| NEW YORK, March 31
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
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
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
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