JPMorgan has agreed to pay $153.6 million to settle charges it misled investors in the sale of a complex mortgage-backed security. The charges arise out of the 2007 sale of a collateralized debt obligation (CDO) that JPMorgan Securities marketed to investors without disclosing that a hedge fund involved in the creation of the CDO was betting it would decline in value, according to the SEC. Robert Khuzami, the SEC’s top enforcement officer:
JPMorgan marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests.
The $1.1 billion CDO in question — called “Squared CDO 2007-1” — was designed to allow investors to make bets on the housing market. According to the SEC, JPMorgan allowed Magnetar Capital, a Chicago-based hedge fund, to help select the underlying assets in the Squared CDO. By the time the deal closed, Magnetar had a $600 million “short” position in the CDO betting it would decline, compared with a $8.9 million long position, according to the SEC. The sale occurred just as the housing market began to collapse and more homeowners started to default.
The $153 million settlement will make the investors whole, according to the SEC. As part of the settlement, JPMorgan agreed to improve how it reviews and approves mortgage-backed securities, the SEC said. The agreement has many similarities to a settlement the SEC achieved last year with Goldman Sachs, which paid a record $550 million to settle charges it misled investors in the sale of a CDO that was being shorted by Paulson & Co. The settlement is subject to court approval.
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