ProPublica: SEC investigating JPM and Magnetar | FT Alphaville

ProPublica: SEC investigating JPM and Magnetar

Just a quick post alerting readers to the latest from ProPublica’s Jesse Eisenger and Jake Bernstein — the gist of which will sound awfully familiar to those who followed the Abacus case:

The Securities and Exchange Commission is investigating whether JPMorgan Chase allowed a hedge fund to improperly select assets for a $1.1 billion deal backed by subprime mortgages, according to people familiar with the probe.

Called “Squared” and completed in May 2007, the deal was a collateralized debt obligation, or CDO, made up of pieces of other CDOs. The hedge fund, Magnetar Capital, based in Evanston, Ill., purchased the riskiest slice of Squared as part of a strategy to bet against the mortgage market.

This report builds from ProPublica’s investigation into Magnetar, and it also follows on its prior report that other banks had acted as Goldman did in the Abacus case — the result of which was a lawsuit and settlement.

A bit more from ProPublica:

In the case of Squared, the SEC is examining whether JPMorgan adequately disclosed to the investors it marketed Squared to that Magnetar had a role in picking the securities that went into the deal while also betting against segments of the deal. …

As we noted in our earlier story about Magnetar, Squared included a piece of a CDO from one of those Goldman Sachs deals, called Abacus 2006-17. …

Since Magnetar made no legal representations to investors in any of its CDOs, it may not have violated any of the rules that govern the transactions. Another possible complication in the SEC’s probe is that the biggest loser in the deal by far was JPMorgan itself. …

JPMorgan Chase, which kept the large, supposedly safe top slices of Squared on its books, without hedging itself, lost about $880 million on the deal. Banks often kept such slices since they were widely believed to be nearly risk-free.

Related links:
The Magnetar Trade – ProPublica
Magnetar coverage – FT Alphaville