SEC Fraud

To mark one of the most significant legal actions against a Wall Street bank since the economic downfall, JPMorgan Chase has agreed to pay $153 million to settle allegations of securities fraud.

The Securities and Exchange Commission stated on Tuesday that it believed JPMorgan mislead investors, and didn’t tell them that the hedge fund, which helped establish the mortgage investment in question, also bet that the investment would fail. The failure of the investment cost investors over $100 million with the list of losing investors including a religious nonprofit group in Minneapolis, multiple Asian financial firms, and General Motors Asset Management.

JPMorgan isn’t the first Wall Street Bank to come under fire. Last year, Goldman Sachs agreed to pay $500 million for similarly misleading investors. Head fund guru, John Paulson, sold a mortgage investment with Goldman Sachs knowing and betting that it would fail.

JPMorgan created its mortgage investment deal with hedge fund Magnetar Capital. The SEC believes that Magnetar Capital played a “significant role” in creating the portfolio and knew it was “to benefit” fro the deal’s demise.

“JPMorgan marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests,” stated Robert Khuzami, the SEC enforcement director. “What JPMorgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection.”

The downfall of the Squared deal is to be predominately blamed on the failing housing market. By 2007, JPMorgan had lost $40 billion on the portfolio, and attempted to unload the deal by launching “a frantic global sales effort.” During this campaign is when unlikely investors, such as the Thrivent Financial for Lutherans, were brought into the deal.

The Squared CDO deal’s marketing materials are what caught the attention of the SEC. The materials stated that the investment advisory branch of the GSC Capital Corporation created the portfolio. What the materials failed to mention was that Magnetar choose many of the assets included in the portfolio and then bet $600 million against the deal.

Magnetar has stated that it is “not a party to the settlement nor a defendant in this case, and was not involved in the marketing of the securities.”

Although evidence suggests that JPMorgan knowingly misled investors, the bank has neither admitted nor denied any wrongdoing. JPMorgan did, however, stat that it “sustained losses of nearly $900 million in connection with” the investment.

As part of the settlement agreement, JPMorgan has agreed to repay all investors and restructure the way it reviews mortgage deals.

The SEC has said they believe the investors who were bilked by R. Allen Stanford’s Ponzi scheme may be entitled to compensation from the Securities Investor Protection Corporation (SIPC). The SIPC fund typically pays out to investors of failed brokerages and the SIPC does not believe investors are covered in this case, at least that’s what it ruled two years ago.

.“SIPC’s board will review the referral and analyze the S.E.C.’s underlying documentation as quickly as possible,” SIPC’s chief executive, Stephen P. Harbeck, said in a statement.

It will be interesting to see how this plays out. Swindled investors are typically not protected by SIPC and this opens the door for a lot of other cases (Madoff, anyon?).

Fund Could Cover Ponzi Losses [The New York Times]

Insider trading has been a growing concern among many in the private sector and business alike. Whether our prosecution of these offers is effective or adequately proportionate is one question worth asking but Zvi Goffer has added his name to the list. He was nicknamed Octopussy because he, seemingly, had his arms in such a vast array of information sources. Many are touting this as a victory for the government in its latest crackdown on hedge funds and their systemic insider trading practices.

Mr. Goffer was found guilty last Monday by a jury of twelve. Alongside Mr. Goffer his two conspirators, Emanuel Goffer and Michael A. Kimelman. The trail took about five days to complete deliberation at a Federal District Court in Manhattan. Each person faces up to 25 years in prison but won’t face sentencing till later this year. All three are currently free on bail.

Prosecution officials who worked on the case said that wiretaps were essential in securing the convictions and are just one example of forty-nine different convictions. These secretly recorded telephone conversations showed Mr. Goffer and fellow traders swapping confidential information about coming mergers and acquisitions. This conviction came on the heals of a case against Raj Rajaratnam, a hedge fund tycoon and co-founder of the Galleon Group. This group, just last month, was found guilty of one of the largest insider trading cases in years.

Despite the evidence and verdict against the defendants Goffer’s lawyer, William R. Barzee, stated officially, ” We’re disappointed in the verdict. It was a difficult trial and we plan on appealing.” The case seemed more lowbrow as the evidence emerged. Mr. Goffer received his corporate secrets from low-level associates at corporate law firms. All of these associates have also pleaded guilty to passing information to Mr. Goffer. He would deliver his kickback payments in envelopes filled with cash.

This issue isn’t going away and seems to be keeping law enforcement officials busy as more and more individuals are tried and convicted of insider trading. With each conviction information comes to light as to how interconnected this issue can be. One person links to another and another. Though Mr. Goffer was convicted it begs the question as to how many are guilty of insider trading that the public is unaware of?