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 US Securities and Exchange Commission (SEC) announced Tuesday.
In a case simultaneously brought and settled, the SEC asserted that JPMorgan?s investment bank had structured and marketed a security known as a synthetic collateralised 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 SEC 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 Steffelin were accused of negligence but not intentional or reckless misconduct.
The agency accused 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 SEC said, a hedge fund named Magnetar Capital chose the assets. A lawyer for Steffelin said he intended to fight the charges.
The settlement comes after a $550-million agreement the SEC 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 SEC, 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 SEC did not bring any action related to Tahoma.
?We believe this settlement resolves all outstanding SEC inquiries into JP Morgan?s CDO 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 SEC 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 SEC 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 collateralised debt obligations.