I.G. about its actions, even as A.I.G. neared collapse in 2008, prompting the government bailout.

“We at all times acted in the best interest of our clients and intend to vigorously defend these allegations,” Thomas C. Priore, one of ICP’s principals, said in an e-mail message.

A.I.G.’s involvement with ICP was organized by Goldman Sachs and UBS. Those two banks each bought the safest part of different Triaxx deals and then insured that part with a guarantee from A.I.G. Both banks received billions of dollars from the Federal Reserve in the fall of 2008 related to mortgage securities they insured with A.I.G., including their Triaxx investments.

The S.E.C. did not name either bank in the complaint. Goldman’s Triaxx deal was particularly tricky for the Fed to handle in 2008 because Goldman was not able to deliver some of the Triaxx bonds to the Fed. That meant that Goldman had insurance on some bonds that it no longer had. As a result, the Fed left part of Goldman’s deal out of its bailout.

A spokeswoman for UBS declined to comment, and a spokesman for Goldman did not provide a comment.

A.I.G. put in place safeguards in the deals it insured. But in the complaint against ICP, the S.E.C. describes several instances in which ICP did not follow its agreement with A.I.G.

For instance, in the summer of 2007, when two hedge funds run by the now-defunct Bear Stearns investment bank were in trouble, ICP agreed to buy $1.3 billion in bonds from the Bear funds. ICP did not have the money to accept the bonds immediately, so it agreed to accept them later on behalf of Triaxx C.D.O.’s. ICP was supposed to obtain A.I.G.’s permission before making such an agreement, but did not do so, the complaint said.

Shortly thereafter, ICP resold some of those Bear Stearns bonds to one of its other funds at a $14 million profit. But, the S.E.C. said, ICP canceled the trades with the Triaxx C.D.O.’s in such a way as to divert that profit to ICP’s owners, rather than giving it to the investors in the C.D.O.’s.

Mr. Priore was also named by the S.E.C., which said he had breached his duties to Triaxx’s investors in favor of investors in his other vehicles.

For instance, the commission said that in mid-2008, one of ICP’s vehicles was hit with margin calls from its lenders. To raise cash for those calls, ICP sold hundreds of millions of dollars of bonds from that vehicle to the Triaxx C.D.O.’s at inflated prices. The C.D.O.’s overpaid by about $40 million, the complaint said.

“Priore knew that the prices of sales from Triaxx Funding were substantially above prevailing market levels, yet instructed ICP employees to proceed with the sales,” the complaint said. “After several sales were executed, ICP’s portfolio manager, who felt uncomfortable following Priore’s instructions, directed ICP employees to name Priore as the trader in ICP’s books and records.”

ICP marketed the Triaxx deals when they were created in 2006 and 2007 by using A.I.G.’s name. The firm said in marketing materials that A.I.G. would serve as a “collateral manager,” approving trading by the Triaxx vehicles, according to the S.E.C.

14 Responses

  1. how convenient, that mers shows the supposed investors now, how about the info from the origination of the loan should have been and should be on there, so that the borrowers have the access to watch the trading from the origination.

  2. to all homeowners:

    it is very easy now too find out who is the investors of your mortgage, just go to MERS servicer ID . it will tell you who is the investors and servicer of your loan or mortgage. if the debt collector attorney are foreclosing in behalf of other entity, in my opinion you could bring a copy of MERS info and tell the court the name of your investors is different f rom the one named on the lawsuit . i don’t think it easy for the debt collector to name an incorrect secured creditors because Mers are showing the investor names now on their website after effective June 15, 2010. I got mine all the info and guess what? all the entity that brought motion for relief from stay are totally different from the name the debt collectors attorney is telling the judge. ha ha ha , i really don’t know what explanations their attorneys would say. this information is very important to us. i am still fighting and i would never give up no matter what because i believed we are all victims by things we don’t have control of.

  3. deontos,

    sorry i did not return your call. I am still working on my reorganization Plan and a lot of motions needed to be answer. talk to you next week so we could share the same info.

  4. i was reading the MERS Manual in re: to MERSCORP, INC. Rules of Membership.- Meaning LOAn Servicer RULES.

    in Florida effective June 1, 2006, the loan servicer (The member) shall be sanction $10,000.00 per violation for commencing a Foreclosure in FLORIDA in the name of MERS RULE 8 section 1 (c). i think this would help to all Florida homeowners.

    i found out when MERS will be named defendant in a lawsuit , the member ((loan servicer) will defend the MERS and pays all MERS legal fees. so, in other words its all Loan servicer obligation if you named MERS as a defendant. hope this will help.

