J.P. Morgan ordered by SEC to pay $153.6 million for misleading investors
By Sean Sweeney on November 14, 2011
The SEC issued a press release stating that J.P. Morgan was ordered to pay $153.6 million to settle SEC charges for misleading investors regarding Collateralized Debt Obligations (CDOs) tied to the U.S. Housing Market it sold.
Basically CDOs were a way for companies like J.P. Morgan to take a bunch of individual securities, like notes on people's homes, and combine them into one security to be repackaged and sold. This allowed the otherwise low rated debt to receive a higher rating based on the theory that not everyone could default on the mortgages all at once, so as a group the security was safer than each individual note. That of course turned out not to be true, and everyone will recall that the CDOs being sold on the U.S. Housing market were a major factor in the economic collapse of 2008 (basically multiplying the effects of the massive amount of home loans being defaulted on).
Apparently J.P. Morgan was selling these CDOs promising investors that the mortgage assets in the CDO would be selected by an independent manager looking out for investor interests. What J.P. Morgan allegedly failed to tell its investors was that the "independent manager" they happened to pick was Magnetar, who by the time the deal closed in May of 2007, was betting against these investments with a $600 million short position. An internal e-mail from a J.P. Morgan employee stated, "We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart."
Without admitting fault J.P. Morgan agreed to pay a fine of $153.6 million, with $125.87 million to be returned to the investors who lost nearly all of their investment. While seemingly a hefty fine, keep in mind that the $153.6 million represents less than 1% of the $25 billion in bailout money J.P. Morgan received and less than 1/100th of 1% of the over $2 trillion in assets that J.P. Morgan has at its disposal.
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