Journalism in the Public Interest

Financial Firm Fined for Misleading Investors on Magnetar Bets

Yet another player, Boston’s State Street, is scrutinized over Magnetar deals and fined $5 million.

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State investigators in Massachusetts slapped the investment company State Street Global Advisors yesterday with a $5 million fine for failing to tell investors about the role of the hedge fund Magnetar in a risky collateralized debt obligation that collapsed in the housing market crisis.

In 2006, State Street and Deutsche Bank put together a $1.56 billion CDO deal, called Carina CDO Ltd. As we reported with This American Life and NPR, Magnetar was involved in the creation of at least $40 billion of CDOs, including Carina, while simultaneously taking positions that would allow it to profit if the CDOs failed.

As we noted in our original story, sources involved in the negotiations said State Street managers were “highly skeptical” about dealing with Magnetar, raising concerns about the company’s “reputational risk.”

According to the settlement, a State Street executive also sent an email saying, “We are not comfortable with [Magnetar] shorting into the deal.”

Carina defaulted only 16 months after it was launched. Investors lost nearly $450 million. The Massachusetts settlement says Magnetar was closely involved in picking assets that went into the CDO — and “was able to reap a windfall” when it failed. (Here’s the settlement.)

Magnetar has never been charged with wrongdoing, and has always maintained that it did not have a strategy to bet against the housing market.

The settlement reached with Massachusetts faults State Street for not informing investors of Magnetar’s role in creating Carina and its bets against CDOs. “Investors were unaware of a potential conflict of interest between Magnetar and other Carina investors and thus were unable to make a fully informed investment decision,” the settlement states.

State Street will pay a $1.5 million fine and return $3.5 million to the state for fees, commissions and other revenue related to Carina.

State Street is being fined under a Massachusetts law regulating investment activity. In a statement, William Galvin, Secretary of the Commonwealth of Massachusetts, said his office “is actively investigating how banks misled buyers of securitized debt instruments backed by subprime mortgages.” The deals, he said, “allowed the mortgage crisis to continue and caused further harm to the U.S. economy.” The secretary’s office did not respond to requests for further comment on the settlement.

A spokesperson for State Street said that in accepting the settlement, the company “neither admits nor denies [Massachusetts’] findings or conclusions concerning information contained in the offering documents for the CDO.”

Massachusetts has gone after State Street before: In 2010, the company settled with Galvin’s office and the Securities and Exchange Commission for more than $300 million over charges that the firm failed to disclose to investors the extent of their exposure to subprime investments.

J.P. Morgan settled with the SEC last year for $153 million over claims that the bank misled investors about Magnetar’s role in a CDO. The SEC is also reportedly considering charges against one former manager of a Japanese bank over his involvement with Magnetar CDOs — the first public evidence of possible charges against a bank executive related to the scandal.

Caraline Levy

Feb. 28, 2012, 6:24 p.m.

Banks should not be allowed to use federally insured customer savings make their risky bets.  (Hazard) Bring back Glass-Steagal, so that we don’t have another crisis. And why isn’t anyone in JAIL?  Didn’t a bunch of S&L execs go to jail during the last crisis? Where is the accountability and blame going to if no one is landing in jail? As Maggie would say “This is preposterous!”

So, they’ve been “taxed” one percent of one percent of their gains, without having to report on their doings in the public record.  That’s like being fined a dollar for stealing a car without having to face the charge, which is a darn good deal.

We need to start banning these plea deals just for the money.  The cases need to go to court, so that the public can finally hear how this really works.

Not a bad deal for the crooks in addition to being a great return on investment.

When do you think we’ll get the bill for our payment of the “fine”?

These people are the real 1% er’s For every $100 you steal, you are fined $1.00.

Why stop you pay 15% in taxes and an additional 1% fine for stealing.

Wish I had that deal…


March 1, 2012, 7:57 a.m.

da post of u

“I’m sorry officer, I didn’t know I couldn’t do that”

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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