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.
