Hedge fund Magnetar Capital appears poised to avoid allegations of wrongdoing over a controversial collateralized debt obligation.
The Securities and Exchange Commission is preparing to charge Bank of America's Merrill Lynch over its role in creating the $1.5 billion Norma CDO I. But the regulator will not charge Magnetar, The Wall Street Journal reports.
The decision makes it likely that no hedge fund will face a civil enforcement action over CDOs created prior to the financial crisis. While the SEC plans to take action on Norma and at least one other CDO, the agency plans to wrap up the matters this year.
The SEC has been scrutinizing Magnetar's role in the CDO market for more than a year. The hedge fund was among the biggest investors in CDOs prior to the crisis, both on the long and short side.
Magnetar was not alone among hedge funds playing the CDO market; the SEC's biggest victory in the probe, last week's jury verdict against former Goldman Sachs executive Fabrice Tourre, involved a CDO allegedly structured and marketed on behalf of Paulson & Co. In that case, as in the Magnetar cases, Paulson—which was not accused of wrongdoing—allegedly had a hand in selecting the securities that went into the CDO.
The SEC's probe focused on whether Magnetar's influence on those selection processes was so great that it was in effect the collateral manager, a position that would give it a fiduciary duty to the CDO's investors. But the agency's enforcement division has concluded there isn't enough evidence to support such a charge, and will not recommend a civil action against the hedge fund.
The investigation into Magnetar has not been formally closed, and the SEC could choose to file charges if new evidence emerges.