SEC Warns Top Banker of Charges Over Magnetar Deal
(Toru Yamanaka/AFP/Getty Images)
According to The Wall Street Journal, the Securities and Exchange Commission has warned a top banker that it may bring civil charges against him for his role in creating a risky collateralized debt obligation, or CDO, that exploded spectacularly as the housing market crashed. It's the first public evidence that the SEC is considering charges against a top banking executive involved in CDOs, which fueled the financial crisis.
The CDO, from the end days of the boom in 2007, was one of dozens that had been created with the help of the hedge fund Magnetar. As we reported with This American Life and NPR, Magnetar often pushed for riskier assets to be included in CDOs, and placed bets against many of the same investments so that it would profit if those risky assets went sour. (Magnetar has never been charged with any wrongdoing, and has always maintained that it did not have a strategy to bet against the housing market.)
Alexander Rekeda, the banker warned by the SEC, helped create a $1.6 billion CDO called Delphinus CDO 2007-1 for the Japanese bank Mizuho. Investigators allege that investors were not told Magnetar stood to profit if the investments failed. (Here's the pitchbook for Delphinus.)
In a related matter, the Financial Industry Regulatory Authority, an independent Wall Street watchdog, has made a preliminary recommendation that Rekeda be disciplined for "alleged misrepresentations in the sale of" another type of security -- we have the details here.
Delphinus is not the first deal involving Mizuho and Rekeda that the SEC has looked into. As The Journal reported last year, the agency has been investigating a CDO called Tigris that Magnetar created with Mizuho. That CDO was a collection of the riskiest bits of other CDOs — as we described it, they were "bundling up the dregs of a CDO," a "rare, if not unprecedented" strategy. The Tigris deal has not yet resulted in charges.
We've reached out to Rekeda, who no longer works at Mizuho, but have yet to hear back. A Mizuho spokesman told The Wall Street Journal that it "has been asked by the SEC to provide related documents and information, and it's currently dealing with it." (We also have reached out to Mizuho.)
The warning sent to Rekeda, called a Wells notice, says that the SEC has made a "preliminary determination … to recommend charges based on alleged misrepresentations in connection with the structuring of a CDO."
As we noted last fall, the SEC has also warned the ratings agency Standard & Poor's that it also may face civil charges in connection with the Delphinus CDO. Standard & Poor's abruptly downgraded Delphinus just a few months after the security was issued and received a top rating.
Other banks have been charged by the SEC and settled allegations involving CDOs. In 2010, Goldman Sachs settled with the SEC for more than $500 million. In June, J.P. Morgan agreed to pay $153 million, and in October, Citigroup reached a $285 million settlement.
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.
Latest Stories in this Project
- The Magnetar Fallout: Who’s Been Charged, Has Settled, or is Now Being Investigated?
- Four Whistleblowers Who Sounded the Alarm on Banks' Mortgage Shenanigans
- 13 Reasons Goldman's Quitting Exec May Have a Point
- Financial Firm Fined for Misleading Investors on Magnetar Bets
- Two Wall Street Players Ensnared in New Probe
Get Updates
Our Hottest Stories
- Donations to Scott Walker Flagged as Potential Fraud
- In Race For Better Cell Service, Men Who Climb Towers Pay With Their Lives
- Billion Dollar Bait & Switch: States Divert Foreclosure Deal Funds
- Pardon Attorney Torpedoes Plea for Presidential Mercy
- Patient Died at New York VA Hospital After Alarm Was Ignored
- Introducing the ProPublica Patient Harm Community on Facebook
- Finding Oscar: Massacre, Memory and Justice in Guatemala
- Built for a Simpler Era, OSHA Struggles When Tower Climbers Die
- Got Student Loans? Share Your Documents With Us
- Remember Stuxnet? Why the U.S. is Still Vulnerable
- Donations to Scott Walker Flagged as Potential Fraud
- Pardon Attorney Torpedoes Plea for Presidential Mercy
- In Race For Better Cell Service, Men Who Climb Towers Pay With Their Lives
- Air Force Pilots Balk at Flying the World’s Most Expensive Fighter Jet
- Watchdog Group Calls for Probe of Lobbyists Behind Congressional Trip to Taiwan
- Patient Died at New York VA Hospital After Alarm Was Ignored
- Billion Dollar Bait & Switch: States Divert Foreclosure Deal Funds
- Broadcasters Sue to...Block Transparency
- Happy Graduation! Here's The Best, Most Depressing Journalism on Student Debt
- Remember Stuxnet? Why the U.S. is Still Vulnerable







2 comments
Caraline Levy
Feb. 21, 3:25 p.m.
Bring back Glass-Steagall regulations to avoid banks from gambling with peoples money. Here is history http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html
Caraline Levy
Feb. 21, 5:17 p.m.
Get money out of politics and have publicly funded campaigns, so that government is of, by and for the people (not corporations). Here is a list of companies that donated to Senator Phil Gramm who was instrumental in repealing Glass-Steagall in 1999. The act that put the last nail in the coffin was also called Gramm, Leach Bliley Act. http://www.opensecrets.org/politicians/contrib.php?cid=N00005709&cycle=1998&type=C&newMem=N&recs=100
This is bribery! This is gross. Follow all political money at http://WWW.opensecrets.org
Commenting on this story is closed.