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After SEC Settlement With JPMorgan, Will Other Banks Pay Too?

Many other banks created deals with similar characteristics to the transaction that resulted in JPMorgan’s $154 million settlement with the government. But the SEC still faces big challenges in wresting more settlements from banks.

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The U.S. Securities and Exchange Commission (Chip Somodevilla/Getty Images)

June 23: This story has been updated.

The $154 million settlement the Securities and Exchange Commission wrested from JPMorgan Chase involved only one of more than two dozen mortgage securities deals that the hedge fund Magnetar helped create. As we detailed last year, many banks in the waning days of the boom created collateralized debt obligations, or CDOs, with the help of Magnetar, which also bet against many of the same investments.

So, is the SEC going to do anything about any of the other deals? The answer to that question reveals as much about the difficulties in policing Wall Street as it does about the excesses committed in the lead up to the financial crisis.

In the SEC's complaint [PDF] released yesterday it accused JPMorgan of misleading investors in a complex mortgage deal it peddled in 2007. Neither the bank, nor the manager of the deal had disclosed to the investors that Magnetar not only helped choose the assets in the deal, called "Squared," but also bet against much of the deal.

Magnetar participated in at least 28 similar deals, worth more than $40 billion. Other hedge funds, such as Paulson & Co., asked Wall Street banks to design billions worth of other similar deals, crucial aspects of which were not clearly disclosed to investors.

While the SEC may yet reach a few more settlements over similar conduct at other banks, it's likely that only a fraction of those responsible on Wall Street will be caught in the dragnet.

"It is impossible for the SEC to sweep the Street on every one of these bum deals," says Charles Landy, a partner at Pillsbury who was a former attorney in the SEC's enforcement division.

The largest stumbling block may be lack of resources. The SEC spent two years investigating Squared. A special group within the agency that helps the enforcement staff examine these complex securities was formed in January 2010 and wasn't fully staffed until May of that year. To cut through the complexity of the deals and the legal defenses of the banks takes time and knowledge.

Understanding the mechanics behind Squared was no easy matter. It was a collateralized debt obligation, usually the last stop for mortgages on an assembly line of slicing, dicing and repackaging. But Squared took the process a step further; it was a CDO consisting entirely of other CDOs. To make it even more confusing, it didn't consist of actual cash bonds but side bets on those bonds, credit default swaps, so-called synthetics that mimicked the physical bonds. Neither CDOs nor CDSs received much regulatory attention in the lead-up to the crisis. CDSs were private transactions, outside the SEC's traditional jurisdiction. Congress specifically prohibited the SEC and other regulators from regulating derivatives such as CDSs. As the financial crisis was hitting, "there wasn't one piece of paper on file relating to a CDO" at the agency, says one SEC official. That meant "we couldn't see the forest or the trees."

The banks generally swathed their prospectuses for these deals in dense legalese detailing all kinds of risks, real and imagined. These warnings became so standard and voluminous that they lost any power to help investors. The banks might seek to use them as a legal defense when regulators come calling. In the case of "Squared," however, the SEC wrote in its complaint that a generic disclosure covering the possibility that an investor might bet against the deal was inadequate because it didn't disclose that Magnetar was involved in the asset selection process. Since JPMorgan settled, that theory was never tested in court. The banks also argue that they sold these bonds only to "sophisticated investors" who should have been fully aware of what they were buying.

Once they unwrapped the deals, regulators needed to identify the players and the nature of their relationships. This required poring over months of email traffic from multiple parties. In the case of Squared, in addition to JPMorgan, the banker, and Magnetar, the hedge fund whose small purchase got the deal started, there was also GSC, an asset manager. CDO managers like GSC served as the referee between the investor and the bank. They selected the assets and had a fiduciary duty to ensure the investment was described fairly to potential buyers. The SEC alleges that GSC failed in this duty, and it is pursuing charges against Edward Steffelin, the manager who worked on the deal. GSC did three other Magnetar deals in the same time period with similar characteristics. The bank was Citigroup, which has said its activities are under investigation by the SEC.

