The SEC just announced that JPMorgan will pay over $150 million to settle charges that it misled investors in “CDO Squared.”
The charges were that JPMorgan let Magnetar, a hedge fund, select the assets in CDO Squared, and then sold those assets to investors.
The problem was that JPMorgan didn’t disclose to investors that Magnetar had selected the assets in CDO Squared, and then bet that those assets would fail.
Here’s how the SEC describes what JPMorgan did wrong:
Marketing materials stated that the Squared CDO’s investment portfolio was selected by GSCP (NJ) L.P. – the investment advisory arm of GSC Capital Corp. (GSC) – which had experience analysing CDO credit risk. Omitted from the marketing materials and unknown to investors was the fact that the Magnetar Capital LLC hedge fund played a significant role in selecting CDOs for the portfolio and stood to benefit if the CDOs defaulted…
The SEC’s complaint points to a couple of emails that show that JPMorgan employees knew that they were helping Magnetar set up the CDOs to fail:
A J.P. Morgan employee noted, “We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart.”
[Scrambling to sell the CDO to investors,] the J.P. Morgan employee in charge of Squared’s global distribution said in a March 22, 2007, e-mail that “we are so pregnant with this deal…Let’s schedule the cesarian (sic), please!”
The firm’s stock took a quick hit, but then it bounced back on the news of a settlement.
FYI, the SEC is also investigating Merrill Lynch about its involvement in the Magnetar trade, so Bank of America might be the next to settle.
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