The Securities and Exchange Commission (SEC) announced today that it settled claims against one of the largest and most successful registered investment advisors in the world. The SEC claimed that, in late 2006, Aladdin Capital Management LLC (“Aladdin Management”) marketed to its clients two CDOs that it was managing and stated that it would co-invest in the same CDOs. But, contrary to its representation, Aladdin Management did not co-invest as it represented.
According to the SEC, when marketing the MAST program, Aladdin Management and Aladdin Capital stated that Aladdin Management would co-invest in the same equity tranches of each CDO or CLO alongside its clients. Joseph A. Schlim, a former principal and CFO of Aladdin Capital and Aladdin Management, also settled with the SEC. Schlim has obtained, and currently possesses, Series 4, 7, 24, 27 and 63 licenses issued by the Financial Industry Regulatory Authority was personally involved in creating the co-investment feature of the MAST program. Schlim knew that Aladdin Management’s co-investment representation was a key feature of, and selling point for, the MAST program.
For example, Aladdin Management explained in marketing material that, “[w]e align our interests with MAST investors by co-investing in every transaction with them. And don’t forget, we are not investing in other firms’ transactions. Instead, we only invest in deals where we can control the management of the collateral – our own programs.” In the same marketing piece, Aladdin Management also posed the question, “[w]hy is an investor better off just investing in Aladdin sponsored CLOs and CDOs?” Aladdin answered by emphasizing that the “most powerful response I can give to your question is that Aladdin co-invests alongside MAST investors in every program. Putting meaningful ‘skin in the game’ as we do means our financial interests are aligned with those of our MAST investors.” Aladdin Capital also emphasized that Aladdin Management would co-invest in the same products when marketing specific CDOs to potential MAST participants.
“If you sell an investment with the pitch that you are co-investing and have ‘skin in the game,’ then you better actually have ‘skin in the game,’” said Robert Khuzami, director of the SEC’s enforcement division. “Such a representation by an investment adviser or broker dealer is an important consideration to investors in complex products.”
Aladdin Management is an SEC-registered investment adviser based in Stamford, Connecticut. During the relevant time period, Aladdin Management had assets under management of approximately $20 billion, which consisted predominantly of cash and synthetic CDOs, collateralized loan obligations (“CLOs”), several credit hedge funds, and separately managed accounts. Aladdin Management’s typical practice was to act as the collateral manager for CDOs and CLOs underwritten by major investment banks.
CDOs are complex structured financial products known as collateralized debt obligations. CDOs are securities backed by debt obligations including, for example, subprime residential mortgage-backed securities. The underlying mortgage-backed, or other, securities are packaged and generally held by a special purpose vehicle that issues notes entitling their holders to payments derived from the underlying assets.
“These investment products are complicated even for institutional investors to understand. Add the element of outright fraud, and you better hire an investment expert who works solely for you BEFORE you invest,” said Jeffrey Wittenberg. Mr. Wittenberg continued, “it doesn’t matter whether you have substantial investment experience or no investment experience, the assistance of counsel can help you verify the representations to ensure that your on a level playing field.”
If you lost money in CDOs or any other investment product, call Wittenberg Law at (310) 295-2010 to determine whether you have a legal right to recover your funds.