SEC looking at hedge fund as part of CDO inquiry

Thu May 17, 2012 12:01pm EDT

* Magnetar helped package securities made up of loans

* Magnetar says it is cooperating with regulators

NEW YORK May 17 (Reuters) - U.S. securities regulators are investigating the hedge fund Magnetar Capital for its role in putting together packages of consumer loans that big banks sold as bonds before the financial crisis, sources confirmed on Thursday.

The Wall Street Journal first reported Magnetar was "a target" of an Securities and Exchange Commission investigation. Magnetar has been involved in at least one previous investigation involving a large Wall Street bank and securitized loans.

The investigation involving Magnetar focuses on collateralized debt obligations, securities that often included bonds backed by mortgage and other consumer loans.

"As we have stated publicly and acknowledged many times, the SEC has been investigating a variety of aspects of the CDO markets for some time, and we continue to cooperate with the SEC in relation to these inquiries," a spokeswoman for Magnetar said on Thursday.

Last August, after a similar investigation, the SEC charged a former employee of GSC Capital Corp with fraud, accusing him of failing to reveal that a CDO called Squared CDO 2007-1 contained securities that were being shorted by a hedge fund, according to court documents.

That hedge fund was Magnetar, where the GSC Capital employee, Edward Steffelin, hoped to land a job.

Magnetar was not charged with any wrongdoing by regulators in that deal.

A lawyer for Steffelin, whose case is still pending, did not immediately respond to a request for comment.

JPMorgan Chase & Co then sold the CDO to investors, who did not know Magnetar had a $600 million bet against some of the loans and securities packaged in the transaction. The bank settled SEC charges related to the case for $153.6 million.

The person familiar with the investigation involving Magnetar said the SEC was also looking at other big banks that sold CDOs.

"This morning's Wall Street Journal article is an unfortunate re-packaging of previously-reported information," the Magnetar spokeswoman said, adding that its CDO strategy was "hedged" and had been found by the Financial Crisis Inquiry Commission to be "a common strategy among medium sized hedge funds."

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