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The Magnetar Fallout: Who’s Been Charged, Has Settled, or is Now Being Investigated?

A rundown of the various investigations into the deals spawned by the hedge fund Magnetar that helped super charge the financial meltdown.

(Jonathan Ernst/Reuters)

July 27: This post has been corrected.

July 19: This post has been updated. It was originally published on May 17.

March 14, 2013: This post has been updated.

The hedge fund Magnetar helped create billions of dollars' worth of risky deals called collateralized debt obligations, many of which failed spectacularly in the financial crisis. Magnetar, meanwhile, had taken positions that allowed the firm to profit when many of those same CDOs collapsed. Since ProPublica reported on Magnetar's dealings two years ago, there's been a long line of investigations and settlements related to the hedge fund.

Magnetar itself has never been charged with wrongdoing, and it has always maintained that it did not have a strategy to bet against CDOs they were involved with. But today's Wall Street Journal reported that Magnetar is indeed under investigation by the SEC.

What might come of the investigation is unclear. Unlike the banks that have been charged with misleading investors, Magnetar never sold or marketed CDOs, and never made representations about them to customers.

But the Journal reports that the SEC's investigation is looking into whether Magnetar took such a prominent role in structuring some of the CDOs in which it invested that it became a de facto collateral manager, responsible for selecting the assets in a CDO. If that were the case, Magnetar might have some responsibility to all the investors in the deal.

The SEC has been circling around the Magnetar deals for some time, hitting some of the investment banks and managers involved. Here's a roundup of all the charges, settlements, and investigations that we know of stemming from Magnetar deals:

Settled:

June 2011: JPMorgan agrees to pay $153.6 million to the SEC to settle allegations that it misled investors by not telling them that Magnetar was involved in the creation of a CDO called Squared CDO 2007-1. In reaching the settlement, JP Morgan did not admit or deny the SEC's allegations.

February 2012: State Street Global Advisors pays the state of Massachusetts $5 million to settle allegations that it did not disclose to investors that Magnetar was involved in constructing the CDO Carina CDO Ltd. State Street did not admit or deny Massachusetts' allegations.

Update (7/19): July 2012: The U.S. arm of the Japanese bank Mizuho settled with the SEC for $127.5 million over charges they misled investors about the CDO Delphinus. A former bank executive, Alexander Rekeda, was hit with a $125,000 penalty and a one-year suspension from the securities industry. Two other former Mizuho employees and a financial firm called Delaware Asset Advisors involved in making and marketing Delphinus also settled with the SEC. In reaching the settlements, none of them admitted or denied the SEC's charges.

Update (3/13/13): March 2013. The state of Massachusetts fined Deutsche Bank $17.5 million for failing to inform investors about the role that its securities unit and Magnetar played in structuring a $1.56 billion CDO called Carina and planning to place bets against assets in the deal. Carina went bust in 2007. Deutsche Bank did not admit or deny wrongdoing.

Charged:

June 2011: The SEC files a complaint against manager Edward Steffelin for his involvement in structuring JPMorgan's Squared CDO 2007. In October 2011, a judge threw out part of the SEC's case, ruling that Steffelin had not engaged in "fraud or deceit." Other charges are still pending. A lawyer for Steffelin declined to comment on an ongoing case.

Under investigation:

June 2011: The SEC is reportedly investigating Merrill Lynch and the firm NIR Capital Management over the Magnetar CDO called Norma.

September 2011: The SEC is reportedly investigating the Japanese Bank Mizuho and an executive there, Alexander Rekeda, over the making and marketing of the CDO Tigris, another Magnetar deal. Mizuho did not immediately respond to our requests for comment on the current status of the investigation. As noted above, the SEC settled with Mizuho and Rekeda over another CDO in July 2012. The SEC would not comment on whether an investigation into Tigris was still ongoing, and Rekeda’s lawyer did not respond to our requests for comment.

September 2011: The SEC warns it may bring charges against the Ratings Agency Standard & Poor's, which abruptly downgraded a Magnetar CDO called Delphinus CDO 2007-1. (In an SEC filing in February, S&P's parent company, McGraw Hill, said that the SEC's warnings "have no basis and they will be vigorously defended.")

May 2012: According to the Wall Street Journal, Magnetar itself is under investigation by the SEC. Magnetar told ProPublica in our original story that the SEC was "looking broadly" at CDOs and had requested information from Magnetar, but said that they were unaware of a particular target of the investigation.

The Journal also reports that the SEC continues to investigate NIR and its founder, Corey Ribotsky, for its role in creating Norma with Merrill Lynch. NIR did not respond to our requests for comment, but a lawyer for NIR and Ribotsky told the Journal that the firm had not acted improperly in selecting Norma's assets. A spokesman for Bank of America, which now owns Merrill Lynch, declined to comment.

Correction: As noted in the story, in July 2012, the SEC settled with Mizuho and Alexander Rekeda. In one reference, we mistakenly stated that the SEC settled with Mizuho and Magnetar. Magnetar has never been charged by the SEC.

Who has been charged?  Who has settled?  How about:

Who among all of the players in Wall Street’s and the Republicans’ mortgage-backed securities pyramid scam was left with so little money that they were late on their mortgage payments with the consequence that their bank repossessed their home(s)?

Or is ProPublica averse to publishing stories that are far shorter than the story’s headline?

That is the great hypocrisy of Wall Street and America’s ability to “enforce” existing or proposed laws that have been weakened by the equally corrupt Republicans:  Sure, a few Wall Street and banking players may have their names publicized, but will they feel anything approaching the pain that they inflicted upon millions in America and around the world?

No.

So can any rational human being state that Wall Street’s or banking’s players have now been deterred from participating in the same or equivalent corruption?

No.

I guess the Feds were too busy getting Martha.  What more do you want!

http://www.opensecrets.org/news/2012/05/lawmakers-invested-in-jpmorgan-chase.html


Many Lawmakers Personally Invested in JPMorgan Chase
By Russ Choma on May 17, 2012 2:41 PM
| More
wallstreetbull.jpgWhen Wall Street giant JPMorgan Chase announced this week that it had lost an estimated $2 billion (now upped to $3 billion) on risky trades, Republican and Democratic members of Congress rushed to make their political cases: Either this was something that more regulation couldn’t have prevented, or this was exactly what stronger government rules could have thwarted.

None of them, however, mentioned whether they had a financial stake in JPMorgan Chase.

Usually, the money-in-politics conversation is about how much money a company has invested in a politician via campaign donations. In this case, while JPMorgan Chase has plenty invested, it also goes the other way: at least 38 members of Congress owned shares in the bank.

According to OpenSecrets.org data, which is based on personal financial disclosure forms filed by all members of Congress for the year 2010 (disclosure forms for 2011 were due this week, but aren’t yet publicly available), 15 Democrats and 23 Republicans owned shares in JPMorgan Chase worth a total of between $2.1 million and $3.8 million.

Prediction:  The SEC will gut Magnetar like a fish to show how tough they are, then throw one or two low-level lackeys in jail.  Then the dust has cleared, the executives will show up at cushy jobs at Goldman and the SEC by late November.

Steal billions, deny wrongdoing and settle for millions. Great business model.

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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