(CN) – JPMorgan Securities will pay more than $150 million to settle fraud charges that it misled investors about a mortgage-securities transaction as the housing bubble began to burst in 2007, the SEC said Tuesday.
The SEC complaint alleges that JPMorgan structured a collateralized debt obligation (CDO) deal without letting investors know that the assets in the CDO portfolio were selected by the hedge fund Magnetar Capital, which had a short position in more than half of those assets.
If those assets defaulted, Magnetar would profit, but JPMorgan allegedly failed to reveal that fact to investors.
The CDO, called Squared CDO 2007-1, was mainly structured with credit default swaps that referenced other CDO securities related to the housing market.
JPMorgan told investors that the CDO was structured by GSCP (NJ) L.P. – the investment advisory arm of GSC Capital Corp.
A separate complaint filed Tuesday also implicates Edward Steffelin, who led the team at GSCP, in the fraud. Steffelin was seeking employment with Magnetar at the time he led the team to close the deal, and the SEC said he allowed Magnetar to short the portfolio assets.
The deal closed on May 11, 2007, and JPMorgan Securities sold approximately $150 million in “mezzanine” tranches of liabilities to a group of around 15 investors, according to the complaint.
The investors included Thrivent Financial for Lutherans, a Minneapolis nonprofit; Security Benefit Corporation, a Topeka company that provides insurance and retirement products; and a number of financial institutions in East Asia.
The CDO defaulted in January 2008, and the investors lost most of their principal.
JPMorgan did not admit or deny the allegations but agreed to pay $18.6 million in disgorgement and $2 million in prejudgment interest on top of a $133 million penalty. The SEC says $125.87 million will be returned to the investors, and the remainder will go to the U.S. Treasury.