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American bank JPMorgan agreed on Tuesday to pay the U.S. Securities and Exchange Commission a $153.6 million fine to settle a fraud case filed against the company.
SEC had charged that the bank misled investors in the 2007 sales of a complex mortgage-backed security because it did not disclose to investors that the hedge fund involved in the creation of the collateralized debt obligation was betting the CDO would decline in value.
Robert Khuzami, the top enforcement officer of the SEC, said that JPMorgan promised investors that the mortgage assets of the CDO would be picked by an independent manager who would look out for investors' interest.
The Chicago-based hedge fund, Magnetar Capital, placed the investors' $1.1 billion money in the housing market, but by the time the deal close, Magnetar was in a $600 million short position in the CDO betting that it would decline, compared to an $8.9 million long position. The sale took place at the start of the housing market collapse when more homeowners started to default.
With the settlement, investors who lost on the deal are assured of getting all their money back, the SEC said.
Despite the agreement to pay the fine, JPMorgan did not admit or deny fault. None of the bank's executives or employees was charged, but Edward Steffelin - an outside adviser who helped structure the deal - was charged with civil securities fraud.
The SEC said Steffelin was seeking a job at Magnetar Capital while he was helping the hedge fund select and bet against the housing assets on which the CDO was built, Khuzami said it was JPMorgan's responsibility, not Magnetar's, to disclose the conflict of interest on the investment.
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