Legal/Regulatory December 12, 2013, Bank of America to Pay $131.8 Million Penalty in Mortgage Deals By MATTHEW GOLDSTEIN The fallout from the bursting of the housing bubble continues to plague Wall Street. Bank of America agreed on Thursday to pay the Securities and Exchange Commission a $131.8 million penalty to settle an investigation linked to the structuring and sale of two complex mortgage securities that its Merrill Lynch division sold to investors. The settlement arises from a series of collateralized debt obligations that Merrill Lynch cobbled together and marketed. The hedge fund Magnetar Capital, based in Evanston, Ill., had a role in helping pick some of the mortgage securities in the C.D.O.’s. The S.E.C., in an administrative order, accused Merrill Lynch of misleading investors by failing to disclose Magnetar’s role in influencing the selection of the underlying securities in the C.D.O.’s. Merrill Lynch also failed to disclose that the hedge fund had not only invested in the deal but was also shorting, or betting against, its performance in some instances, the S.E.C. said. The deals, called Norma C.D.O. and Octans 1 C.D.O., which were sold in 2006 and 2007, had a combined face value of $3 billion. The so-called Magnetar deals were the subject of a Pulitzer Prize-winning investigation by the nonprofit website ProPublica in 2010. But the S.E.C.’s inquiry appears to be ending without any finding of fault or liability by Magnetar. In response to the S.E.C. settlement with Bank of America, the hedge fund issued a statement saying that it had received a “closing letter” from the S.E.C. with regard to the investigation of the firm. “We are happy to report that the S.E.C. has issued a closing letter to Magnetar, which confirms that the staff has completed its investigation as to Magnetar’s activities regarding the relevant C.D.O.’s and will not recommend any action against the firm, its funds or any of its personnel,” the statement said. The S.E.C. will sometimes issue a closing letter to a party under investigation in a case that has received considerable scrutiny. The letter does not preclude regulators from reopening an investigation if new information comes to light. William Halldin, a spokesman for Bank of America, which acquired Merrill Lynch during the depths of the financial crisis in 2008, said in a statement that the bank was “pleased to resolve this matter, which predated Bank of America’s acquisition of Merrill Lynch.” He added that the bank had already set aside reserves to cover the settlement cost. The apparent decision by the S.E.C. not to bring charges against Magnetar was similar to the outcome of the now-infamous Abacus C.D.O. investigation involving Goldman Sachs. In 2010, Goldman paid a $550 million penalty to the S.E.C. to resolve accusations that it failed to tell investors that the hedge fund Paulson & Company had helped pick some of the underlying securities in that deal and was also betting against them and stood to profit if the C.D.O. collapsed. Paulson & Company, the hedge fund founded by the billionaire investor John A. Paulson that made billions betting against C.D.O.’s and the housing market in the run-up to the financial crisis, was not charged with any wrongdoing. The S.E.C. on Thursday also announced a settlement totaling $472,000 with two managing partners of NIR Capital Management, the firm that oversaw and managed the selection of securities for the Norma C.D.O. The S.E.C. said the two men, Scott H. Shannon and Joseph G. Parish III, did not initially know that Magnetar had played a role in selecting securities for the deal and had a financial interest in the C.D.O., but after learning of Magnetar’s role, they raised no objections. The regulators pointed out that in its marketing information for the deal, Merrill told investors the portfolio of mortgage securities in the Norma C.D.O. was picked solely by NIR. In the administrative order, the S.E.C. said investors had a right to know of Magnetar’s “significant role in selecting collateral for the portfolio” because as an equity investor in the C.D.O.’s, the hedge fund did not necessarily have the same interests as other investors. In October, the S.E.C. filed a lawsuit against the manager of the Octans C.D.O., charging Harding Advisory and its owner, Wing F. Chau, with fraud for allowing Magnetar to influence the selection of mortgage securities in that deal. Mr. Chau was one of the money managers who appeared in Michael Lewis’’ book “The Big Short: Inside the Doomsday Machine,” which focused on hedge funds and Wall Street banks that made money betting against mortgage securities. The settlement between Bank of America and the S.E.C. also covered a third security called Auriga C.D.O. that Merrill sold partly for the benefit of Magnetar and delayed the recording of certain trades. The S.E.C. cited the bank with a books and records violation in connection with that deal.
Posted on: Sat, 14 Dec 2013 04:23:26 +0000
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