(Refiles to remove extraneous word, paragraph 2)
* Squared CDO settlement follows $550 mln Goldman accord
* JPMorgan has repaid investors in its Tahoma CDO
* Lawyer for defendant Steffelin "baffled" at charges
* JPMorgan shares rise 1.1 pct
(Adds Magnetar statement, rephrases second and third
By Jonathan Stempel and Sarah N. Lynch
WASHINGTON/NEW YORK, June 21 JPMorgan Chase &
Co (JPM.N) agreed to pay $153.6 million to settle U.S.
Securities and Exchange Commission charges that it defrauded
investors who bought mortgage securities sold just before the
nation's housing market collapsed.
The regulator's complaint against the banking giant was
larded with excerpts from internal JPMorgan communications that
indicated bankers sold a collateralized mortgage obligation in
2007 to ensure that it could get credit-scarred mortgage
securities off its books.
"We are soooo pregnant with this deal, we need a
wheel-barrel [sic] to move around," the head of CDO
distribution wrote in a March 22, 2007 email to the sales
staff. "Let's schedule the cesarian [sic], please!"
The settlement with JPMorgan, the second-largest U.S. bank,
echoes on a smaller scale the $550 million accord that Goldman
Sachs Group Inc (GS.N) reached last July over its Abacus
collateralized debt obligation. [ID:nN15236037]
Both cases involved charges that banks let hedge fund
clients structure complex securities -- and then bet against
them -- without disclosing their involvement to investors.
The SEC on Tuesday also filed civil charges against Edward
Steffelin, 41, a former managing director at the now bankrupt
GSC Capital Corp, which served as collateral agent for the
JPMorgan CDO marketed as Squared CDO 2007-1.
Breakingviews on JPMorgan's settlement [ID:nN1E75K1CR]
JPMorgan unbowed by SEC,
may show wounds later [ID:N1E75K1VU]
It alleged that he hoped to get a job with the Magnetar
Capital LLC hedge fund, while helping to create marketing
materials that failed to disclose that Magnetar chose some
securities in the CDO and had a nearly $600 million bet that
they would lose value.
JPMorgan sold $150 million of Squared CDO notes to pension
funds and investors worldwide that lost most of their value in
just 10 months, the SEC said.
"This is deja vu all over again," said John Coffee, a
securities law professor at Columbia University, recalling the
Goldman case with a quote from baseball legend Yogi Berra. "If
Goldman and JPMorgan were doing this, it wouldn't surprise me
if others were as well."
No individual bankers were charged in the JPMorgan case,
but SEC enforcement chief Robert Khuzami told reporters the
agency continues to pursue individuals and has charged roughly
50 people in cases related to the credit crisis of 2008.
Earlier in the day, SEC Chairman Mary Schapiro also
addressed criticism that about the lack of charges against
"It is not for lack of will and desire that we are not
seeing as many senior people being named in these cases,"
Schapiro said. "If we could, we would be naming them."
Fabrice Tourre, a Goldman vice president whose case is
ongoing, was the only individual charged by the SEC over
Ms. Schapiro said the SEC will continue to bring charges
"We have a pretty full pipeline of post-crisis cases," she
said. "They relate to disclosure failures, particularly around
structured products, accounting issues and so forth."
EXACERBATING A CRISIS
Critics say CDOs such as Squared and Abacus allowed banks
and mortgage lenders to dump credit-deficient loans and then
make more, further inflating the subprime mortgage bubble even
as signs of excess were apparent.
JPMorgan agreed to pay a $133 million fine, plus $20.6
million of improper profits and interest. About $125.9 million
will go to investors in the Squared CDO, and $27.7 million will
go to the U.S. Treasury.
The accord also requires JPMorgan to change its policies
for reviewing and approving offerings of mortgage securities.
It must be approved by U.S. District Judge Richard Berman in
Manhattan. Steffelin's case was assigned to a different judge.
JPMorgan did not admit wrongdoing, but said it lost nearly
$900 million on the Squared transaction. It also said the SEC's
penalty reflected in part its voluntary decision to pay $56.8
million to investors in a separate CDO, Tahoma CDO I.
Unlike Goldman, which settled a fraud charge indicating it
acted with intent or recklessness, JPMorgan was charged in a
way that suggests its activity may have been negligent.
Alex Lipman, a partner at Nixon Peabody who represents
Steffelin, criticized the SEC's claims, and denied that his
client had been pursuing a job with Magnetar.
"We are baffled by the SEC's decision to proceed against an
individual in a contested proceeding on a negligence theory,"
he said. Steffelin "did not work for the underwriter and had no
responsibility for the contents of the offering memorandum."
Magnetar in a statement said SEC staff advised it not to
expect any enforcement action by the regulator. "We did not
control the asset selection process and our mortgage CDO
investment strategy was designed and implemented to maintain a
market-neutral portfolio," it said.
The SEC said Squared sales materials indicated that the
underlying investments in the CDO were chosen by a GSC
affiliate, but failed to reveal that Magnetar played a
The SEC earlier this year sent a "Wells notice" indicating
possible civil charges to both Steffelin and Michael Llodra,
JPMorgan's former global head of structured product CDOs.
Llodra was not charged on Tuesday. He could not immediately
be reached for comment. Walton Securities Inc, which according
to regulatory records now employs Steffelin, did not return a
call seeking comment.
JPMorgan shares closed up 43 cents, or 1.1 percent, at
$40.91 on the New York Stock Exchange.
The cases are SEC v. JPMorgan Securities LLC, U.S. District
Court, Southern District of New York, No. 11-04206; and SEC v.
Steffelin in the same court, No. 11-04204.
(Breakingviews on the settlement [ID:nN1E75K1CR])
(Reporting by Sarah N. Lynch and Jonathan Stempel; Additional
reporting by David Henry, Andrew Longstreth, Andrea Shalal-Esa
and Dan Wilchins; editing by Gerald E. McCormick, John Wallace,
Jed Horowitz and Bernard Orr)