J.P. Morgan to Pay $153.6 Million to Settle SEC Charges of Misleading Investors in CDO Tied to U.S. Housing Market
Harmed Investors Getting Their Money Back, Firm to Pay Penalty and Change Practices
FOR IMMEDIATE RELEASE
2011-131
Washington, D.C., June 21, 2011 – The Securities and Exchange Commission today announced that J.P. Morgan Securities LLC will pay $153.6 million to settle SEC charges that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet. Under the settlement, harmed investors will receive all of their money back.
In settling the SEC’s fraud charges against the firm, J.P. Morgan also agreed to improve the way it reviews and approves mortgage securities transactions.
The SEC alleges that J.P. Morgan structured and marketed a synthetic collateralized debt obligation (CDO) 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.
Additional Materials
“J.P Morgan 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,” said Robert Khuzami, Director of the Division of Enforcement. “What J.P. Morgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection. With today’s settlement, harmed investors receive a full return of the losses they suffered.”
According to the SEC’s complaint against J.P. Morgan filed in U.S. District Court for the Southern District of New York, the CDO 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. Marketing materials stated that the Squared CDO’s investment portfolio was selected by GSCP (NJ) L.P. – the investment advisory arm of GSC Capital Corp. (GSC) – which had experience analyzing CDO credit risk. Omitted from the marketing materials and unknown to investors was the fact that the Magnetar Capital LLC hedge fund played a significant role in selecting CDOs for the portfolio and stood to benefit if the CDOs defaulted.
The SEC alleges that by the time the deal closed in May 2007, Magnetar held a $600 million short position that dwarfed its $8.9 million long position. In an internal e-mail, a J.P. Morgan employee noted, “We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart.”
The SEC alleges that in March and April 2007, J.P. Morgan knew it faced growing financial losses from the Squared deal as the housing market was showing signs of distress. The firm then launched a frantic global sales effort in March and April 2007 that went beyond its traditional customer base for mortgage securities. The J.P. Morgan employee in charge of Squared’s global distribution said in a March 22, 2007, e-mail that “we are so pregnant with this deal…Let’s schedule the cesarian (sic), please!” By 10 months later, the securities had lost most or all of their value.
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, Kan.-based company that provides insurance and retirement products.
- General Motors Asset Management, a New York-based asset manager for General Motors pension plans.
- 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.
In a separate complaint filed against Steffelin, who headed the team at GSC responsible for the Squared CDO, the SEC alleges that Steffelin allowed Magnetar to select and short portfolio assets. The complaint alleges that Steffelin drafted and approved marketing materials promoting GSC’s selection of the portfolio without disclosing Magnetar’s role in the selection process. In addition, unknown to investors, Steffelin was seeking employment with Magnetar while working on the transaction.
The SEC’s complaint charges Steffelin with violations of Sections 17(a)(2) and (3) of the Securities Act and Section 206(2) of the Investment Advisers Act of 1940. The SEC seeks injunctive relief, disgorgement of profits, prejudgment interest, and penalties against Steffelin.
Separately, GSC’s bankruptcy trustee has consented to the entry of an administrative order requiring the firm to cease and desist from committing or causing violations or future violations of Sections 17(a)(2) and (3) of the Securities Act and Section 204 and 206(2) of the Advisers Act and Rule 204-2 thereunder. GSC is in bankruptcy, and its settlement is subject to approval by the bankruptcy court.
The SEC’s investigation was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The SEC investigative attorneys were Carolyn Kurr, Jason Anthony, Jeffrey Leasure, and Brent Mitchell. The SEC trial attorneys that will handle the litigation against Steffelin are Matt Martens, Jan Folena, and Robert Dodge.
For more information about dozens of other SEC enforcement actions against misconduct related to the financial crisis, visit the SEC website at:
http://www.sec.gov/spotlight/enf-actions-fc.shtml
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Everyday on Bloomberg and CNBC they play both sides of the coin. They talk about the mortgage fraud and blah, blah, blah but then they have a guest on who says there are millions of “DISTRESSED” HOMES THAT HAVE TO BE SOLD TO THE FOREIGNER INVESTORS. THEY ARE COMING OVER HERE TO BUY UP OUR STOLEN HOMES FOR PENNIES ON THE DOLLAR AND MILLIONS MORE FRAUDCLOSURES ARE ON THE WAY AND IT IS GOING TO TAKE 12 YEARS FOR THE BANKS TO CLEAR THEIR BALANCE SHEETS OF ALL OF THESE FORECLOSURES (STOLEN HOMES.) and you just want to rip all of their heads off and send them to the IMF ON A SILVER PLATTER. .
