By Jonathan Stempel
Dec 12 Bank of America Corp has agreed
to pay $131.8 million to settle U.S. Securities and Exchange
Commission charges that its Merrill Lynch unit misled investors
about mortgage securities it structured and sold.
Thursday's settlement marks the latest enforcement action
against Wall Street banks over the marketing of collateralized
debt obligations prior to the 2008 financial crisis.
Regulators have said hedge fund firms helped structure some
of these CDOs, and then used them to bet against the housing
market. These firms have not been targets of formal enforcement
actions in the higher-profile cases against the banks.
The SEC said Merrill failed to tell investors that hedge
fund firm Magnetar Capital LLC exercised significant influence
in choosing collateral underlying two $1.5 billion CDOs, Octans
I CDO in 2006 and Norma CDO I in 2007.
According to the regulator, Magnetar took equity positions
in the CDOs that gave it "substantial leverage" to influence the
holdings, and hedged them with short positions.
It said this meant Magnetar's interests might not have been
aligned with the interests of investors who wanted the CDOs and
their collateral to perform well.
The case included various communications between Merrill and
Magnetar, including a July 13, 2006 message from a Merrill sales
representative to a Magnetar principal.
"Extremely important to us that you know this partnership is
the top priority of the cdo group (top to bottom)," the Merrill
representative wrote. "Their ultimate goal is to maximize your
return with the best structure possible."
Merrill "portrayed an independent process for collateral
selection that was in the best interests of long-term debt
investors," George Canellos, co-director of the SEC enforcement
division, said in a statement. "Investors did not have the
benefit of knowing that a prominent hedge fund firm with its own
interests was heavily involved behind the scenes."
MAGNETAR NOT CHARGED
Merrill was also charged with maintaining inaccurate books
and records by delaying the recording of various trades tied to
a third $1.5 billion CDO, Auriga, which closed in 2006.
Bank of America did not admit or deny wrongdoing. The
second-largest U.S. bank will pay a $56.3 million civil fine,
$56.3 million of disgorged funds and $19.2 million of interest.
A spokesman, Bill Halldin, said the Charlotte, North
Carolina-based bank is pleased to settle.
Also settling with the SEC were Scott Shannon and Joseph
Parish, managing partners of Charlotte-based NIR Capital
Management LLC and the collateral manager for the Norma CDO.
Without admitting or denying wrongdoing, Shannon and Parish
agreed to pay nearly $474,000 and exit the securities industry
temporarily over charges they let Magnetar influence the makeup
of Norma. Their lawyer David Kornblau declined to comment.
Magnetar was not charged, and the Evanston, Illinois-based
firm said in a statement that the SEC issued a "closing letter"
indicating that its staff will not recommend charges against the
firm, its funds or its employees.
"We are pleased that these matters are now behind us,"
SEC spokesman Kevin Callahan declined to comment.
In October, the regulator charged collateral manager Harding
Advisory LLC and its owner Wing Chau, a character in Michael
Lewis' book "The Big Short," with fraud in connection with the
The SEC estimated it has recovered about $3 billion for
investors over misconduct linked to the financial crisis.
JPMORGAN, GOLDMAN, CITIGROUP
Magnetar had previously been identified by the SEC as having
chosen some assets for and then bet against the Squared CDO
2007-1 structured by JPMorgan Chase & Co.
JPMorgan agreed in June 2011 to pay $153.6 million to settle
SEC civil fraud charges that it misled investors about that CDO.
In November 2012, the SEC dropped its related civil case against
Edward Steffelin, the only individual charged.
Separately, Goldman Sachs Group Inc agreed in July
2010 to pay $550 million to settle SEC charges over the Abacus
2007-AC1 CDO, which hedge fund manager John Paulson helped
structure and bet against.
Former Goldman vice president Fabrice Tourre is appealing an
Aug. 1 jury verdict finding him liable for civil fraud over the
marketing of Abacus.
Citigroup Inc and the SEC are awaiting a federal
appeals court decision on whether to reinstate their $285
million settlement over a CDO, Class V Funding III, that the
bank structured and then bet against.
The case is In re: Merrill Lynch, Pierce, Fenner & Smith
Inc, SEC Administrative Proceeding No. 3-15642.