06/22/2011 05:19:00 PM EST
J.P. Morgan to Pay $153M to Settle SEC Lawsuit
WASHINGTON, D.C. - (Mealey's) J.P. Morgan Securities LLC
will pay $153.6 million to settle claims brought by the Securities and Exchange
Commission alleging that it misled investors "in a complex mortgage securities
transaction just as the housing market was starting to plummet" (Securities
and Exchange Commission v. J.P. Morgan Securities LLC, No. 11-4206, S.D.
According to a press release announcing the settlement,
in addition to repayment of the $153.6 million investors lost in the mortgage
securities transactions, J.P. Morgan has agreed to "improve the way it reviews
and approves mortgage securities transactions."
In addition, J.P. Morgan, without admitting or denying
guilt, has consented to a permanent injunction prohibiting it from violating
Sections 17(a)(2) and (3) of the Securities Act of 1933 and payment of $18.6
million in disgorgement, $2 million in prejudgment interest and a $133 million
penalty. Of the total $153.6 million, $125.87 million will be returned to
investors and $27.73 million will be paid to the U.S. Treasury.
The SEC filed its complaint against J.P. Morgan in the
U.S. District Court for the Southern District of New York, alleging that J.P.
Morgan violated the Securities Act by marketing a $1.1 billion "largely
synthetic collateralized debt obligation" (CDO), named Squared CDO 2007-1,
which consisted of credit default swaps, without informing investors that the
hedge fund that helped select the collateral for Squared CDO, Magnetar Capital
LLC, "had a short position in more than half of those assets" that would allow
it to benefit if the Squared CDO assets that were selected defaulted.
The SEC also filed a separate complaint against Edward S.
Steffelin, who headed the team at GSCP (NJ) L.P., which was listed in the
Squared CDO marketing materials as the entity selecting the collateral for the
Squared CDO, contending that "Steffelin allowed Magnetar to select and short
portfolio assets" in violation of Sections 17(a)(2) and (3) of the Securities
Act and Section 206(2) of the Investment Advisers Act of 1940.
The SEC is seeking injunctive relief, disgorgement of
profits, prejudgment interest and penalties against Steffelin.
The SEC's press release announcing the settlement is
available online at http://www.sec.gov/news/press/2011/2011-131.htm.
[Editor's Note: Full coverage will be in the June
issue. For all of your legal news needs, please visit www.lexisnexis.com/mealeys.]
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