JPMorgan Chase & Co said it agreed to pay $153.6 million to settle U.S. Securities and Exchange Commission charges that it misled investors about a mortgage securities transaction just as the nation's housing market was starting to plummet.
The SEC also filed civil charges against Edward Steffelin, a principal at GSC Capital Corp, accusing him of drafting misleading marketing materials for the transaction that failed to reveal that the Magnetar Capital LLC hedge fund helped choose and bet against the underlying securities.
Tuesday's announcement came less than a year after Goldman Sachs Group Inc agreed to pay $550 million to settle SEC charges that it did not tell investors in the Abacus CDO that hedge fund investor John Paulson helped choose the underlying securities and bet against them.
According to the SEC, JPMorgan in 2007 structured a collateralized debt obligation, Squared CDO 2007-1, mainly with credit default swaps tied to other CDO securities whose value was tied to the nation's housing market.
It said the Squared CDO's marketing materials said the underlying investments were chosen by a GSC affiliate. But in fact, Magnetar played a significant role and would benefit from defaults because of a nearly $600 million short position, it said.
In a conference call, SEC enforcement chief Robert Khuzami said he did not anticipate the agency bringing charges against any JPMorgan executives in connection with the CDO case.
JPMorgan did not admit wrongdoing in agreeing to settle. In a statement, it said it also made payments of about $56 million to investors in a separate CDO, Tahoma I.
Alex Lipman, a lawyer for Steffelin, criticized the SEC's actions involving his client.
We are baffled by the SEC's decision to proceed against an individual in a contested proceeding on a negligence theory, especially in a case where Mr. Steffelin did not work for the underwriter and had no responsibility for the contents of the offering memorandum, Lipman said in an interview.
(Reporting by Sarah N. Lynch and Jonathan Stempel, editing by Gerald E. McCormick and John Wallace)