It’s a complicated question, but the gist is, should a company publicly entice you to buy securities that it itself is shorting? JPMorgan is in talks with the Securities and Exchange Commission to have the SEC drop its investigation into a deal concerning collateralized debt obligations and the Magnetar hedge fund. A little history lesson is in order.
Last year, Goldman Sachs reached a settlement with the SEC over a similar issue. There, the charge was that Goldman was structuring and marketing CDOs recommended to Goldman by the Paulson & Co hedge fund, even as Paulson was shorting those same CDOs. The settlement cost Goldman $550 million. The charges were that the CDOs were dogs and that Goldman was shafting its customers as it and Paulson profited on the loser CDOs.
Now, JPMorgan would like to walk away from a SEC investigation in which the role of Paulson is played by Illinois-based hedge fund Magnetar. If JPMorgan gets its way, there will be no SEC lawsuit. According to the Financial Times, a settlement could be weeks away.
It’s not known what the outcome of the talks will be. The SEC is curious about $1.1 billion in CDOs called “Squared”, and whether Magnetar was shorting these puppies as JPMorgan was recommending them at Magnetar’s behest. Magnetar, for the record, denies any wrongdoing.-A spokesman for Obiwan Kenobe claimed “These aren’t the droids you’re looking for. Move along, move along.”
In the end, JPMorgan lost $880 million on Squared. Perhaps the proper name of the deal should have been Screwed.
In a separate case this week, the SEC is contemplating civil charges against Wachovia, since purchased by Wells Fargo & Co, for Wachovia’s sale of some allegedly overpriced CDOs. No hedge funds are involved in the Wells Fargo case.
© 2011 Hedge Fund Writer LLC
