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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.

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:


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 Advisorspays 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.


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 investigatingMerrill 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.

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