The Securities and Exchange Commission has made an investment advisory firm in Philadelphia agree to pay more than $21 million to settle charges that it fraudulently retained fees belonging to collateralized debt obligation (CDO) clients.

An SEC investigation found that Taberna Capital Management did not tell CDO clients it was retaining payments known as 'exchange fees' in connection with 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 also charged Taberna’s former managing director Michael Fralin and former chief operating officer Raphael Licht for their roles in certain aspects of Taberna’s misconduct. According to the SEC, between 2009 and 2012, Taberna sought and retained millions of dollars in exchange fees paid by issuers of securities held by the CDOs when Taberna recommended exchange transactions to CDO clients. Under the terms of the CDOs’ governing documents, Taberna was not permitted to retain the exchange fees. Instead, those fees belonged to the CDOs. Taberna obscured its misconduct by improperly labeling the exchange fees as “third party costs incurred” in various documents. Such costs, howeve3r, comprised only a trifling portion of the total exchange fees. In quarterly reports that Taberna sent to investors, it omitted any mention of exchange fees in its detailed descriptions about the exchange transactions. Taberna also failed to identify the fees in Forms ADV despite its obligation to do so. Fralin was responsible for exchange negotiations and transaction documents that mischaracterized the exchange fees as compensation for third-party costs. Licht helped approve and supervise Taberna’s collection of exchange fees. He played a role in the drafting and review of Taberna’s inaccurate forms.

The SEC, in its order, said that Taberna, which is a subsidiary of RAIT Financial Trust, broke section 15(a) Securities Exchange Act of 1934 and ss206(1), 206(2), 206(4), and 207 Investment Advisers Act 1940 as well as Rule 206(4)-8. Taberna agreed to pay a 'disgorgement' of $13 million, prejudgment interest of $2 million, and a penalty of $6.5 million, and will not act as an investment adviser for three years. The SEC’s order finds that Fralin broke ss206(2) and 206(4) Advisers Act and Rule 206(4)-8, and Licht broke ss206(2) and 207 Advisers Act. Fralin agreed to pay a $100,000 penalty and is barred from the securities industry for at least 5 years. Licht agreed to pay a $75,000 penalty and is barred from the securities industry for at least 2 years. Taberna, Fralin, and Licht consented to the SEC’s order without admitting or denying the findings.