Fraud & Investigations

JPMorgan Settles SEC Mortgage Securities Case for $154M

Posted on Thursday, June 30, 2011

The Securities and Exchange Commission said Tuesday that JPMorgan Chase has agreed to pay $153.6 million to settle charges that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet.
The New York-based financial institution noted in a statement that the SEC’s complaint was against one of its U.S. broker-dealer affiliates, J.P. Morgan Securities LLC, and involved certain collateralized debt obligations (CDOs) the firm sold over four years ago.
The company said it is “pleased to have reached agreement with the SEC to put this matter concerning certain 2007 disclosures behind us,” and added that the SEC has not charged the firm with intentional or reckless misconduct.
The SEC alleges that JP Morgan’s securities affiliate structured and marketed a synthetic CDO without informing investors that a hedge fund helped select the assets in the portfolio and had a short position in more
than half of those assets, putting the hedge fund in a position to benefit if the CDO assets defaulted.
According to the SEC’s complaint against JPMorgan, the financial instrument known as Squared CDO 2007-1 was structured primarily with credit default swaps referencing other CDO securities whose value was tied to the U.S. residential housing market.
The SEC alleges that by the time the deal closed in May 2007, the hedge fund, Magnetar Capital LLC, held a $600 million short position that dwarfed its $8.9 million long position.
The SEC says, in an internal e-mail, a JPMorgan employee noted, “We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart.”
Less than 10 months later, the securities underlying the CDO had lost most or all of their value.
The SEC says under the settlement, harmed investors will receive all of their money back. Of the $153.6 million total, $125.87 million will be returned to the mezzanine investors through a Fair Fund distribution, and $27.73 million will be paid to the U.S. Treasury.
As part of the agreement, J.P. Morgan Securities consented to the filing of a complaint by the SEC, without admitting or denying the allegations in the complaint. The federal agency added that JPMorgan has also agreed to improve the way it reviews and approves mortgage securities transactions.
JPMorgan says its securities affiliate took risk of loss on 85 percent of all the notes issued by Squared at the time of the sale, and the firm ultimately sustained losses of nearly $900 million in connection with those notes.
By: Carrie Bay DS NEWS


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