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. N.Y.).

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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