Regulation

Investment Firm Fined $21M for Diverting CDO Fees

Taberna Capital Management pocketed fees it owed to CDO clients, says the SEC.
Matthew HellerSeptember 4, 2015

Investment advisory firm Taberna Capital Management has agreed to pay $21 million to settle charges it pocketed $17 million in fees that it owed to collateralized debt obligation (CDO) clients.

According to the U.S. Securities and Exchange Commission, the retention of the fees was not permitted by the governing documents of the CDOs and created conflicts of interest that were not disclosed.

Taberna generated the fees for restructuring transactions with issuers of the underlying obligations in its CDO portfolio. The issuer typically paid an “exchange fee” of 1% of the value of the exchanged securities — which, the SEC said, in an administrative order, “greatly exceeded Taberna’s actual out-of-pocket costs associated with the exchanges.”

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In 2009, Taberna’s exchange fees revenues exceeded the management fees paid by the Taberna CDOs, which had been affected by the financial crisis.

To settle alleged securities law violations, Taberna, a subsidiary of RAIT Financial Trust, will pay disgorgement of $13 million, prejudgment interest of $2 million, and a penalty of $6.5 million. It also accepted a three-year ban on acting as an investment adviser.

“CDO managers have an obligation to act in the best interests of their CDO clients and communicate fairly with them,” Michael J. Osnato Jr., chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said in a news release. “Taberna secretly diverted funds owed to CDO clients, and concealed that diversion and the conflicts it created.”

The SEC said issuers began to approach Taberna in early 2008 about restructuring their obligations due to their heavy exposure to the collapsing real estate market. The firm insisted that issuers pay a fee and, between 2009 and 2012, executed more than 50 exchange transactions, collecting gross fees totaling more than $17 million and netting $15 million.

The fees “were significant to Taberna’s business … and replaced some of the revenue lost when the Taberna CDOs, due to their declining performance, ceased paying subordinated management fees to Taberna,” the SEC noted.

Taberna’s former managing director Michael Fralin and former chief operating officer Raphael Licht agreed to pay penalties of $100,000 and $75,000, respectively, in connection with their roles in the illegal fee retention.