August 31, 2011 / 1:35 PM / 8 years ago

Target in JPMorgan CDO fraud seeks to end SEC case

* Edward Steffelin accused of negligence

* Defendant said to hide hedge fund’s role in Squared CDO

* JPMorgan paid $153.6 million to settle with SEC in June

By Jonathan Stempel

NEW YORK, Aug 31 (Reuters) - The only person charged in a JPMorgan Chase & Co (JPM.N) fraud case that led to the bank’s $153.6 million settlement with the U.S. Securities and Exchange Commission asked a federal judge to throw out the regulator’s lawsuit against him.

Edward Steffelin was accused of negligence for helping mislead investors about a collateralized debt obligation, Squared CDO 2007-1, that JPMorgan sold to clients.

The SEC said marketing materials failed to disclose that the Magnetar Capital LLC hedge fund, where Steffelin was hoping to land a job, helped choose some securities for the CDO and had a nearly $600 million bet they would lose value.

Steffelin at the time worked at GSC Capital Corp, a now bankrupt firm that helped put together the CDO.

In a filing late Tuesday with the U.S. District Court in Manhattan, Steffelin said he had no reason to believe the CDO’s offering documents had problems, and that the SEC’s trumpeting of his alleged “parade of horribles” disguise a reality that “nothing was omitted” and “no one was defrauded.”

Steffelin also suggested that his case is an outgrowth of the SEC’s “desire to burnish its reputation” following recent financial scandals, and address pressure from judges and the press to sue more individuals.

“There is no question that the credit crisis and the collapse of the housing market deserve intense regulatory focus,” Alex Lipman, a partner at Nixon Peabody representing Steffelin, wrote. “This is not the right case and certainly the wrong defendant for the SEC to target.”

SEC spokesman John Nester declined to comment. JPMorgan and Lipman did not immediately respond to requests for comment.

Evidence in the case suggested that JPMorgan’s bankers pushed the Squared CDO onto unwary clients so it could move problem mortgage securities off its books.

“We are soooo pregnant with this deal, we need a wheel-barrel [sic] to move around,” the head of JPMorgan CDO distribution wrote in a March 22, 2007 email to sales staff. “Let’s schedule the cesarian [sic], please!”

JPMorgan did not admit wrongdoing in settling on June 21. The SEC said harmed investors would recover all of their money. [ID:nN1E75K13Z]

Goldman Sachs Group Inc (GS.N) last year paid $550 million to settle a similar SEC case over another CDO, Abacus. Fabrice Tourre, a Goldman vice president and the only individual accused of wrongdoing, is still defending against SEC charges.

The case is SEC v. Steffelin, U.S. District Court, Southern District of New York, No. 11-04204. (Reporting by Jonathan Stempel, editing by Dave Zimmerman)

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