SEC Probes JPMorgan CDO Over Magnetar Involvement

Nov 2 2010 | 2:47am ET

The Securities and Exchange Commission is investigating another bank for allegedly failing to disclose the role played by a hedge fund in selecting securities that went into a collateralized debt obligation.

The probe of JPMorgan Chase comes less than four months after Goldman Sachs settled similar SEC charges for $550 million. According to ProPublica, the agency is investigating whether JPMorgan misled investors in a $1.1 billion CDO called "Squared" about Magnetar Capital's alleged involvement in picking the CDO's securities. In the Goldman case, hedge fund Paulson & Co. allegedly played the role of Magnetar.

It is the second time in as many weeks that the Evanston, Ill.-based hedge fund's name has come up in connection with CDOs gone wrong: Last week, a series of funds set up by Deutsche Industriebank—also one of the biggest losers in the Goldman CDO—sued Crédit Agricole, in part for allegedly allowing Magnetar a hand in selecting securities.

Magnetar, like Paulson, has not been accused of any wrongdoing itself. But the hedge fund has denied that it ever bet that a CDO would fail.

But according to ProPublica, in addition to buying the riskiest portions of some CDOs—which helped more than $40 billion worth come to market in 2006 and 2007—Magnetar also shorted the very same CDOs.

Like Paulson, Magnetar denied that it played a decisive role in building the CDOs. In a letter to ProPublica, the hedge fund said it "did not at any time require or expect any specific assets to be purchased into the Squared transaction" and that GSC, which managed the CDO, "at all times exercised its own discretion and judgment regarding the characteristics and appropriateness of each of the assets selected for inclusion in Squared." In addition, Magnetar said it only decided to invest in Squared after JPMorgan and GSC had initiated the transaction.

JPMorgan said it is cooperating with the SEC.

"We, like other firms, have received an inquiry from the SEC related to our CDO business," Joseph Evangelisti said in a statement. "We're cooperating fully on the inquiry."


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