Sunday, 1 May 2016
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Oct 23 2013 | 11:30am ET
The Securities and Exchange Commission has sued a New Jersey firm for giving Magnetar Capital a say in what securities went into a collateralized debt obligation—without telling the CDOs investors.
According to the regulator, Wing Chau and his firm, Harding Advisory, went so far as to give Magnetar the authority to veto the firm's selections for the 2006 CDO, called Octans I, and to push it into choosing securities that its own analysts didn't like. Magnetar's alleged role was not disclosed.
The hedge fund then bet against the CDO, which was issued by Merrill Lynch, and it duly collapsed in 2008.
"A collateral manager's independent selection of assets is an important selling point to potential CDO investors," SEC enforcement co-chief George Canellos said. "Investors had a right to know that Harding and Chau had chosen to accommodate the interests of others and abandon their own obligations to act in the best interests of the CDO they advised."
The SEC is seeking an administrative proceeding to determine whether Harding and Chau, previously best-known for suing author Michael Lewis over his depiction of them in The Big Short, should be fined.
Magnetar has denied any wrongdoing in its CDO investments and has said that its input into their creation was limited. The firm has not been charged.