Merrill Lynch and hedge fund NIR Capital Management are under investigation over a collateralized debt obligation the former structured for another hedge fund, Magnetar Capital.
The probe is part of a larger investigation of banks' CDO practices, and at least the second involving securities created for Magnetar. The SEC is looking into whether Merrill Lynch, now part of Bank of America, misled investors about Magnetar's alleged role in selecting the securities in a CDO called Norma, and whether the bank mispriced those assets. NIR is under scrutiny as the collateral manager for that CDO; the SEC wants to know whether it fulfilled its obligations to the CDO's investors, the Financial Times reports.
In a lawsuit against Merrill settled last year, the Dutch bank Rabobank said Merrill "hand-picked a beholden collateral manager that was willing to ignore its fiduciary duties to Norma's investors by selecting Norma's collateral pool at Merrill Lynch's behest rather than on the basis of the rigorous independent analysis."
Magnetar has not been accused of any wrongdoing and denies allegations—set out in the earlier lawsuit against Merrill—that it helped pick the assets that went into the Norma CDO and then shorted it. The SEC is also investigating JPMorgan Chase over a CDO it allegedly structured and marketed at Magnetar's behest, and has warned a JPMorgan executive and an executive at the CDO's collateral manager, the now-bankrupt hedge fund GSC Group.
The CDO probe is only the latest legal trouble for NIR, which has faced lawsuits accusing it of lying to investors about its funds' performance. Federal prosecutors are also looking into whether the firm paid kickbacks in exchange for helping it inflate the value of its assets.