SEC charges debt adviser for fee abuse

Taberna Capital Management agreed to a nine-figure settlement for charges that it fraudulently retained fees belonging to CDO clients.

The US Securities and Exchange Commission (SEC) charged investment adviser Taberna Capital Management $21.5 million to settle charges that the firm fraudulently retained fees in connection with restructuring transactions between Taberna’s collateralized debt obligation (CDO) clients and the issuers of the underlying obligations in the CDOs’ portfolios.

The SEC found that Taberna, a subsidiary of RAIT Financial Trust, did not tell CDO clients it retained more than $15 million in payments known as “exchange fees” from 2009 to 2012 in connection with the restructuring transactions.

Taberna’s retention of the exchange fees was neither permitted by the CDOs’ governing documents nor disclosed to investors in the CDOs. The fees rightfully belonged to the CDOs and created conflicts of interest that Taberna failed to disclose, the SEC claims.

The SEC also charged Taberna’s former managing director Michael Fralin and former chief operating officer Raphael Licht, fining Fralin $100,000 and banning him from the securities industry for five years and fining Licht $75,000 and banning him from the industry for two years.

Fralin was held responsible for the exchange negotiations and for drafting the transaction documents that mischaracterized exchange fees as compensation for third-party costs. 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, according to the SEC.

“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 in a statement Michael Osnato Jr., chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.

Taberna sold off all of its assets at the end of 2014 and currently has no advisory clients. RAIT, a real estate investment trust, previously disclosed reaching a settlement with the SEC and recorded it during the third quarter of 2014. Taberna, Fralin, and Licht consented to the SEC’s order without admitting or denying the findings.