Steffelin denies the charges, and his lawyer has said he will contest them. Citigroup declined to comment.

But many of the CDO managers, while at the heart of the worst excesses of the CDO business, were fly-by-night shops that disbanded in the wake of the financial crisis and are unlikely to be seen as worthy scalps for a resource-starved SEC.

Since the SEC is incapable of targeting each and every malefactor, its strategy typically is to lay down markers for the civil litigants who follow. Once the details behind the settlements become public, investors and plaintiffs' attorneys can often use those cases as templates for future litigation.

"Historically the SEC enforcement division has always looked for help from class-action lawyers," says former enforcement lawyer Landy.

For at least one of the Magnetar deals, the process might be reversed. The Financial Times has reported ($) the agency is looking at a $1.5 billion Magnetar CDO called Norma. The CDO was the subject of a lawsuit against Merrill Lynch, the bank behind the deal, by Rabobank, a Dutch firm that lost money on it. The lawsuit was settled for an undisclosed sum. Merrill is now owned by Bank of America, which declined to comment. Despite the parties' shutting the door to further discovery, the Financial Crisis Inquiry Commission obtained emails from the lawsuit between the parties involved in the deal.

The emails paint a similar picture to what happened with Squared. In this case, the CDO manager was a small firm called NIR Capital.

"When one Merrill employee learned that Magnetar had executed approximately $600 million in trades for Norma without NIR's apparent involvement or knowledge, she emailed colleagues, 'Dumb question. Is Magnetar allowed to trade for NIR?'," according to the FCIC's report.

"NIR abdicated its asset selection duties to Magnetar with Merrill's knowledge," the FCIC report states.

NIR declined to comment.

In a letter to the commission, a Bank of America lawyer stated that NIR had ultimate responsibility for asset selection and it was common for investors like Magnetar to have input in that process.

The SEC's complaint involving Squared makes it clear that Magneter's true aim was to bet against the deal, and that JPMorgan and GSC employees knew it. While Magnetar has consistently maintained that it had a market-neutral strategy and was not betting on a housing market collapse, the SEC complaint paints a different picture. A Magnetar employee explained in an internal email that its investment in Squared was "basically nothing," and that the firm was "just doing it ... to buy some protection," or shorts. A JPMorgan salesperson wrote on Feb. 13, 2007, a year and a half before the financial crisis: "We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart."

Did Merrill and NIR employees have similar knowledge? An SEC action may reveal the answer. As with Squared, Magnetar's role in Norma was never disclosed to investors.

Excellent story and it goes without saying that the politicians need fund legal approaches to bring these exotic “synthetics” and their kissin’ cousins to heel. As an old retired and perhaps out of date guy, I remain convinced that integrity in the financial industries can be found and/or created. There is simply too, too much at stake for the nation not to investigate these cases. We either do it now via the agency route or we need to write a law that is blessed by the elected officials of the nation.

The statute of limitations will run out on these cases soon. I may be a cinic, but I don’t see a single CEO (or Gov’t employee) going to jail. Ever. They won’t pay personally when the class action bar comes calling. Their employer will pay the fine and then it’s business as usual.

sorry, “cynic”.

Class action suits against politically connected businesses were dealt a serious blow by the Supreme Court.  And this is not about Obama, as some will claim.  These were problems when GW was president, as corporations ruled.  I have always maintained that nothing is going to change ulness someone with clout goes to jail.  Period!

Stephanie Palmer

June 22, 2011, 5:32 p.m.

I’m not interested in fines. I think that these companies were wrong to do what they did all in the worship of the almighty dollar.  I want to see the CEOs in prison for what they’ve done to the world’s economy. Nothing less than that will satisfy me.  We have minor drug dealers in prison. What these people have done is far more sinister and long reaching. They need to be stopped from even contemplating anything like this in the future.

Nothing righteous will happen to the investment banking parasites…the own our elected officials.