  5. To Jade OOOPS see Abby in CA

  6. To Jade: Have you seen the post of carra in the homeowners section, dated today about filing AP in delaware bankruptcy court , New Century…

  7. Face to Face With Polished Wall Street Psychopathy
    Posted on June 25, 2010 by Foreclosureblues
    Editor’s Note…Now here is something you won’t see in the mainstream media.


    Tom Adams: Face to Face With Polished Wall Street Psychopathy (SEC Says that ICP Stole from My Old Company Edition)
    Today, June 25, 2010, 8 hours ago | Yves Smith
    By Tom Adams, an attorney and former monoline executive

    When the financial crisis hit, I was in the direct line of fire. My company blew up very early in the crisis, giving me the dubious opportunity to see how bad things were going to get long before most of the rest of the world, including other banks, insurers, investors, administration officials or Federal Reserve members, were able to perceive the trajectory of the crisis.

    After Lehman and AIG blew up, however, suddenly, everyone was talking about my industry and how horrible it was. I had already concluded that I had failed at the business I had worked at for over twenty years. I blamed myself for rationalizing taking credit risks that, with each passing month, were becoming more obvious and acute.

    I was not alone in the many mistakes I had made. My competitors, including the largest and savviest banks and investors had made the same errors on an even grander scale. If you were to take them at the word, the highest ranking regulators, officials and economists had failed to anticipate the decline in home prices and its impact on mortgage bonds and, even worse, the impact of such declines on the US and global economy.

    As this realization began to sink in, I began to wonder how I had made such mistakes. I began to look into the parties and transactions and the connections between them and what they knew, should have known or had no way of knowing. I pulled the loose threads of some questions I had about how the problems were so widespread and how so many people could have made such large mistakes.

    The more I pulled on these threads, the more I discovered that much of what I thought I knew was based on things that weren’t really true. And by that I don’t mean assumptions about housing prices, I mean information people like me had been provided about specific deals by other parties to those transactions. While many of the failings of the structured credit market were due to unsound reliance on historical data, some were not mistakes in judgment but were the result of bad actors, misinformation and wrongdoing.

    Over the past year, journalists, investigators and law enforcement officials conducted their own investigations into what went wrong in the financial markets. The veil was pulled back on actions of people like Magnetar, John Paulson and various banks such as Goldman Sachs. While some of these parties have managed to stay within the boundaries of the law, it’s become clear that the CDO market itself was filled with dubious participants, misaligned incentives and damaging activities.

    Back in April of this year, Yves Smith and I suggested that some of the responsibility for the widespread failure of CDOs might lie with CDO managers. CDO managers were tasked with assembling the assets that went into CDOs and overseeing the transactions. While they failed miserably at creating successful deals, they have somehow managed to escape the wrath of the broader world. Large investment companies, such as TCW, Putnam, BlackRock and even Pimco, had assembled and managed CDOs backed by toxic mortgage bonds as had well-regarded banks such as Goldman, Merrill, UBS and Citibank.

    Thanks in large part to the CDO managers own assertions of expertise, investors trusted in their ability to wisely select safe mortgage bonds while avoiding the increasing risks that were appearing in the mortgage market. By 2008 it was obvious that the faith that investors had in these highly skilled and highly paid managers was misguided.

    After several months of analyzing the deals and participants in the market, I began to suspect that the CDO managers, had ample opportunity and motivation to knowingly or negligently contribute the collapse of the deals under their charge.

    As jaded as I have now become, I must confess that I am still surprised at just how blatant and casual some of the thievery in the CDO market appears to have been. As an example, I look to the SEC’s complaint against a company called ICP. I met with the folks from this company many times and my former company insured a large transaction that they assembled. This week the SEC accused the company and its founder of defrauding my former company and AIG in the way they managed the transaction after it closed. The SEC accuses ICP of inflating the prices of bonds it sold to the CDOs and defrauding the investors in the transactions by manipulating the bond price data, violating the terms of the agreements and effectively stealing from the investors and insurers in order to line their own pockets. The actions of ICP helped offset their own losses and bad investment decisions (they purchased a $1.3 billion pool of mortgage bonds from the blown up Bear Stearns hedge funds at what they thought was a great bargain but what turned out to be overly optimistic prices).

