Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > Federal Regulation > SEC

SEC: Insurers to Get CDO Deal Compensation

Your article was successfully shared with the contacts you provided.

WASHINGTON BUREAU — J.P. Morgan Securities has agreed pay about $154 million into a settlement fund to resolve a U.S. Securities and Exchange Commission (SEC) investigation involving synthetic collateralized debt obligations (CDOs) that were sold to life insurers and other institutional investors.

SEC officials have alleged that J.P. Morgan Securities, a unit of JPMorgan Chase & Company, New York, sold the synthetic CDOs to the institutional investors without disclosing that a hedge fund involved in the deal was betting that the synthetic CDOs would drop in value.

J.P. Morgan Securities agreed to the settlement without admitting or denying the allegations, officials say.

About $28 million of the settlement payment will be paid to the U.S. Treasury Department, and about $126 million will go to the investors through a Fair Fund distribution, officials say.

SEC officials allege in the complaint that J.P. Morgan Securities sold about $150 million of the “mezzanine tranches,” or riskiest slices, of a CDO arrangement to group of institutional investors that included Thrivent Financial for Lutherans, Minneapolis; Security Benefit Corp., Topeka, Kan.; Far Glory Life Insurance Company Ltd., Taipei, Taiwan; and Taiwan Life Insurance Company Ltd., Taipei.

SEC officials allege that J.P. Morgan Securities structured and marketed the CDO without telling investors that Magnetar Capital L.L.C., New York, an independent hedge fund, was helping to choose the assets in the CDO portfolio while holding a short position in more than half of the assets.

As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted, SEC officials allege.

J.P. Morgan Securities entered into the deal knowing that the housing market was beginning to founder, SEC officials allege.

The J.P. Morgan Securities settlement agreement requires the company to change how it reviews and approves offerings of certain mortgage securities.

The company notes in its consent that it voluntarily paid about $57 million to certain investors in a transaction known as Tahoma CDO I.

The settlement is subject to court approval.

JPMorgan, the parent of J.P. Morgan Securities, says in a statement that J.P. Securities is pleased to have reached the agreement with the SEC and pleased to be putting the matter behind it.

“The SEC has not charged the firm with intentional or reckless misconduct,” JPMorgan says.

J.P. Morgan Securities did take risk of loss on 85% of the notes involved in the deal and ultimately sustained about $900 million losses in connection with the notes, JPMorgan says.

Although there are allegations of problems with the disclosures in the offering notes for the CDO, the complaint acknowledges that the offering documents for the CDO did disclose that a noteholder in the CDO “may hold a short position with respect to the collateral or buy credit protection with respect to the collateral, and that a noteholder may act with respect to those positions ‘without regard to whether any such action might have an adverse effect on the Issuer, the Noteholders, related Reference Entity or any Reference Obligation,’” JPMorgan says.

“The complaint also acknowledges that the third-party collateral manager for [the CDO] was aware that Magnetar was both an investor in the transaction and purchased the credit protection on a substantial portion of the collateral,” JPMorgan says.

Representatives for Security Benefit say the company is aware of the SEC announcement but cannot comment further until its legal team has had a chance to review the settlement.

Other CDO market coverage from National Underwriter Life & Health:


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.