ClaudeM—

A law that is “blessed by the elected officials of the nation” will NEVER happen; however, a constitutional amendment by “We The People” can certainly be proposed under the mandate given in Article V of the U.S. Constitution.  Congress needs to be compelled to call an Article V Amendments Convention; only 34 applications are lawfully required to call a convention—there’s already over 750 from 49 of the 50 states!  Congress is vetoing the U.S. Constitution by ignoring high law itself by failing to call a convention; additionally, Congress is in criminal violation of their oath of office (plus several other federal laws).

The question is: How do we word a constitutional amendment so effectively—that’ll garner the approval from an overwhelming amount of citizens from across the political spectrum.  Do you and others have any suggestions?  Go to http://www.article-v-convention[.]com and click on “Sitemap” then “Contact Us” and offer suggestions.

Then, tell your grandchildren you helped save the Republic.

Hi guys,

Excellent work;well done.Here in the UK we are still half asleep and no such Regulatory actions have been started.

Keep up the good work.

Ian Taplin

Great item.  I think Magnetar et al skate unless you can connect them to the underwriter.  See my comment from Reuters on this:

http://blogs.reuters.com/christopher-whalen/2011/06/22/is-jpmorgans-sec-settlement-the-end-of-subprime-claims/

Chris

This will never work…A fine that is smaller than the cumulitive bonus’s of their management!

Jail time is the only answer… This is a sham from the SEC!

Sameer Mandke

June 23, 2011, 1:36 p.m.

I appreciate the work on these very important stories, so please keep up the great work.  One thing I would like to point out, the “settlements” the SEC is extracting are “consent decrees”, whereby the alleged wrongdoer does not have to admit fault.  This poses a problem for civil litigants, as they may not use the consent decree to prove any part of their case.  By contrast, if the SEC goes to trial and receives a judgment against the defendant, then civil litigants may use the judgment as proof of liability in their own law suits, which makes things much more precarious for the defendants.

Personally, I would like to see the SEC take these cases to trial and put some drain on the resources of these banks.  Further, the settlements they are extracting are for pennies on the dollar; the banks pay hundreds of millions when they wreaked hundreds of billions in profits and damages.

JPM only paid out half a weeks profits & are now no longer libel to those in that cases. Only a fool would have lawyers who do go full out RICO on all these claims with a jury for the lawyers of the banksters to explain just how they did not screw the public knowingly!

Christina Marlowe

June 30, 2011, 1:18 p.m.

My most fervent and most urgent desire is to see, at last, each and every one of these so-called white collar CRIMINALS prosecuted and imprisoned for LIFE for their blatant and totally irredeemable CRIMES.  I am so sick and tired of getting RAPED REPEATEDLY, IN BROAD DAYLIGHT,  by these no-good pathological LIARS and crooked, smarmy, worthless and truly unforgivable VILLAINS that comprise the entire US Financial System and the FILTHY WHORES in the US Government, Republican and Democrat alike.

Larry Crawford

June 30, 2011, 4:08 p.m.

Christina M.:

Well and perfectly said. Now write and call your senators and congresspeople. Talk to your family and friends. Check/out google websites Amped Status or Capitalism without Failure, Finance my Money, My Budget 360…read It Takes a Pillage, etc.

Hope you can handle it.

Larry

Christina Marlowe

June 30, 2011, 4:17 p.m.

Thank you, Larry.  At this point in life, I can take ANYTHING…

And, by the way, here’s another:

How to Rule: (in this case, a nation)

1.  Keep the overwhelming majority of the population focused on carefully-crafted delusions; 

2.  feed the population, constantly and consistently, outright lies and complete fabrications, all whilst totally convincing population, through any form of trickery, convince population to believe things that are simply NOT TRUE;  LIES.

