The SEC alleges that J.P. Morgan structured and marketed a synthetic collateralized debt obligation (CDO), called Squared CDO 2007-1, without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets. As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted.
The SEC separately charged Edward S. Steffelin, who headed the team at an investment advisory firm that the deal’s marketing materials misleadingly represented had selected the CDO’s portfolio.
According to the SEC’s complaint, J.P. Morgan sold approximately $150 million of so-called “mezzanine” notes of the Squared CDO’s liabilities to more than a dozen institutional investors who lost nearly their entire investment.
These investors included:
- Thrivent Financial for Lutherans, a faith-based non-profit membership organization in Minneapolis;
- Security Benefit Corporation, a Topeka, Kansas-based company that provides insurance and retirement products;
- General Motors Asset Management, a New York-based asset manager for General Motors pension plans; and
- Financial institutions in East Asia including Tokyo Star Bank, Far Glory Life Insurance Company Ltd., Taiwan Life Insurance Company Ltd., and East Asia Asset Management Ltd.
Without admitting or denying the allegations, J.P. Morgan consented to a final judgment that provides for a permanent injunction from violating Section 17(a)(2) and (3) of the Securities Act of 1933, and payment of $18.6 million in disgorgement, $2 million in prejudgment interest and a $133 million penalty.
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.
The settlement also requires J.P. Morgan to change how it reviews and approves offerings of certain mortgage securities. In addition, J.P. Morgan’s consent notes that it voluntarily paid $56,761,214 to certain investors in a transaction known as Tahoma CDO I. The settlement is subject to court approval.More information is at http://www.sec.gov/news/press/2011/2011-131.htm.