JPMorgan’s settlement of charges that it misled investors in a complex mortgage-related security called Squared may mean that we never learn what role the hedge fund Magnetar played in setting up the deal.
The Securities and Exchange Commission claims that JPMorgan structured and marketed Squared, a synthetic collateralized debt obligation or CDO, without informing investors that Magnetar helped select the assets in the CDO portfolio and had a short position in more than half of those assets.
Magnetar, however, seems to dispute this characterization of its role.
In a letter written to Pro Publica—the journalistic outfit most responsible for uncovering Magnetar’s role in a vast web of CDO deals—the hedge fund said that it “did not at any time require or expect any specific assets to be purchased into the Squared transaction.” It insisted that GSC, a third-party CDO manager, “at all times exercised its own discretion and judgment regarding the characteristics and appropriateness of each of the assets selected for inclusion in Squared.”
In settling the case, JPMorgan agreed to pay $153.6 million in fines and penalties but did not admit or deny the allegations. So this apparent contradiction between the SEC’s view and Magnetar’s remains unresolved.
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