    ICP’s alleged manipulation of bond prices also, conveniently, helped them keep the deals in compliance with their triggers, which helped them wrongfully earn millions of dollars in fees at the direct expense of the bondholders. The bondholders and insurers on the deals suffered many millions of dollars in losses as a direct result of these alleged activities. Because AIG insured two very large deals from ICP, US taxpayers were ultimately on the hook for some these losses because the Federal Reserve bought the CDO bonds at par and placed them into the Maiden Lane transaction.

    Over the course of diligence visits, meetings and dinners, I had formed the impression that the people at ICP were knowledgeable, smart and reputable. Mr. Priore, ICP’s founder, was held in high regard in the industry and occasionally spoke about his views on the market to reputable news organizations such as Bloomberg Television, the New York Times and Reuters. He was listed by Investment Dealers Digest magazine as one of the 40 under 40 worth watching. So not only was I completely taken in by his knowledge and interpersonal skills, so were many others. In fact, given his sterling reputation, voicing suspicion of him would have been seen as paranoia rather than well founded skepticism.

    The CDO transactions at issue in the SEC complaint were not structured as speculative, risky bets on the housing market. The deals were backed by a pool of AAA-rated mortgage bonds (by contrast, the overwhelming majority of CDOs contained much lower-rated assets). The CDO bonds to which the insurers took exposure had an additional cushion of protection in the amount of approximately 10% to create “super senior” AAA bonds. Nonetheless, within about a year, the super senior bonds were valued at about 60 cents on the dollar and required cash payments of about $2 billion by AIG and the Federal Reserve to make bondholders whole (see previous discussion of AIG and Maiden Lane amounts here: http://www.nakedcapitalism.com/2010/01/more-of-that-secret-maiden-lane-iii-transaction-level-detail.html).

    As described in the SEC’s complaint, ICP stole from my old company and from AIG and caused millions of dollars of losses, the loss of many jobs, the misapplication of taxpayer funds and contributed to the destruction of the economy. They did so while smiling and shaking our hands, vowing to protect our interests and then asking about our children and our families. They did so while taking that money and paying themselves millions of dollars of misappropriated fees and bonuses, even as our companies ran out of money and struggled to understand why.

    What is most interesting about the ICP case to me is not that the people involved were unusual or evil, but rather how common and normal they seemed. They seemed to be knowledgeable and reasonable people; above average, by my assessment of the industry. As the CDO manager was allegedly committing its fraudulent activities they probably believed that their actions were justifiable and, indeed, were a normal way to conduct CDO business. I would agree: their behavior was likely commonplace, not extraordinary, and part of the acceptable course of business.

    Investors purchased CDO bonds based in large part on the expertise, experience and reliability of the CDO managers to create and manage safe bonds. As it turns out, investors were foolish to hold such beliefs. The CDO market was far more opaque than it appeared and the structures permitted far too much latitude and created far to many opportunities for the managers to line their own pockets at the expense of their investors. Following its complaint against ICP, the SEC may finally be uncovering the widespread, ordinary frauds that lurked behind the failed CDO market.

  8. To Mary, I don’t have alot of info on this but in my case HSBC attached an allonge that went straight from New Century to HSBC. I showed that the loan had been sold twice before HSBC became the trustee. The judge in Ohio didn’t care, so off to BK court, maybe the trustee will care. The papers say trustee as of April 1, 2007 the day before New Century filied BK

  9. Neil ,really the SEC are filing these cases day in and day out… while the SEC staff surf’s for porn… there is a slap on the wrist… and all disclosure of fraud is scrubbed and goes under ground until the next tax payer bailout comes around…

    Read the same article in the WSJ with a good LOL… Ouch!

  10. To Mary- I believe that Carrington Mortgage bought substantially all of New Century’s loans. I don’t remember where I got this information, only that is the context of the article which I was reading, I took it as factual. I hope this helps. Ian






  12. Does anyone know what other companys are also under investigation. Thanks.

  13. Does anyone know if the bankruptcy court of delaware approved the sale of some of new century’s loans and residual interest in some securitized loan pools to greenwich capital and what about the approval of debtor in possession to citigroup & greenwich?

    Any answers would be helpful. Thanks

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