3.  Use so-called buzz words (such as “God,” “Guns”), while simultaneously using fear tactics (“communism,” “fascism”) in order to prop up or legitimize all conspired-confabulations;

4.  No matter what, ADAMANTLY DENY ANY AND ALL FACTS;  CONVINCE people that each of their now-strenuously-held “beliefs” (which actually, in reality, are delusions) convince them that their beliefs are TRUE, RIGHT, RATIONAL and WORTH FIGHTING FOR; 

5.  Blatantly pit separate groups of people against each other, heavily using all media, in order to keep each group insanely confused and belligerent with increasingly irrational fear, as they become more and more preoccupied with their delusions and self-righteousness;

6.  Feed the fire: instill hugely inflated sense of rightness (self-righteousness) through wholly-manufactured “evidence;”  this particularly useful form of trickery, by the way, is often found disguised as religion in which any one will do;

7.  Merely repeat the words “GOD,” “GUNS,” etc. etc.


And, with that, the robber barons have their whole voting base:  an utterly deluded and totally brainwashed population, busily fighting tooth and nail directly against themselves and against their own self-interests, liberally fed with deliberate and outright lies and wildly inflammatory rhetoric.

The good news, however, is that TRANSPARENT OPPRESSION is NEVER FOREVER.  NOT ANYWHERE IN THE WORLD…Even here in “FREEDOM-LOVING,” “GOD-FEARING,” [WAR-MONGERING, GUN-TOTING] AMERICA…

Christina Marlowe

This is just a repeat of pst history and the same happenings. the same happened in the Savings and Loan collapse—politics and money buy favors. But it does not create honesty but covers fraud and thievery. This is only a continuous repeat of the great depressions of the past and the recessions also. If you want some insight into what has occurred in the banking collapse of today, the fraud, thievery just read this book——DAISY CHAIN   How borrowed billions sank a texas S &L by James O’Shea this happened during the Reagan and Bush 1 as president. And boy was politics at work.. This episide of insider robbery happend in TEXAS after the deregulation occurred as wanted by REagan. And it turned out to cost our country and its people several hundred billions of tax dollars—-makes interesting reading and gives insight into the collapse and the bailouts of today. Reason for this failure was no true oversight in the S&L industry and no money inthe Federal S &L insurance corporation , it was broke. The thieves were turned loose on the common people as was Wall Street had no oversigt in todays collapse. The same will happen in the future.

Do You and Can Take the Truth, backed up by court records, many more writings & time lines that back up every thing you will read? If not, just keep jogging for your Masters & always with a smile[:(>

:) If you do there is court records, dates, names and the content of this & every one of his other writings to make you want jump to make others aware of “what really goes on behind the curtain”.  http://armstrongeconomics.files.wordpress.com/2011/07/armstrongeconomics-is-paulson-next-panic-trade-070441.pdf.

Ask yourself, why are there no one behind bars like savingsings & lscandalndle? Do you think JPM, GS or HSBC did not know if they lost the bets they, their man, Hank Paulson a formal Goldmans Sachs big dog now the SecTreasuryuary of U.S.A. would grab Trillions of Tax Payers Money to pay them 100% on the Dollar if they failed. Any blind man knows better than this because they more comsensensse than most. He is a brave man to go against the mpowerfulfull people in the world so that freedom may return to this once great Republic that is now no more than just another 3rd world nation. Together we will make it whole again for our children’s children depend on it.

Barry Schmittou

July 19, 2011, 9:03 a.m.

JPM also received a non prosecution agreement for bid rigging in 32 States on July 6, 2011.

Here’s a quote from the U.S. Department of Justice :

“From 2001 to 2006, certain then-employees ofJPM at its municipal derivatives desk (which was closed by the Company in 2008) and/or predecessor desks entered into unlawful agreements to manipulate the bidding process and rig bids on certain relevant municipal contracts, and made payments and engaged in other activities in connection with those agreements, in violation of Section 1 of the Sherman Act, 15
U.S.C. § 1, and certain sections of Title 18 of the United States Code”
The full agreement can be seen at :

http://www.justice.gov/atr/public/press_releases/2011/272815a.pdf

Prudential Insurance, Unum Insurance, and MetLife also committed similar violations regarding health care plans and also received Non Prosecution agreements !!

