JP Morgan pays SEC $153m to settle charges over mortgage securities

Investors not told hedge fund Magnetar was influencing choice of mortgage assets for CDO investment JP Morgan has paid $153.6m (£95m) to US regulators to settle charges that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet. The charges refer to a $1.1bn investment vehicle called Squared CDO set up by JP Morgan in 2007. The collateralised debt obligation made a series of complex bets on the mortgage market. Marketing material for the investment stated that the its portfolio had been picked using an independent adviser, GSCP, part of advisory service GSC Capital Corp. According to the securities and exchange commission, however, JP Morgan’s clients were not advised that the hedge fund Magnetar helped select the assets in the portfolio and had a short position in more than half of them. Magnetar was poised to benefit if the assets it was selecting for the portfolio failed, said the regulator. When the deal closed, the Securities and Exchange Commission (SEC) calculates that Magnetar was betting $600m that the assets would fall and $8.9m that they would rise. The SEC claimed that JP Morgan launched “a frantic global sales effort” in March and April 2007 as the housing market appeared to be collapsing. In a 22 March 2007 email disclosed by the SEC, the JP Morgan employee in charge of Squared CDO’s global distribution said: “We are so pregnant with this deal … Let’s schedule the cesarian [sic], please!” Ten months later, the securities had lost most or all of their value. Robert Khuzami, the SEC’s director of enforcement, said the bank failed to tell investors “that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection”. “With today’s settlement, harmed investors receive a full return of the losses they suffered,” he said. JP Morgan did not admit any wrongdoing. The bank said it ultimately lost $900m in connection with Squared CDO’s assets. This is the second time this week US regulators have clashed with JP Morgan. The National Credit Union Administration is also suing the bank for $800m alongside Royal Bank of Scotland, again for allegedly mis-selling mortgage-based securities. Earlier this month Jamie Dimon, JP Morgan’s chief executive, said financial reform was stifling recovery following the credit crisis. “Has anyone bothered to study the cumulative effect of all these things?” he asked the Federal Reserve chairman, Ben Bernanke. “Is this holding us back at this point?” The SEC reached a record $550m settlement with Goldman Sachs over similar charges last year. Regulators are investigating many other deals from the housing crisis, with more settlements expected. JP Morgan Banking Credit crunch Financial crisis United States Securities and Exchange Commission Regulators Dominic Rushe guardian.co.uk

Posted by on June 21, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.