Magnetar, which held both equity and short positions in the collateralized debt obligations known as Octans I CDO Ltd. and Norma CDO I Ltd., exercised significant influence over the selection of collateral for the investments, the Securities and Exchange Commission said today in a statement.
The SEC also sanctioned managing partners of investment adviser NIR Capital Management LLC, which handled the collateral selection for Norma. The executives agreed to pay collectively more than $472,000 and exit the securities industry, according to the SEC.
The settlement stems from a U.S. crackdown on Wall Street firms for misconduct during the creation of mortgage-backed securities that fueled investor losses during the housing slump and ensuing market turmoil of 2008. The SEC has brought cases against banks including Goldman Sachs Group Inc., Citigroup Inc. and JPMorgan Chase & Co. related to their roles in structuring and marketing investments tied to faulty home loans.
“Merrill Lynch marketed complex CDO investments using misleading materials that portrayed an independent process for collateral selection that was in the best interests of long-term debt investors,” George Canellos, co-director of the SEC’s enforcement division, said in a statement. “Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios.”
“We are pleased to resolve this matter, which pre-dated Bank of America’s acquisition of Merrill Lynch,” said Bill Halldin, a Bank of America spokesman. The lender agreed to buy Merrill Lynch at the height of the credit crisis in 2008.
Scott Shannon and Joseph Parish, the NIR managers, compromised their independent judgment by allowing a third party with its own interests to influence the portfolio-selection process of Norma, the SEC said in a separate statement. Shannon accepted assets chosen by Magnetar and Parish allowed the hedge fund to influence the selection of some other assets, according to the agency.
Merrill Lynch and the NIR managers agreed to settle the SEC’s accusations without admitting or denying wrongdoing, according to the regulator’s statements. David Kornblau, an attorney at Covington & Burling LLP representing the NIR managers, declined to comment.