SEC Warns Top Banker of Charges Over Magnetar Deal
The SEC has warned Alexander Rekeda that it is considering civil charges against him for his role in creating risky collateralized debt obligations while working for the Japanese bank Mizuho.
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.
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.