JPMorgan Settles CDO Probe, Pays Back Lutherans

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$153.6 million for those pregnancy emails.

The bank 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.

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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. In the months before the deal closed in May 2007, the bank made a “frantic global sales effort” to sell the Squared securities amid signs of distress in the housing market, the SEC said in a statement. “We are soooo pregnant with this deal, we need a wheel- barrel to move around,” wrote a JPMorgan employee in charge of distributing the CDO in a March 2007 e-mail meant to encourage the sales staff, according to the SEC complaint. “Let’s schedule the cesarian, please!”

[Bloomberg]

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