August 18, 2022

J.P. Morgan Settles Mortgage Securities Case

In a case that was simultaneously brought and settled, the S.E.C. asserted that J.P. Morgan structured and marketed a security known as a synthetic collateralized debt obligation without informing the buyers that a hedge fund that helped select the assets in the portfolio stood to gain, in most cases, if the investments 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 J.P. Morgan.

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 included in the investment portfolio. Instead, the S.E.C. said, a hedge fund named Magnetar was choosing the assets. A lawyer for Mr. Steffelin said he was reviewing the complaint.

Investors harmed in the transaction, known as Squared CDO 2007-I, will receive all of their money back, according to the S.E.C., an amount totaling $125.87 million. J.P. Morgan also voluntarily paid $56.76 million to certain investors in a separate transaction known as Tahoma CDO I, a similar transaction in which investors lost money. The S.E.C. did not bring any charges related to the Tahoma transaction.

“We believe this settlement resolves all outstanding S.E.C. inquiries into J.P. Morgan’s C.D.O. business,” Joseph Evangelisti, a J.P. Morgan spokesman, said in a statement. In settling the case, the company neither admitted nor denied wrongdoing.

Although the S.E.C. asserted that J.P. Morgan “launched a frantic global sales effort” in 2007 to unload the securities, no executives, traders or salesmen from J.P. Morgan were charged with wrongdoing. That is a contrast to the case that the S.E.C. brought against Goldman Sachs last year, which resulted in a $550 million settlement. 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 file charges against any J.P. Morgan executive was based on the evidence in the case.

“We look hard at the conduct of individuals in our cases,” 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 J.P. Morgan 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 fines in the J.P. Morgan settlement are the largest in an S.E.C. case since the Goldman settlement, which was the largest in the agency’s history.

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