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SEC Issues More Fines Over Magnetar Deals – and Appears to Move on

There have now been more than $435 million in SEC settlements regarding one of the most notorious groups of mortgage securities deals behind the financial crisis.

(Chris Ratcliffe/Bloomberg via Getty Images)

Five years after the financial crisis, the Securities and Exchange Commission appears to be wrapping up its investigation into more than $40 billion worth of controversial mortgage deals that helped turn the financial crisis into the worst economic collapse since the Great Depression. Today, the agency announced fines against Merrill Lynch for its role in sponsoring three of the securities with a total value of $4.5 billion.

Merrill, which is now owned by Bank of America, agreed to pay a fine of $131 million, but did not admit wrongdoing in the deals, which were created at the behest of an Illinois-based hedge fund called Magnetar. 

As ProPublica detailed in 2010, Magnetar worked with investment banks to build CDOs that the hedge fund also bet against.  Magnetar would buy the riskiest part of the CDO, which gave it influence in picking which bonds would be included in the CDO. In turn, the hedge fund pushed riskier bonds that would make the investment more likely to fail.

The fines against Merrill are the just the latest in a long series of Magnetar-related SEC settlements, now totaling more than $435 million.

“We are pleased to resolve this matter, which pre-dated Bank of America's acquisition of Merrill Lynch,” said William Halldin, a spokesman for the bank.

A North Carolina-based asset manager called NIR Capital Management was also fined over one of the three mortgage deals, known as collateralized debt obligations. NIR agreed to pay $472,000 for its involvement in a $1.5 billion deal called Norma. As part of the SEC order, NIR will cease operations and its two principals, Joseph Parish III and Scott Shannon, will be barred from working in most aspects of the financial services industry for one and two years respectively.  

A lawyer for the two declined to offer a statement.

The latest charges are less serious than some earlier CDO-related charges. The agency charged another CDO manager and its chief executive with fraud in October. And it fined Goldman Sachs $550 million for its role in another non-Magnetar CDO.

Magnetar, which approached investment banks in 2006 and 2007 with an elaborate plan to create collateralized debt obligations, said today that the SEC has ended its investigation into the firm’s activities. While the SEC has levied fines against several banks over Magnetar deals, it has never taken any action against the hedge fund.

“We are happy to report that the SEC has issued a closing letter to Magnetar, which confirms that the Staff has completed its investigation as to Magnetar’s activities regarding the relevant CDOs and will not recommend any action against the firm, its funds or any of its personnel,” the firm said in a statement.

The SEC declined to comment beyond the charges it has already brought.

Merrill and Magnetar collaborated on four CDOs, all named for constellations, a trademark of the hedge fund. The SEC singled out three – Norma, Octans and Auriga – in the settlement.

The SEC’s order uses emails and other communication to detail Magnetar’s role in creating the CDOs. The hedge fund was a valued customer of Merrill because it was willing to do multiple transactions. In the end, Merrill’s business with Magnetar made the bank more than $40 million. The hedge fund selected many of the assets that went into the CDOs and rejected others. Magnetar then bet against many of assets. Investors who subsequently invested in the CDOs were unaware of Magnetar’s extensive role in the transactions. The SEC found that Merrill’s marketing material for the deals was misleading since it did not detail Magnetar’s role.

The SEC also hit Merrill over a “books-and-records” violation for improperly recording the appreciation of assets to avoid overpaying Magnetar on a deal.

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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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