NEW YORK, March 31 An investment advisor featured in "The Big Short," a best-selling book about the financial crisis, faced an administrative trial Monday on claims he misled investors in a complex investment product linked to mortgages.
The U.S. Securities and Exchange Commission called its first witnesses in administrative proceedings in New York in a fraud case launched in October against Wing Chau and his New Jersey investment advisory firm Harding Advisory LLC.
The hearing marked the start of one of a handful of trials in cases brought by the SEC over events leading up to the 2008 financial crisis. Chau lost a bid to block the case from going forward.
The SEC accuses Chau and Harding Advisory of allowing hedge fund Magnetar Capital LLC undisclosed influence over the selection of collateral for a $1.5 billion transaction called Octans I CDO Ltd.
The SEC alleges that Magnetar played a role in the deal despite its known strategy of taking short positions on mortgage-backed securities in CDOs, including ones it was investing in, as it was in Octans I.
The CDO deal, which closed in September 2006, was structured and marketed by Merrill Lynch. The CDO failed in April 2008, leaving investors with $1.1 billion in losses, the SEC said.
In a small courtroom in lower Manhattan, Chau, who denies the charges, sat beside his lawyers as the SEC questioned a former Merrill Lynch sales employee.
Richard Lasch, the former employee, testified about a 2006 meeting in which Merrill and Magnetar agreed to together choose the firms that would serve in the deals as collateral manager.
Those firms included Maxim Group LLC, a predecessor firm to Harding headed by Chau that became the manager of Octans, the first CDO involving Magnetar, he said.
"There were a number of CDOs Magnetar was involved in that Merrill Lynch issued," said Lasch, who now works in a sales capacity at SunTrust Banks Inc in Boston.
Bank of America Corp, which now owns Merrill Lynch, agreed in December to pay $131.8 million to resolve claims the company misled investors about Magentar's role in two CDOs, including Octans I.
FEATURED IN 'THE BIG SHORT'
The case before SEC Administrative Judge Cameron Elliott could last up to two weeks, according to the SEC website.
Chau was featured in "The Big Short," a best seller about the financial crisis by Michael Lewis.
In the book, Lewis describes a dinner conversation in January 2007 during a conference in Las Vegas between Chau and Steve Eisman, a hedge fund manager at FrontPoint Partners who based on the discussion increased his bets against CDOs.
In 2011, Chau sued Lewis for defamation, saying the book portrayed him and other CDO managers in the book as "villains" while Eisman came off as a "heroic" figure who saw the collapse of the mortgage market coming. A judge tossed the lawsuit in March 2013.
Chau also sued the SEC seeking to block the current case, claiming the regulator was violating his constitutional rights by "shoehorning" its case into an administrative proceeding after it "repeatedly stumbled" in similar cases.
At a March 19 hearing, U.S. District Judge Lewis Kaplan denied Chau's motion for a temporary restraining order. (Reporting by Nate Raymond in New York; Editing by David Gregorio)