JP Morgan is to pay $153.6m to settle fraud charges and compensate investors who lost money in a toxic mortgage bond it created in 2007 as the housing market began to crash.
The Wall Street giant misled investors by not telling them that the vehicle had been created on behalf of a hedge fund, Magnetar, which was betting heavily against its success. Magnetar also secretly had a hand in choosing which mortgage-related investments were chosen for inclusion in the vehicle, according to a complaint filed yesterday by the SEC.
The case is reminiscent of the regulator's action last year against Goldman Sachs, which paid $550m and admitted misleading investors about the involvement of hedge fund manager John Paulson in the creation of one of its mortgage investment vehicles.
JP Morgan did not admit wrongdoing as part of yesterday's settlement. According to the SEC, one of the bank's employees wrote in an email: "We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart."
Magnetar held a $600m short position and made a large profit, while buyers such as the General Motors pension fund lost almost all their money. JP Morgan had launched what the SEC called a "frantic global sales effort" to find buyers. In an email, a JP Morgan salesman wrote: "We are soooo pregnant with this deal, we need a wheel-barrel to move around... Let's schedule the cesarian [sic], please!"
The vehicle was what is known as a CDO-squared, created from other collateralised debt obligations, whose underlying components were US sub-prime mortgages.Reuse content