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Magnetar Deal Prompts SEC Settlement With JPMorgan Chase

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(Chris Hondros/Getty Images)

This post has been updated.

The Securities and Exchange Commission announced today that JPMorgan Chase has agreed to a $154 million settlement for allegedly misleading investors in a mortgage-securities deal involving the hedge fund Magnetar.

As we reported last year, Magnetar often pushed for riskier assets to be included in deals and placed bets against many of the same investments, known as collateralized debt obligations, or CDOs. Our piece first detailed the JPMorgan deal, called Squared. (The story was part of a collaboration with our friends at Chicago Public Radio's This American Life and NPR's Planet Money. And so was this special CDO show tune. You can read our full Pulitzer prize winning series on Wall St. via our site or on your Kindle. )

The SEC’s complaint [PDF] underscores those findings. According to the complaint, JPMorgan allowed Magnetar to play "a significant role in the portfolio selection process" for Squared without disclosing Magnetar's role to investors. In the settlement, JPMorgan didn't admit to any wrongdoing. A court must still approve the deal.  

As the housing market showed signs of trouble at the end of the boom, JPMorgan became desperate to sell Squared and get it off its books. In one 2007 email, a JPMorgan Securities employee wrote to the sales team, "we are soooo pregnant with this deal, we need a wheel-barrel to move around. ... Let's schedule the cesarian, please!"

Squared plummeted in value just months after it was sold. As the SEC noted, more than a dozen institutional investors—pension funds, a Lutheran nonprofit group, Asian financial institutions, and others—saw their investments reduced to almost nothing. As part of the settlement, the investors will be made whole, a relatively rare event.

Ironically, JPMorgan was among the losers. While the bank earned about $20 million for creating the deal, it ultimately lost $880 million on the parts of Squared that it didn't sell off to investors. We reported Magnetar earned about $290 million off its bet on Squared.

Other emails showed Magnetar, JPMorgan and GSC Capital—a supposedly independent manager tasked with representing investors' interests—communicating directly about what the hedge fund wanted to include in Square's portfolio.

"To be honest, I don't love it," a Magnetar employee wrote to GSC while Squared's portfolio was still being determined. "Some recent deals I'd like to get in there are missing. Also, think they're missing some of the trades to which we've already agreed. Lets discuss."

Magnetar initially declined to answer our questions about Squared but disputed our account months after the story ran, saying that it never required or expected any specific assets to be put in Squared. The hedge fund told us that GSC Capital "at all times exercised its own discretion and judgment" regarding the inclusion of assets.

Apparently, that's not what the SEC came to believe after it conducted its own investigation. The SEC separately filed suit [PDF] against Edward Steffelin, a former executive at GSC Capital, for also failing to tell investors about Magnetar's role. The SEC also noted that Steffelin was actually seeking a job with Magnetar at the same time he was working on the deal.

Steffelin could not immediately be reached for comment. He declined our request for comment in April, when it was first reported by Bloomberg that the SEC sent him notice of possible legal action.

The Associated Press has noted that the $154 million settlement is less than 1 percent of JPMorgan's income last year. Most of the money will go to repaying investors who lost out on the deal, and $27 million will go to the U.S. Treasury.

Today's penalty is relatively small compared to the $550 million paid by Goldman Sachs to settle nearly identical SEC charges over the firm's Abacus CDO. The U.S. Treasury also netted much more in that settlement, taking in $300 million.

Update: Magnetar's PR representative sent along a statement. Here it is in full: 

The SEC’s settlement with respect to the Squared CDO transaction relates to the adequacy of disclosures during the marketing of the securities.  Magnetar is not a party to the settlement nor a defendant in this case, and was not involved in the marketing of the securities. In fact, the SEC Staff issued a closing letter to Magnetar stating that it does ‘not intend to recommend any enforcement action’ against Magnetar, any of its funds or any current or former Magnetar personnel in connection with that investigation. Although the SEC has included certain descriptions of Magnetar’s role in the transaction in the complaint, we respectfully stand by our prior statements on these topics, specifically that we did not control the asset-selection process and our Mortgage CDO investment strategy was designed and implemented to maintain a market-neutral portfolio.

They’ve “agreed to a settlement?”  Wth does that mean?  They broke the law.  Again.  They committed fraud. Again.  They’ve “agreed to a settlement.” Again.  Must be nice to be so above the law.

Oops!  I forgot one!  Dimon’s gotten away with it,  Again.  WOW.

Maureen!  C’mon!  We need to look ahead not focus on the mistakes of the past.  The Justice Dept is busy going after Assange and Bradley Manning and covering for illegal spying on American citizens.  They can’t be bothered with crimes committed by guys in expensive suits.  Remember Superman’s crede, Truth, Justice, and the American way?  The Justice Dept. has decided to follow a different path.

