SEC May Sue Hedge Funds In CDO Deals

May 13 2011 | 1:10pm ET

Hedge funds that played a role in structuring mortgage-backed securities deals only to short them could face Securities and Exchange Commission charges.

The regulator is mulling civil charges against hedge funds as part of its broader investigation into collateralized debt obligations and other mortgage-backed products, The Wall Street Journal reports. The SEC is investigating nearly a half-dozen banks, most of which, led by JPMorgan Chase, are pursuing settlements with the agency.

But the SEC plans to go further than that, planning to file civil charges against at least one individual at each firm, according to the Journal. In January, the SEC sent Wells notices to former JPMorgan executive Michael Llodra and former GSC Group executive Edward Steffelin, warning the two that they plan to bring civil charges related to a $1.1 billion CDO called "Squared."

The SEC is said to believe that hedge fund Magnetar Capital had an undisclosed hand in selecting the securities that went into the CDO. Magnetar has not been accused of, and has denied, any wrongdoing.

The SEC alleged last year that Paulson & Co. played a similar role on a CDO crafted by Goldman Sachs; Goldman settled those charges last year for $550 million, but Paulson has not been charged.

In the Goldman case, the SEC has sued Goldman executive Fabrice Tourre.

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