JPMorgan to pay $153.6 million to settle SEC charges in CDO deal

JPMorgan Securities (JPM) will pay $153.6 million to settle Securities and Exchange Commission charges that it misled investors in a complex mortgage securities transaction just as the housing market began to tank, the SEC said Tuesday. Under the settlement, harmed investors will receive all of their money back, the SEC said. JPMorgan also agreed to improve the way it reviews and approves mortgage securities transactions, the regulatory agency said. The SEC alleged JPMorgan structured and marketed a synthetic collateralized debt obligation without informing investors that a hedge fund helped select the assets in the portfolio and had a short position in more than half of those assets. The SEC separately charged Edward Steffelin, who headed the team at an investment advisory firm that the deal’s marketing materials misleadingly represented had selected the CDO’s portfolio. “JPMorgan marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests,” said Robert Khuzami, director of the division of enforcement. “What JPMorgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection.” The CDO known as Squared CDO 2007-1 was structured primarily with credit default swaps referencing other CDO securities whose value was tied to the U.S. residential housing market, according to the SEC. “Omitted from the marketing materials and unknown to investors was the fact that the Magnetar Capital LLC hedge fund played a significant role in selecting CDOs for the portfolio and stood to benefit if the CDOs defaulted,” the SEC said. The SEC alleges that by the time the deal closed in May 2007, Magnetar held a $600 million short position that dwarfed its $8.9 million long position. In an internal e-mail, a JPMorgan employee noted, “We all know (Magnetar) wants to print as many deals as possible before everything completely falls apart,” according to the SEC. The SEC alleges that in March and April 2007, JPMorgan knew it faced growing financial losses from the Squared deal but launched a frantic global sales effort. Ten months later, the securities had lost most or all of their value. Last year, Goldman Sachs (GS) settled a similar CDO case involving a deal known as Abacus for $550 million. The SEC alleged that Goldman failed to disclose the role that hedge fund Paulson & Co. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO. After the Goldman settlement, analysts at Credit Suisse said they did not anticipate any material long-term impact on the global investment company. But analysts added they “would not be surprised” to see further regulatory actions with others active within the CDO market. Write to Kerry Curry. Follow her on Twitter @communicatorKLC.