The MetLife agreement was signed by a VP who gave President Obama a $30,000 contribution for his election victory celebration.

You can see the details at :  obamacontributorsfelonies.blogspot.com

Barry Schmittou

July 19, 2011, 11:34 a.m.

I did not link the last website correctly. It is :

http://www.obamacontributorsfelonies.blogspot.com

ProPublica is doing an excellent job of exposing the corruption. I pray you can get action to stop what appears to be corporations with no human conscience in almost complete control of our government !

Boy the people are really waking up to the crimes going on against the people by the past & present admins. The new boss is just like the old boss. Since Wilson, every President has done the bidding of the central bankers, stealing the wealth of the nation through legislation, regulations, land grabs, courts stacked with appointed progressives judges, congress is no more than a figure head that passes a law but it’s the judiciary that says what part of the bill is law & the Executive that choses what part or any part of the law to enforce,period. This is the proof the people have lost any say in their own future because congress has become powerless to act in the people’s behalf over the years no matter what law they pass! The amount of documents to back up the many crimes made by past members of congress, sec of treasuary,  roge Banks & bankers, heads of states that the people have never been aware of until now, is fair game & it’s now coming to the surface from all over the world.

The internet opened up a whole new way to counter all governments & the influnce they weilded over the people’s behaviour has come full circle and now haunts many of these people & their family to the core. Of course there are those that have sold their souls for the life of luxuary & power and will never change. Here we find what the men wanted would turn out to be a total different beast, had they been alive today, I wonder what they would say to the worlds people; http://www.marketskeptics.com/2011/06/the-esf-and-its-history.html. (Part 1-5) Rated *****  by most that have viewed these videos, every one should make their own mind if the content is true, I myself was told of many of these events by a realitive while he was living, but he has passed on from this world & many things I viewed in these videos he talked about but I never really thought much about it until I watched all of these. I would never have gave these vidoes any attention in normal times, but these are not normal times we live in! The economic & monetary crisis sparking political gamemenship. The world food shortages & inflation forced upon nations has sparked unrest and many deaths in nations once friendly to the USA & has strained those relationships to the brink of war. The USA has seen the worst weather in decades and the loss of life to storms, floods & drought has hurt any sort of economic recovery if there was really one in the first place. The amount of land under water or lost to drougth is growing daily. We have leaders in the white house that has done every thing against what would start to rebuild the basics of how a economy would come back to life at all critical levels. Yes, I would say these not normal times we face. 


There are so many laws that needs to be question by the people & it would all start at the local levels & progress up to the States. The 16th amendment is one of many. Are income tasxes even legal? This might answer the question, is has before for those who stood their ground! http://www.apfn.net/Doc-100_bankruptcy20.htm. There is many cases out lined in this link that is proof there is many who have stood up against the tyrants in high places & won. Today is the day to stand up!

There are many people who have took chances to expose the dark deeds committed by our own gov & have now posted them on the internet for all too see, but many do not care or they are so busy in their own little world they never see what is really going on around them untill its to late to react. Actions of few can sprout into something good that allows freedom to rise up from the ashes of ruin caused by men who lost all sense of what is right and joined in with those on the wrong path that desrtoys everthing they cared about & loved, for fast fortunes & lust of the rush they got from the drugs of power they now used to control others. Many reside in high places in private & public corporations like Bernake & Obama! The gang of six also comes to mind, all making noise that does no good for any one!

This article is part of an ongoing investigation:
The Wall Street Money Machine

The Wall Street Money Machine

Enticed by profits and bonuses, Wall Street took advantage of complicated mortgage-based instruments to reap billions, only to exacerbate the eventual crash.

The Story So Far

As the housing market started to fade, bankers and hedge funds scrambled for ways to maintain the lavish bonuses and profits they had become so accustomed to, repackaging mortgages in complex securities called collateralized debt obligations. The booming CDO market masked how weak the housing market was, and exacerbated its collapse.

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