CDO Manager and Its GC Charged with Misleading Disclosure and Conflict of Interest
A CDO Manager agreed to pay $21.5 Million to settle charges that it misled clients and breached its fiduciary duty by not disclosing certain exchange fees received in note restructurings. The firm’s senior executive in charge of the restructurings and the General Counsel were also barred from the industry and fined. The SEC alleges that the respondents failed to fully disclose and intentionally misled clients about restructuring fees received from issuers. The SEC asserts that the senior executive had a conflict of interest because he received a percentage of the 1% restructuring fee that he negotiated for the firm. The SEC faults the General Counsel because he (i) supervised the senior executive’s negotiations, (ii) personally negotiated some of the transactions, (iii) negotiated the senior executive’s compensation structure, (iv) was aware of the misleading statements in client documents, (v) failed to ensure full disclosure of fees, and (vi) played a role in drafting the misleading Form ADV.
OUR TAKE: This case raises many issues about GC or CCO liability. Why did the SEC prosecute the GC? Is it because he acted with extreme recklessness by not stopping unlawful conduct that the SEC says he knew about and helped facilitate? Or, does a GC have a Hall Monitor duty to stop the misconduct of senior executives. Under either theory, the SEC brought charges even though it does not allege the GC personally benefitted.