JPMorgan Will Pay $153.6 Million To Settle Charges Over Misleading Investors


The SEC announced today that JPMorgan Chase will pay $153.6 million to settle charges that it misled investors when it sold them mortgage securities as the housing market was beginning to crumble.

The SEC alleged in its suit that JPM sold investors collateralized debt obligations that were selected by a hedge fund which had already bet that the securities would drop in value. “As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted,” the SEC says.

The problem is that investors weren’t being told that a hedge fund with short position on the assets in the CDOs was also the one helping JPM select the assets included the CDO portfolio.

The settlement amount doesn’t come close to the record amount Goldman Sachs paid the SEC to settle charges that it misled investors when it sold them mortgage bonds. Goldman paid $550 million to the SEC last summer to settle the charges.

In that case, the SEC alleged that Goldman created a mortgage investment that contained mortgage bonds that were selected by famed hedge fund manager, John Paulson. Paulson, who wasn’t named in that suit, was meanwhile betting that the mortgage bonds would lose value as the housing market collapsed. He made billions in profits by doing so.

According to the SEC, the CDO portfolio being sold to investors was structured primarily with credit default swaps referencing other CDO securities whose value was tied to the U.S. residential housing market. Meanwhile, Magnetar Capital (he hedge fund that helped pick the assets in the CDOs) held a $600 million short position that dwarfed its $8.9 million long position when the deal closed in May 2007.

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.”

A few institutional investors who bought into the deal and lost nearly their entire investment according to the SEC include:

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.
In typical SEC-settlement fashion, JPM was able to settle the civil charges without admitting or denying wrongdoing. As part of the settlement terms, the bank must change how it reviews and approves offerings of certain mortgage securities.

Yesterday federal regulators sued JPM and the Royal Bank of Scotland for misrepresenting the risk associated with securities tied to high-risk mortgages. In its lawsuit The National Credit Union Administration is seeking $278 million from JPMorgan Securities LLC and $565 million from RBS Securities Inc.




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