JPMorgan Chase agrees to $153.6 million settlement with SEC

The SEC alleges that JPMorgan structured and marketed a synthetic collateralized debt obligation (CDO) without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets. 

As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio 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,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “What J.P. Morgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection.”

The SEC is working to complete its investigations into how banks bundled and sold investments involving risky mortgages along with Wall Street’s role leading up to the financial crisis in September 2008.

Federal regulators have been investigating a number of major banks, including loan originators and underwriters involved in the mortgage industry, with more charges expected.

The SEC separately charged Edward Steffelin, who headed the team at an investment advisory firm that the deal’s marketing materials misleadingly represented had selected the CDO’s portfolio.

The focus on CDOs gained steam last year following congressional hearings followed by a $550 million settlement in July with Goldman Sachs and the SEC, the largest in the regulator’s history.

Goldman said its marketing materials were incomplete and that it made a “mistake” in its disclosures about a subprime-mortgage linked CDO. 

Following a two-year inquiry, a Senate panel found in April that Goldman Sachs misled clients and Congress about the firm’s bets on securities tied to the housing market.  

Sen. Carl Levin (D-Mich.), who chaired the Senate Permanent Subcommittee on Investigations, said Goldman Sachs executives engaged in “disgraceful” tactics to profit themselves at the expense of some clients and then misrepresented their actions when called to testify before Congress. 

He stopped short of saying anything illegal occurred, instead referring that matter to federal investigators.

“In my judgment, Goldman clearly misled their clients and they misled the Congress,” he said in April. “Whether or not that constitutes perjury … is for someone else to decide … It needs to be decided by an appropriate authority.”