JPMorgan Chase & Co.’s investment banking unit has settled for more than $150 million charges that it misled investors on mortgage securities. It’s the second big action announced against the financial behemoth in as many days.
J.P. Morgan Securities LLC was sued this month by the Securities and Exchange Commission in a federal court in Manhattan, according to a copy of the complaint.
The SEC claims that the company misled investors in a complex collateralized-debt obligation transaction at the beginning of the mortgage meltdown. That transaction was known as Squared CDO 2007-1.
“J.P. Morgan structured and marketed a synthetic collateralized debt obligation without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets,” the SEC stated in an announcement Tuesday. “As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted.”
That hedge fund was Magnetar Capital LLC.
A separate lawsuit was filed against Edward S. Steffelin by the SEC. Steffelin reportedly headed a team at GSCP (NJ) L.P. — an experienced investment advisory arm of bankrupt GSC Capital Corp. — that was promoted as the firm that actually assembled the CDO portfolio. Steffelin, who was reportedly hoping to land a job at Magnetar, allegedly drafted and approved marketing materials promoting GSC’s selection of the portfolio without disclosing Magnetar’s role in the selection process.
“What J.P. Morgan 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,” SEC Director of the Division of Enforcement Robert Khuzami said in the news release.
Magnetar reportedly held a $9 million long position in the CDO — hardly anything compared to its $600 million short position.
An internal e-mail message from a J.P. Morgan employee reportedly said, “We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart.”
Within 10 months of its issuance, Squared CDO 2007-1 had lost most or all of its value, the SEC claims. More than a dozen mezzanine investors who had poured around $150 million into the deal lost nearly their entire investment.
On Tuesday, the SEC said the J.P. Morgan consented to a final judgment that provides for a permanent injunction from violating Section 17(a)(2) and (3) of the Securities Act of 1933. The settlement, which is still subject to court approval, also requires a disgorgement payment of $18.6 million, prejudgment interest of $2 million and a $133 million penalty.
Mezzanine investors are slated to receive $126 million of the $153.6 million total, while the Department of the Treasury will get $28 million.
“The settlement also requires J.P. Morgan to change how it reviews and approves offerings of certain mortgage securities,” the announcement stated. “In addition, J.P. Morgan’s consent notes that it voluntarily paid $56,761,214 to certain investors in a transaction known as Tahoma CDO I.”
On Monday, the National Credit Union Administration said it sued JPMorgan’s investment banking unit in U.S. District Court for the District of Kansas. The unit allegedly violated federal and state securities laws and misrepresented the sale of hundreds of securities to five failed credit unions that the NCUA took over as liquidating agent.
U.S. Securities and Exchange Commission, Plaintiff, v. J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.), Defendant.
(U.S. District Court for the Southern District of New York).
U.S. Securities and Exchange Commission, Plaintiff, v. Edward S. Steffelin, Defendant.
(U.S. District Court for the Southern District of New York).
