A federal judge dismissed part of a U.S. securities regulator's lawsuit against the only individual charged in a JPMorgan Chase & Co case that led to the bank's $153.6 million settlement of civil fraud charges.
The accused executive, Edward Steffelin, did not engage in a "fraud or deceit" upon investors in a collateralized debt obligation, Squared CDO 2007-1, that JPMorgan had sold in early 2007 to clients, U.S. District Judge Miriam Goldman Cedarbaum in Manhattan ruled.
Steffelin then worked at GSC Capital Corp, a now-bankrupt firm that helped put the CDO together. The U.S. Securities and Exchange Commission had contended that marketing materials failed to reveal that the Magnetar Capital LLC hedge fund, where Steffelin was pursuing a job, helped choose securities for the CDO and was betting they would lose value.
Cedarbaum refused to dismiss other SEC charges against Steffelin in the negligence case, including one accusing him of hiding the CDO's risks. Her order was made public on Thursday, following oral argument on October 24.
Alex Lipman, a lawyer for Steffelin, declined to comment. Jan Folena, an SEC lawyer handling the case, did not immediately respond to a request for comment.
JPMorgan is one of three banks to settle major SEC fraud cases over CDOs in the last 16 months. Goldman Sachs Group Inc reached a $550 million accord in July 2010 and Citigroup Inc last week reached a $285 million accord that still requires court approval. The banks did not admit wrongdoing.
According to a transcript of the oral argument, Cedarbaum said it would have been a "big stretch" to conclude that Steffelin had a fiduciary duty to investors who bought the CDO, and should thus face the SEC charge that he defrauded them.
"You have to have something else," the judge told Folena. "His duty was not a duty to the investors."
Steffelin has argued that he had no reason to believe the CDO offering documents had problems, and that "nothing was omitted" and "no one was defrauded."
Evidence in the case suggested that JPMorgan bankers pushed the CDO onto clients so it could move toxic mortgage debt off its books.
Cedarbaum's colleague Jed Rakoff scheduled a November 9 hearing over whether he should approve the Citigroup settlement.
In an order Thursday, he expressed deep skepticism about the accord, and directed the SEC and Citigroup to answer nine questions, including why Citigroup shareholders "rather than culpable individual offenders" should pay up.
The case is SEC v. Steffelin, U.S. District Court, Southern District of New York, No. 11-04204.
(Adds dropped word "no" in "Steffelin has argued that he had no reason to believe the CDO offering documents had problems" in paragraph 9)
(Reporting by Jonathan Stempel in New York; Additional reporting by Andrew Longstreth; editing by Matthew Lewis)