JPM Settles SEC Case: Hedge Fund Would Make Money if Assets Failed, Which They Did



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EDITOR’S COMMENT: This is a slap in the face of investors, taxpayers and homeowners who accepted this garbage masquerading as “loans.” $153 million is chump change, unless they intend to follow it up with the same action on all the pools. But it does show a tacit admission from JPM that the accusations are true. Laddering the risk, JPM used a hedge fund that would make money when the bonds they were selling to investors lost value. Since the bonds derived their value from supposed mortgage loans in a pool that didn’t really exist, the mortgage loans never made it into the pool, it was a scam, pure and simple.

But the case is significant for another reason. It shows the profit motive for making bad loans, because the issue with the SEC missed the point. It wasn’t that the bonds were worthless because the loans never made it into the pool, it was all about the quality of the mortgage loans which stunk. The SEC also missed the point that the reason the bonds stunk was that JPM made a ton of money keeping large portions of the funds from investors as “profit” on the “sale” of the mortgage loans to the “pool.”

For Borrowers, it is important because it demonstrates (but does not prove, which is why JPM settled) that JPM knew exactly what it was doing. It knew it was funding loans based upon false appraisals that would not stand the test of time, it knew the quality of the loan did not match the borrower’s finances, and it went ahead anyway because JPM did not have the risk of loss. And Yet JPM et al are the ones seeking to foreclose mortgages that it says were transferred into the pool. It has no title, no money in the deal, and yet free house after free house was awarded them in the courts and by abandonment by homeowners who did not understand that their loan probably wasn’t in default even though they hadn’t  made a payment.

JPMorgan Settles Case With S.E.C.


WASHINGTON — JPMorgan Chase has agreed to pay $153.6 million to settle federal civil accusations that it misled investors in a complex mortgage securities transaction in 2007, just as the housing market was beginning to plummet, the Securities and Exchange Commission announced Tuesday.

In a case simultaneously brought and settled, the S.E.C. asserted that JPMorgan’s investment bank had structured and marketed a security known as a synthetic collateralized debt obligation without informing buyers that a hedge fund that helped select the assets in the portfolio stood to gain, in most cases, if the investment lost value.

The S.E.C. also separately accused Edward S. Steffelin, an executive at the investment advisory firm responsible for putting together the mortgage security that was sold by JPMorgan. Both JPMorgan and Mr. Steffelin were accused of negligence but not intentional or reckless misconduct.

The agency accused Mr. Steffelin of misleading investors into believing that a unit of the firm he worked for, the GSC Capital Corporation, had selected the mortgage securities in the investment portfolio. Instead, the S.E.C. said, a hedge fund named Magnetar Capital chose the assets. A lawyer for Mr. Steffelin said he intended to fight the charges.

The settlement comes after a $550 million agreement the S.E.C. reached with Goldman Sachs last year to resolve similar claims.

Investors harmed in the JPMorgan transaction, known as Squared CDO 2007-I, will receive all of their money back, according to the S.E.C., a total of $125.87 million. JPMorgan also voluntarily paid $56.76 million to some investors in a separate transaction known as Tahoma CDO I, a similar deal in which investors lost money. The S.E.C. did not bring any action related to Tahoma.

“We believe this settlement resolves all outstanding S.E.C. inquiries into J.P. Morgan’s C.D.O. business,” Joseph Evangelisti, a JPMorgan Chase spokesman, said in a statement. In settling the case, the company neither admitted nor denied wrongdoing. JPMorgan said it sustained losses of $900 million related to Squared CDO.

The case is part of a raft of litigation stemming from the mortgage crisis. The S.E.C. is still investigating accusations of improper sales practices at Deutsche Bank, Morgan Stanley and several other companies. In addition, the New York State attorney general recently opened a number of cases involving several big banks as part of a broad sweep of Wall Street’s loan packaging business.

Private investors are looking to recoup some of their losses in the courts. There are still about $200 billion in private legal claims over mortgage securities against major banks, according to Institutional Risk Analytics.

In the JPMorgan case, the S.E.C. asserted that the bank undertook “an aggressive effort” in 2007 to unload the securities on investors outside its usual circle of customers for deals involving collateralized debt obligations.

In one e-mail on March 22, 2007, the JPMorgan employee in charge of the sales effort wrote, “We are soooo pregnant with this deal, we need a wheel-barrel to move around. … Let’s schedule the cesarian, please!”

The S.E.C. also cited numerous JPMorgan e-mails noting Magnetar’s involvement in the selection. But no executives, traders or salesmen from JPMorgan were accused of wrongdoing.

That contrasts with the case the S.E.C. brought against Goldman Sachs last year. That case also accused a trader at Goldman, Fabrice Tourre, who is fighting the claims.

Robert S. Khuzami, the S.E.C.’s director of enforcement, said in a conference call with reporters that the decision not to take action against any JPMorgan executive was based on the evidence in the case.

“We look hard at the conduct of individuals,” Mr. Khuzami said. “First and foremost, you have to show that an individual is aware that information is not being disclosed, that it is material and that they knew the facts.”

Those elements were present in the company’s conduct, he said. “What JPMorgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of the C.D.O. portfolio assets heavily influenced the C.D.O. portfolio selection,” he said.

The S.E.C. previously notified at least one other individual — Michael Llodra, the former head of structured C.D.O.’s at JPMorgan — that he might be sued for his role in marketing such securities. And Magnetar has been involved with multiple C.D.O.’s arranged by other brokerage firms. Mr. Khuzami declined to comment on whether any other such cases were still proceeding.

Magnetar, which is not a defendant in the case or a party to the settlement, said in a statement that it was not involved in the marketing of the Squared CDO. “Although the S.E.C. has included certain descriptions of Magnetar’s role in the transaction in the complaint,” the company said, “we did not control the asset-selection process.”

6 Responses


    Watch this from today’s Dylan Ratigan show–it’s AWESOME!!!
    Finally—publicity on a national TV media show about what is REALLY going on—this is fantastic…the “wall” is cracking!!!

    Neil—can’t you get on his show???

  2. This is very interesting—click this link–then click Dylan Ratigan show—then click on Ben Bernanke’s face—listen carefully to David Stockman—ESPECIALLY near the END of the clip where he talks about GE’s Jeffery Immelt…then Google Jeffery Immelt—his Wikipedia page…and look how much money he made while America fell apart…thanks to him and Hank Paulson…America crashed because they were afraid of losing their own net worth.

  3. Homeowner Warrior
    Got M.E.R.S.?

    For anyone interested, I’ve made that bumpersticker available:

  4. @ Gregory Bryl,

    How do you dovetail that in non-judicial Minnesota, where in 2004 the legislature adopted bills 580.01 & 580.02, otherwise known as the Mers Statute, which just happened to be written by a Mers lawyer. It’s what drove the state’s Supreme court in Jackson v. Mers to decline the plaintiffs’ argument that an assignment of the promissory note acts as an assignment of legal title, reasoning that MERS is the mortgagee of record and therefore holds legal title to the mortgage.

    “Although an assignment of the promissory note changes the holder of equitable title in the mortgage, it does not change legal title. As a result, MERS may continue to foreclose mortgages in the state of Minnesota because it holds legal title to the mortgage. The public need not be put on notice of who holds equitable title in the mortgage.”

    I don’t know how many people out there have noticed that even though Mers issued a directive forbidding foreclosure in its name, it’s still going on across this once great nation.

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