What about the deal that was sold to Mayor Daily of Chicago.  This was part of the bailout money the taxpayers paid to J.P. Morgan.

They purchased the rights for 75 years to all the parking meters of the city with a check to Chicago for 1.1 billion.  The parking meters in some places went from $.25/hr to $1.00/hr already.  In some areas they are $5.00/hr.

They are going to make their “loan” back in no time and Chicago citizens are going to pay twice for the meters.  Once was the bailout, now is for the meters.

FINE NOT SUBSTANTIAL ENOUGH! Pocket change. Jail time for them would be satisfying to me, plus a billion or so fine.

Steal a case of beer, and the government will make you return one can.

Mark Sherman “Steal a case of beer, and the government will make you return one can.” That’s funny sad as well but you are probably right.

The misery and pain they have caused is beyond measure…

These folks sicken me. When the majority of a societies wealth is controlled by parasites, the public is in terrible straight indeed.

Read “It Takes a Pillage” for an insiders view of the Wall Street/Government tryst.

This Bank is a commercial Trading Bank, so is licensed to create credit.

The $154 million fine and $550 miilion paid by Goldman Sachs cost the banks nothing other then the few cents to create an account in its books, write a check and then honor it at the end of the day or next.
There is an infeticimal less amount of liquidity
The whole American financial system is now focused on one thing and that is basically fluff.
Apart from what they provide(pay off-bribe) the military indutrial complex, the only real threat if there was a revolutionary coup by the people and off course if not that then their open role as enforcer.

The Chinese mean while surge ahead directing their savings and credit they create at infrastructure and alternative energy projects and off course buying gold and important resources to one day back an alternative world reserve currency that is not subject to the few in London and New York who basically dont give a toss about main street let alone people in the 3 world who end up loosing their lively hoods to verocious greed by the few.

Something to be said for a fireing squad and a bullet at times.

nathaniel bostwick

June 22, 2011, 10:20 p.m.

“There’s something happening here
What it is ain’t exactly clear
There’s a man with a gun over there
Telling me I got to beware

I think it’s time we stop, children, what’s that sound
Everybody look what’s going down”

Goldman Sachs and other big investment firms are probably getting the money.  What good does this paltry settlement do the millions of people who are underwater on thier homes or lost them?  What good does it do elderly Social Security recipients whose livilhood is being bargined away in Congress?  This would be a joke if it wasn’t so serious.  The only solution is for average Americans to get OUR money out of the hands of greedy moneyhandlers by putting it in local credit unions or some other place we can watch it.  Maybe it’s time to start burying our money in the back yard (if you’re lucky enough to have one) or stuffing it in mattresses.  Something’s got to give.

Mark Sherman’s comment nails it—steal a case of beer and the gov’t makes you return ONE can. 

The “gov’t” is in bed with all the financial people.  Check out:
http://www.opensecrets.org  It’s a non partisan website that shows the money in politics.  You’ll be surprised (both parties) who has their hands out taking “campaign contribution” and therein lies the problem.  If you take something of value, the party “giving” that money expects something in return.  This is payback to Wall St. and banks: LITTLE TO NO REGULATION!

How many more people need to lose their homes, their life savings, etc.?!?  The media keeps talking about the “investors” of these securitized assets.  Well, what about us small investors, who’ve invested their entire life savings into a business, real estate, land, etc.?!?  They don’t give a sh*t—follow the money is what it’s all about.  Please check out opensecrets website!  More Democrats took a lot more money in the last election cycle than the GOP did.  Many GOP still took it, but the top receivers of campaign contribution are the ones in charge now, doing nothing.  Fannie/Freddie top donations to:
#1 Chris Dodd (D-CT, now retired, thank God), Barack Hussien Obama (D-IL), and #3, John Kerry (D-MA).  Dodd was chair of the banking committee if you weren’t aware of it.  Isn’t that like paying the fox to watch the hen house?!?
Chris Annien l’sgthey “the ajhey . and their
CE

Accountants Dudley

July 11, 2011, 2:47 p.m.

Steal a case of beer and the government will give you a pint glass and a straw.

alberta massey

July 19, 2011, 8:01 p.m.

Thomas Jefferson was absolutely right about the banksters. He said “I bellieve that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that willl grow up around the banks will deprive the people of all property until their chilren wske up homeless on the continent their fathers conquered.” 
Pay attention to Ron Pau;l. He wants us to go back to the gold standard ( specifically memtioned in our Costitution) and get rid of the FDERAL RESERVE BANK (A PRIVATE COMMERCIAL CARTEL) AND THEIR WORTHLESS FIAT PAPER MONEY.oUR MONEY and credit should be controlled by congress and not by the Federal Reserve Bank,
a private banking cartel which is mostly owned by European International bankers.

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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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