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.