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JPM is in a "settlement" mood... how about with us?
06/22/2011 03:55:17 AM EDT -- New York Times, The
JPMorgan Settles Case With S.E.C.
Published Date: June 22, 2011 03:54:27 AM EDT
Author: EDWARD WYATT; Eric Dash contributed reporting from New York.
WASHINGTON -- JPMorgan Chase has agreed to pay $153.6 million to settle federal civil accusations that it misled investors in a complex mortgage securities transaction in 2007, just as the housing market was beginning to plummet, the Securities and Exchange Commission announced Tuesday.
In a case simultaneously brought and settled, the S.E.C. asserted that JPMorgan's investment bank had structured and marketed a security known as a synthetic collateralized debt obligation without informing buyers that a hedge fund that helped select the assets in the portfolio stood to gain, in most cases, if the investment lost value.
The S.E.C. also separately accused Edward S. Steffelin, an executive at the investment advisory firm responsible for putting together the mortgage security that was sold by JPMorgan. Both JPMorgan and Mr. Steffelin were accused of negligence but not intentional or reckless misconduct.
The agency accused Mr. Steffelin of misleading investors into believing that a unit of the firm he worked for, the GSC Capital Corporation, had selected the mortgage securities in the investment portfolio. Instead, the S.E.C. said, a hedge fund named Magnetar Capital chose the assets. A lawyer for Mr. Steffelin said he intended to fight the charges.
The settlement comes after a $550 million agreement the S.E.C. reached with Goldman Sachs last year to resolve similar claims.
Investors harmed in the JPMorgan transaction, known as Squared CDO 2007-I, will receive all of their money back, according to the S.E.C., a total of $125.87 million. JPMorgan also voluntarily paid $56.76 million to some investors in a separate transaction known as Tahoma CDO I, a similar deal in which investors lost money. The S.E.C. did not bring any action related to Tahoma.
''We believe this settlement resolves all outstanding S.E.C. inquiries into J.P. Morgan's C.D.O. business,'' Joseph Evangelisti, a JPMorgan Chase spokesman, said in a statement. In settling the case, the company neither admitted nor denied wrongdoing. JPMorgan said it sustained losses of $900 million related to Squared CDO.
The case is part of a raft of litigation stemming from the mortgage crisis. The S.E.C. is still investigating accusations of improper sales practices at Deutsche Bank, Morgan Stanley and several other companies. In addition, the New York State attorney general recently opened a number of cases involving several big banks as part of a broad sweep of Wall Street's loan packaging business.
Private investors are looking to recoup some of their losses in the courts. There are still about $200 billion in private legal claims over mortgage securities against major banks, according to Institutional Risk Analytics.
In the JPMorgan case, the S.E.C. asserted that the bank undertook ''an aggressive effort'' in 2007 to unload the securities on investors outside its usual circle of customers for deals involving collateralized debt obligations.
In one e-mail on March 22, 2007, the JPMorgan employee in charge of the sales effort wrote, ''We are soooo pregnant with this deal, we need a wheel-barrel to move around. ... Let's schedule the cesarian, please!''
The S.E.C. also cited numerous JPMorgan e-mails noting Magnetar's involvement in the selection. But no executives, traders or salesmen from JPMorgan were accused of wrongdoing.
That contrasts with the case the S.E.C. brought against Goldman Sachs last year. That case also accused a trader at Goldman, Fabrice Tourre, who is fighting the claims.
Robert S. Khuzami, the S.E.C.'s director of enforcement, said in a conference call with reporters that the decision not to take action against any JPMorgan executive was based on the evidence in the case.
''We look hard at the conduct of individuals,'' Mr. Khuzami said. ''First and foremost, you have to show that an individual is aware that information is not being disclosed, that it is material and that they knew the facts.''
Those elements were present in the company's conduct, he said. ''What JPMorgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of the C.D.O. portfolio assets heavily influenced the C.D.O. portfolio selection,'' he said.
The S.E.C. previously notified at least one other individual -- Michael Llodra, the former head of structured C.D.O.'s at JPMorgan -- that he might be sued for his role in marketing such securities. And Magnetar has been involved with multiple C.D.O.'s arranged by other brokerage firms. Mr. Khuzami declined to comment on whether any other such cases were still proceeding.
Magnetar, which is not a defendant in the case or a party to the settlement, said in a statement that it was not involved in the marketing of the Squared CDO. ''Although the S.E.C. has included certain descriptions of Magnetar's role in the transaction in the complaint,'' the company said, ''we did not control the asset-selection process.''
The lawyer representing Mr. Steffelin, Alex Lipman of Nixon Peabody in New York, said in a statement that his client had been wrongly accused because he ''was told by several sets of fully informed lawyers that the disclosures were complete and accurate'' regarding the offering.
''We do not understand why the S.E.C. lays any failure to make additional disclosure at Mr. Steffelin's feet,'' Mr. Lipman said. ''None of the relevant disclosures were his. However, it looks like the S.E.C. now believes that it has to attach a name and a face to the cases it brings against big banks.''
The S.E.C. complaint said that Mr. Steffelin was seeking employment with Magnetar when he let the hedge fund choose the assets in the portfolio. Mr. Lipman said that was ''a misstatement of the record.'' Discussions about possible employment ceased by the end of February 2007, he said, and the transaction was closed in May 2007.
The S.E.C.'s settlement with JPMorgan is subject to approval by a judge in Federal District Court in Manhattan, where the case was filed. Judges there have criticized some S.E.C. settlements in the financial crisis.
In the Goldman case, Goldman initially signaled its intention to fight the charges, and a settlement was reached months after the lawsuit was filed. In contrast, JPMorgan engaged in settlement talks and agreed to repay investors in a separate deal, all before a court action was filed.
Mr. Khuzami said the decision on whether to begin action before a settlement was based on the facts and ''not based on somebody's posture in negotiations.''
In its settlement of $153.6 million, JPMorgan agreed to pay $18.6 million in disgorgement of revenue, $2 million in prejudgment interest and a $133 million penalty. The company said the settlement, which amounted to less than 1 percent of its 2010 net income of $17.4 billion, would have no material effect on its financial position.
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