These Modern-Day, Greedy and totally Excused Pharoahs – Let off the hook once again! Where is the relief for the homeowner that these bastards defrauded to pay the penalty in the first place – Tim Geithner you are a worthless, no-balls, intimidated, bought off son of a bitch – Drop Dead! And unless and until the lot of you so-called regulators fix this problem by demanding that these evil banks ACCOMMODATE the defrauded homeowners, this country will continue to see destruction by natural disasters – Hence,you and your ill-gotten gains shall be destroyed because you have been purposely relentless in persecuting God’s people! You should realize by now that THE JUST ONE IS STILL IN CONTROL! PEOPLE OF GOD – PRAY WITH ME AT 3:00 P.M. FOR NINE CONSECUTIVE DAYS TO THE JUST ONE ABOVE TO CONFOUND AND PUT AN END TO THESE FOOLISH PHAROAHS AND THEIR FACILITATORS! PRAY THAT RELIEF WILL BE GRANTED TO THE OPPRESSED HOMEOWNERS IN GOD’S NAME! AMEN. UNDERSTAND – ONLY GOD ABOVE WILL DEFEAT THIS EVIL”PRINCE OF THE AIR” THAT THESE BANKSTERS REPRESENT. – PEACE BE WITH YOU.
GREAT…. another “Oh, we’ll fix it” defense and no even an admission what they did was criminal?!?!?! WTF !!!
Take the money out of Jamie DEMON’s own family bank account.
Doesn’t anyone in government have any F-ing balls???
WHERE ARE THE HANDCUFFS?
Nothing has been done because the U. S. Government is bed partners with the frig’en fraud blood sucking multinational thieves..the Nazis who this government allowed to come here and take control….that is why there have been no HANDCUFFS….google ‘the Black pope ‘….go on YouTube…’ the Vatican Pope and Hilter ‘…..this just didn’t start….it has been here for many years….we were lied to….the last 5 presidents…check it out. They all wear/wore masks…………
Sorry corrected: Here is a 153 million for the Trillions we stole and live us alone. a 00001% fee for a license to steel
Did you mean:
Sorry, corrected. Here is a 153 million for the Trillons we stole, leave us alone.
A 00001% fee for a license to steal.
Here is a 153 million for the Trillions we stole and live us a loan a 00001% fee for a license to steel
Ya, what THM said below…
Such common day BULL$HIT, AND AGAIN.
The common man reads this and thinks, Oh Boy, The Banks are getting hit hard for their crimes. Hummm, No They are not. 153.6 Million is like .0000000000001 cents to you and me.
It is time to turn up the DEMAND to jail the scum that Raped our great nation, NOW.
If law enforcement will not doit…., Well… We MUST.
“Fight The Good Fight”
Every Minute, Every Day!
But; again, the moving around of money among the corporate artificial persons “elite” back and forth – how does it address the homeowner’s problems? Could be one cent could be trillions. What does the amount matter if there is absolutely no relief for the actual human victims?
That is the point….it is all bullshit…..it is a stall tactic…to make you think they are doing something….first off….these multinational fraud banksters control the government….the government and the media are both controlled…so the lies fly. Enough time has gone by to prove the U.S. Government is NOT our government…..Has anyone ever heard where the government has come forth to help the people? Where is our government?? CAN YOU HEAR THE SILENCE???? But you bet they ran to pay billions upon billions to the nazi fraudster foreign banks…called bailouts…when the banks did not even need the money….. THEY ARE STEALING THE HO– USES THEY DON’T EVEN OWN….as the government kisses their hands…..and Obama bows.
Where are the handcuffs? And NO one goes to jail, for massive fraud.
How do we use this to get our homes back?
Precise steps to take?
The whole general process is exhausting… need specific practical help.
I’m with you eif, I don’t want to lose my home, what can we do, my story with JP/Morgan/ chase has been going on for a year and a half, with app after app for loan modifications, then filed foreclosure on me in December & haven’t heard anything but send more stuff, Im a wreck, someone def needs to go to jail!
Not to take away from what you say Kathy but to reinforce it .. yes, same here.
One voice is barely heard, Two is the beginning of Many. As other good folks here suggest.
elders.in.foreclosure@gmail.com
Have you found the fraud in your mortgage? Fraud anywhere in the contract kills the contract. Why would you want a loan mod? It is a set up to fail and besides these homes are paid for because of the Ponzi Scheme.
Do you know who your true lender is? You need to know, because only the true lender can give you
relief through modification. No other entity can authorize a cut in your mortgage payments.
And who holds your note? You need to know this too, because any other entity cannot and does
not have standing to do anything to your home or mortgage.
Loan modifications are a fraud…trickery…they take more of your money while they are filing your foreclosure. That is their point…to make a wreck of you, to weaken you…its the cowards they want… NOT the fighters…KATHY…you say JP Morgan Chase…were you originally with Washington Mutual?? WAMU was fraud from the closing on….that is why I ask you….WAMU never was the lender/funder of the mortgages….they did not own the notes/mortgages….the creditor/lender was the funder. If you were not with WAMU than I draw a blank. Chin up girl….. get really pissed off and the strength will get you into the fighting mood….it works everytime….let your spirit guide you and you will see doors open that help you…don’t have loss of hope….millions of people are in the same boat as you are in and we don’t intend to let the boat sink………..
same with me with wells fargo and a friend of mine with chase. we were told not to pay and then denied us a hamp loan. when will this all end.