(Bloomberg News) JPMorgan Chase & Co. agreed to pay $153.6 million to settle U.S. regulatory claims it misled pension funds and a Lutheran group while selling a product linked to risky mortgages as the housing market unraveled.
The company, the only major Wall Street bank to remain profitable throughout the financial crisis, didn't tell investors that hedge fund Magnetar Capital LLC helped pick assets linked to a synthetic collateralized debt obligation in 2007, the Securities and Exchange Commission wrote in a fraud case filed today at Manhattan federal court. Magnetar, betting housing prices would fall, stood to profit if assets defaulted.
"JPMorgan marketed highly complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests," the SEC's enforcement chief, Robert Khuzami, said in a statement. "With today's settlement, harmed investors receive a full return of the losses they suffered."
The SEC is targeting mortgage-industry firms from loan originators such as Countrywide Financial Corp. to underwriters including Goldman Sachs Group Inc. Goldman Sachs paid a record $550 million for failing to inform clients in 2007 that it let a hedge fund, also betting against the housing market, to help put together a CDO.
Like Goldman, JPMorgan's brokerage unit, JPMorgan Securities LLC, didn't admit or deny wrongdoing in settling. The accord is subject to court approval.
$900 Million Loss
"The SEC has not charged the firm with intentional or reckless misconduct," JPMorgan said in a statement. The bank booked $900 million in losses on the CDO, known as Squared, and after an internal review voluntarily made $56 million in payments to investors of a separate CDO called Tahoma I.
The SEC won't bring claims over that investment, Khuzami told reporters on a conference call today. Asked why JPMorgan executives weren't sued, he said, "we look hard and long at the conduct of individuals and make our decisions based on the evidence."
CDOs package assets such as mortgage bonds into new securities with varying risks. A surge in U.S. home loan defaults undermined the instruments, helping lead financial companies to record $1.82 trillion in losses and writedowns during the housing crisis, data compiled by Bloomberg show.
'Frantic' Sales Effort
The SEC's claim focuses on JPMorgan's disclosures about Squared CDO 2007-1. Marketing materials said the instrument's portfolio was selected by the investment advisory arm of GSC Capital Corp., which had experience analyzing CDO credit risk. Magnetar also played a role in the selection and stood to benefit if CDOs tied to the instrument defaulted, according to the agency's complaint.