JPMorgan Chase & Co settled a Securities and Exchange Commission court case with $153.6 million in payment for mortgage fraud. The SEC’s complaint versus JPMorgan reflected how the bank sold collateralized mortgage obligations to free itself from credit-scarred mortgage securities. The case was similar to the one the SEC had with Goldman Sachs Group Inc in July. Both involved the banks’ betting against complex securities structured by hedge fund clients without telling investors of their participation. A case was filed by SEC against JPMorgan’s collateral agent for its Squared CDO, GSC Capital Corp’s ex-managing director Edward Steffelin on Tuesday. He was said to have eyed a Magnetar Capital LLC hedge fund job. This, while he helped create marketing materials without disclosing Magnetar’s chosen CDO securities with $600 million value loss possibility bet. The SEC said JPMorgan sold $150 million of Squared CDO notes that devalued in less than a year.
SEC’s Robert Khuzami said they still pursue individuals after charging about 50 people in 2008’s credit-crisis-related cases. As for the lack of charges against individuals, SEC Chairman Mary Schapiro said it is not for lack of will and desire that not many senior people are named in these cases. She said though that the SEC will pursue charges against banks. So far, the only individual charged over Abacus is Goldman VP, Fabrice Tourre. Squared and Abacus CDOs permitted lenders to leave and again get more credit deficient loans that blew the excessive subprime mortgage bubble bigger.
JPMorgan is fined $133 million, will pay $20.6 of inappropriate profits and interest. Squared CDO investors will get $125.9 million while $27.7 million goes to the U.S. Treasury. JPMorgan has to change mortgage securities review and approval policies as well and must be authorized by U.S. District Judge Richard Berman. Steffelin’s case is handled by another judge. JPMorgan has not admitted any offense, and said it lost about $900 million on the Squared deal. The $56.8 million compensation to CDO, Tahoma CDO I investors was part of an intention to pay, it said.
Steffelin representative, Alex Lipman denied his client pursued a Magnetar job and said they are baffled by the SEC’s decision to proceed against an individual in a contested proceeding on a negligence theory. Magnetar stated that they did not control the asset selection process and that their mortgage CDO investment strategy was designed and implemented to maintain a market-neutral portfolio. The SEC said there were signs that Squared sales materials had CDO investments chosen by a GSC link but did not disclose Magnetar’s part. A Wells notice was sent by the SEC earlier this year. They might charge Steffelin and Michael Llodra, JPMorgan’s ex-structured CDO global head. On Tuesday though, Llodora was not charged. Steffelin, now with Walton Securities Inc gave could not be contacted.
The New York Stock Exchange saw JPMorgan shares up 1.1% at $40.91 or 43 cents higher.
The cases are SEC v. JPMorgan Securities LLC, U.S. District Court, Southern District of New York, No. 11-04206; and SEC v. Steffelin in the same court, No. 11-04204.