In a lawsuit yesterday, the Securities and Exchange Commission said that investors in a mortgage-bond deal lost nearly everything when the housing bubble burst and that J.P.Morgan Chase & Co. has agreed to pay $153.6 million to settle civil charges that it misled investors in the deal, "failing to tell them that a hedge fund helped craft the deal and stood to profit if it failed," according to an article in today's edition of The Wall Street Journal by Jean Eaglesham and Dan Fitzpatrick.
The hedge fund that helped design the deal, the article continued, "walked away with a windfall, and J.P.Morgan itself collected nearly $19 million for arranging the deals, according to the SEC."
"As part of Tuesday's settlement, J.P.Morgan neither admitted nor denied wrongdoing, saying it was 'pleased to have reached agreement with the SEC,' pointing out that it wasn't charged 'with intentional or reckless misconduct.'"
The $1.1 billion 2007 deal was called Squared CDO 2007-1 and the bank "suffered heavy losses on its mortgage-bond deal because the bank held onto a 'super-senior tranche' originally valued at $935 million," the article said, adding that "that stake became nearly worthless."
In the deal, the article continued, J.P. Morgan failed to tell investors that "Illinois-based hedge-fund firm Magnetar Capital LLC had a $600 million 'short' bet on the deal and a tiny $8.9 million bet that the deal would rise in value." "SEC officials have told Magnetar that it won't face enforcement action related to the J.P.Morgan probe," the article added.
The article said that the SEC also filed civil fraud charges against Edward S. Steffelin, a former executive at GSC Capital Corp., the firm that managed the assets in the Squared deal, alleging that he "allowed Magnetar to select and bet against portfolio assets, while approving marketing materials that failed to disclose the hedge fund's role."
The SEC is still investigating accusations of improper sales practices at Deutsche Bank, Morgan Stanley and several other companies and the New York State attorney general recently opened a number of cases involving several big banks as part of a broad sweep of Wall Street's loan packaging business, according to an article in today's edition of The New York Times by Edward Wyatt.
The hedge fund that helped design the deal, the article continued, "walked away with a windfall, and J.P.Morgan itself collected nearly $19 million for arranging the deals, according to the SEC."
"As part of Tuesday's settlement, J.P.Morgan neither admitted nor denied wrongdoing, saying it was 'pleased to have reached agreement with the SEC,' pointing out that it wasn't charged 'with intentional or reckless misconduct.'"
The $1.1 billion 2007 deal was called Squared CDO 2007-1 and the bank "suffered heavy losses on its mortgage-bond deal because the bank held onto a 'super-senior tranche' originally valued at $935 million," the article said, adding that "that stake became nearly worthless."
In the deal, the article continued, J.P. Morgan failed to tell investors that "Illinois-based hedge-fund firm Magnetar Capital LLC had a $600 million 'short' bet on the deal and a tiny $8.9 million bet that the deal would rise in value." "SEC officials have told Magnetar that it won't face enforcement action related to the J.P.Morgan probe," the article added.
The article said that the SEC also filed civil fraud charges against Edward S. Steffelin, a former executive at GSC Capital Corp., the firm that managed the assets in the Squared deal, alleging that he "allowed Magnetar to select and bet against portfolio assets, while approving marketing materials that failed to disclose the hedge fund's role."
The SEC is still investigating accusations of improper sales practices at Deutsche Bank, Morgan Stanley and several other companies and the New York State attorney general recently opened a number of cases involving several big banks as part of a broad sweep of Wall Street's loan packaging business, according to an article in today's edition of The New York Times by Edward Wyatt.
Architecture Critic
Carter Horsley
Since 1997, Carter B. Horsley has been the editorial director of CityRealty. He began his journalistic career at The New York Times in 1961 where he spent 26 years as a reporter specializing in real estate & architectural news. In 1987, he became the architecture critic and real estate editor of The New York Post.
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