The Securities and Exchange Commission recently announced charges against New York City-based brokerage firm VCAP Securities and its CEO, Brett Thomas Graham, for fraudulently deceiving other market participants while conducting auctions to liquidate collateralized debt obligations (CDOs). VCAP and Graham together agreed to pay almost $1.5 million to settle the SEC’s charges, and Graham is barred from the securities industry for a minimum of three years.
The SEC found that VCAP and Graham improperly arranged for a third-party broker-dealer to secretly bid at auctions on behalf of their affiliated investment adviser in order to acquire certain bonds to benefit the funds it managed. Under engagement agreements with the CDO trustees, VCAP and its affiliates were prohibited from bidding while serving as liquidation agent for these auctions. VCAP had access to all of the confidential bidding information as the liquidation agent, and Graham exploited it to ensure their third-party bidder won the coveted bonds at prices only slightly higher than other bidders, according to the SEC. VCAP’s investment adviser affiliate then immediately bought the bonds from its secret bidder.
“Graham abused a position of trust by playing the roles of both conductor and bidder during CDO liquidation auctions to the detriment of other participants,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit in an SEC statement. “The settlement requires Graham and VCAP to give up fees they obtained while conducting these unfair liquidations that landed certain bonds in their und manager’s portfolio.”
According to the SEC’s order instituting a settled administrative proceeding, Graham and VCAP made material misrepresentations to the trustees of the various CDOs for which VCAP served as liquidation agent. After Graham discussing bidding arrangements with the third-party broker-dealer, VCAP and Graham falsely stated in engagement agreements that they and their affiliates would refrain from bidding in the auctions or misusing confidential bidding information. VCAP provided the various trustees with documents that failed to disclose that VCAP’s investment adviser affiliate was the winning bidder. VCAP’s scheme enabled the investment adviser affiliate to obtain a total of 23 bonds during five auctions.
The SEC’s order finds that VCAP and Graham violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. VCAP agreed to pay disgorgement and prejudgment interest of $1,149,599 while Graham agreed to pay disgorgement and prejudgment interest of $127,733 plus a penalty of $200,000. The SEC’s order censures VCAP and requires the firm and Graham to cease and desist from committing or causing any future violations of Section 10(b) of the Exchange Act and Rule 10b-5. VCAP and Graham consented to the SEC’s order without admitting or denying the findings.
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