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The Magnetar Fallout

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Posted on May 18, 2012
scott*eric (CC BY 2.0)

SEC headquarters in Washington, D.C.

By Cora Currier, ProPublica

This article originally appeared at ProPublica.

The hedge fund Magnetar helped create billions of dollars’ worth of risky deals called collateralized debt obligations, many of which failed spectacularly in the financial crisis. Magnetar, meanwhile, had taken positions that allowed the firm to profit when many of those same CDOs collapsed. Since ProPublica reported on Magnetar’s dealings two years ago, there’s been a long line of investigations and settlements related to the hedge fund. 

Magnetar itself has never been charged with wrongdoing, and it has always maintained that it did not have a strategy to bet against CDOs they were involved with. But today’s Wall Street Journal reported that Magnetar is indeed under investigation by the SEC. 

What might come of the investigation is unclear. Unlike the banks that have been charged with misleading investors, Magnetar never sold or marketed CDOs, and never made representations about them to customers. 

But the Journal reports that the SEC’s investigation is looking into whether Magnetar took such a prominent role in structuring some of the CDOs in which it invested that it became a de facto collateral manager, responsible for selecting the assets in a CDO. If that were the case, Magnetar might have some responsibility to all the investors in the deal.

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The SEC has been circling around the Magnetar deals for some time, hitting some of the investment banks and managers involved. Here’s a roundup of all the charges, settlements, and investigations that we know of stemming from Magnetar deals: 

Settled:

June 2011: JPMorgan agrees to pay $153.6 million to the SEC to settle allegations that it misled investors by not telling them that Magnetar was involved in the creation of a CDO called Squared CDO 2007-1. In reaching the settlement, JP Morgan did not admit or deny the SEC’s allegations.

February 2012: State Street Global Advisors pays the state of Massachusetts $5 million to settle allegations that it did not disclose to investors that Magnetar was involved in constructing the CDO Carina CDO Ltd. State Street did not admit or deny Massachusetts’ allegations.

Charged: 

June 2011: The SEC files a complaint against manager Edward Steffelin for his involvement in structuring JPMorgan’s Squared CDO 2007. In October 2011, a judge threw out part of the SEC’s case, ruling that Steffelin had not engaged in “fraud or deceit.” Other charges are still pending. A lawyer for Steffelin declined to comment on an ongoing case.

Under investigation:

June 2011: The SEC is reportedly investigating Merrill Lynch and the firm NIR Capital Management over the Magnetar CDO called Norma. 

September 2011: The SEC is reportedly investigating the Japanese Bank Mizuho and an executive there, Alexander Rekeda, over the making and marketing of the CDO Tigris, another Magnetar deal. Mizuho did not immediately respond to our requests for comment on the current status of the investigation.

September 2011: The SEC warns it may bring charges against the Ratings Agency Standard & Poor’s, which abruptly downgraded a Magnetar CDO called Delphinus CDO 2007-1. (In an SEC filing in February, S&P’s parent company, McGraw Hill, said that the SEC’s warnings “have no basis and they will be vigorously defended.”)

February 2012: The SEC warns Alexander Rekeda that it may bring charges against him for misleading investors about Magnetar’s role in creating Delphinus. Rekeda, who is now at the investment firm Guggenheim Capital, could not be reached today for comment.

May 2012: According to the Wall Street Journal, Magnetar itself is under investigation by the SEC. Magnetar told ProPublica in our original story that the SEC was “looking broadly” at CDOs and had requested information from Magnetar, but said that they were unaware of a particular target of the investigation.

The Journal also reports that the SEC continues to investigate NIR and its founder, Corey Ribotsky, for its role in creating Norma with Merrill Lynch. NIR did not respond to our requests for comment, but a lawyer for NIR and Ribotsky told the Journal that the firm had not acted improperly in selecting Norma’s assets. A spokesman for Bank of America, which now owns Merrill Lynch, declined to comment.


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PatrickHenry's avatar

By PatrickHenry, May 20, 2012 at 7:25 am Link to this comment

Just another game of 3 card monty.

The only tax dollars I want to see expended on these crooks are for investigation, prosecution and incarceration.

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By Rock, May 19, 2012 at 4:41 am Link to this comment
(Unregistered commenter)

If it was legal who changed the laws and regulations to
make it so? We are tired of hearing these claims of
legality while millions of senior lose all their
equity, workers lose their jobs and then their homes,
working people need food stamps to eat because they
can’t live on $8.00 per hour, part time with no
benefits. If you think all this is legal then you have
no moral compass.

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By John Poole, May 18, 2012 at 3:48 pm Link to this comment
(Unregistered commenter)

Surfboy. Maybe we can agree that capitalism works but not in the advertised
manner the proles assume it works. You are welcome to the table at the casino
but if you go bust then you must relinquish the seat and move on-hopefully to
take yourself out after killing your wife and kids.  It only works when people agree
to skulk off and take themselves out- an advanced institutional culling operation.

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By John Poole, May 18, 2012 at 2:09 pm Link to this comment
(Unregistered commenter)

I believe they foisted a counterfeit prosperity by overvaluing certain assets. Sure
people felt rich with their new found home equity credit line and bought stuff but
it was fairy dust sprinkled over their roofs. No fear- the ponzi scheme guys are
taking their time for the government to discretely feed them free money which
will enable to finally write off the toxic assets. They’ll be fine. Those with the fairy
dusted mortgages have been culled from game of casino capitalism.

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By Jeff N., May 18, 2012 at 11:44 am Link to this comment

“Magnetar itself has never been charged with wrongdoing, and it has always maintained that it did not have a strategy to bet against CDOs they were involved with.”

Exactly, because they didn’t break any laws.  People who don’t understand how the financial industry works are always quick to demand vengeance and jail sentences, but the whole lesson from the financial crisis is that all of this was LEGAL, which is why we need effective industry re-regulation in this country.  This isn’t about finding out who to blame for the wrongdoings of the past, but how to prevent these situations from taking place in the future.  Dodd-Frank was a steaming dog turd of an effort for reform, perhaps the JPMorgan losses will make way for some actual change in this area, but I’m not very optimistic.

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