BofA Merrill Lynch to pay $132 mln in SEC case over mortgages
Alamy
By Jonathan Stempel

Bank of America (BAC) has agreed to pay $131.8 million to settle U.S. Securities and Exchange Commission charges that its Merrill Lynch unit misled investors about mortgage securities it structured and sold.

Thursday's settlement marks the latest enforcement action against Wall Street banks over the marketing of collateralized debt obligations prior to the 2008 financial crisis.

Regulators have said hedge fund firms helped structure some of these CDOs, and then used them to bet against the housing market. These firms haven't been targets of formal enforcement actions in the higher-profile cases against the banks.

The SEC said Merrill failed to tell investors that hedge fund firm Magnetar Capital exercised significant influence in choosing collateral underlying two $1.5 billion CDOs, Octans I CDO in 2006 and Norma CDO I in 2007.

According to the regulator, Magnetar took equity positions in the CDOs that gave it "substantial leverage" to influence the holdings, and hedged them with short positions.

It said this meant Magnetar's interests might not have been aligned with the interests of investors who wanted the CDOs and their collateral to perform well.

The case included various communications between Merrill and Magnetar, including a July 13, 2006 message from a Merrill sales representative to a Magnetar principal.

"Extremely important to us that you know this partnership is the top priority of the cdo group (top to bottom)," the Merrill representative wrote. "Their ultimate goal is to maximize your return with the best structure possible."

Merrill "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 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."

Magnetar Not Charged

Merrill was also charged with maintaining inaccurate books and records by delaying the recording of various trades tied to a third $1.5 billion CDO, Auriga, which closed in 2006.

Bank of America did not admit or deny wrongdoing.
The second-largest U.S. bank will pay a $56.3 million civil fine, $56.3 million of disgorged funds and $19.2 million of interest.

A spokesman, Bill Halldin, said the Charlotte, N.C.-based bank is pleased to settle.

Also settling with the SEC were Scott Shannon and Joseph Parish, managing partners of Charlotte-based NIR Capital Management LLC and the collateral manager for the Norma CDO.

Without admitting or denying wrongdoing, Shannon and Parish agreed to pay nearly $474,000 and exit the securities industry temporarily over charges they let Magnetar influence the makeup of Norma. Their lawyer David Kornblau declined to comment.

Magnetar wasn't charged, and the Evanston, Ill.-based firm said in a statement that the SEC issued a "closing letter" indicating that its staff won't recommend charges against the firm, its funds or its employees.

"We are pleased that these matters are now behind us," Magnetar said.

SEC spokesman Kevin Callahan declined to comment.

In October, the regulator charged collateral manager Harding Advisory and its owner Wing Chau, a character in Michael Lewis' book "The Big Short," with fraud in connection with the Octans CDO.

The SEC estimated it has recovered about $3 billion for investors over misconduct linked to the financial crisis.

JPMorgan, Goldman, Citigroup

Magnetar had previously been identified by the SEC as having chosen some assets for and then bet against the Squared CDO 2007-1 structured by JPMorgan Chase (JPM).

JPMorgan agreed in June 2011 to pay $153.6 million to settle SEC civil fraud charges that it misled investors about that CDO. In November 2012, the SEC dropped its related civil case against Edward Steffelin, the only individual charged.

Separately, Goldman Sachs Group (GS) agreed in July 2010 to pay $550 million to settle SEC charges over the Abacus 2007-AC1 CDO, which hedge fund manager John Paulson helped structure and bet against.

Former Goldman vice president Fabrice Tourre is appealing an Aug. 1 jury verdict finding him liable for civil fraud over the marketing of Abacus.

Citigroup (C) and the SEC are awaiting a federal appeals court decision on whether to reinstate their $285 million settlement over a CDO, Class V Funding III, that the bank structured and then bet against.

The case is In re: Merrill Lynch, Pierce, Fenner & Smith Inc., SEC Administrative Proceeding No. 3-15642.


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