A collateralized debt obligation structured on behalf of the Magnetar Capital hedge fund has interested investigators from the Securities and Exchange Commission. It seems they have questions regarding the roles of Merrill Lynch and the hedge fund NIR Capital Management in marketing the CDO. The investigation continues the ongoing probe into banks' CDO marketing practices, and is the second time Magnetar has been involved.
The Merrill Lynch unit of Bank of America is under scrutiny from the SEC for allowing Magnetar to select securities for the "Norma" CDO – securities that Magnetar allegedly shorted. The question is whether Merrill and NIR failed to meet its obligations to the CDO investors by not disclosing the Magnetar role. The Dutch bank Rabobank settled a lawsuit against Merrill last year where it charged that Merrill:
"hand-picked a beholden collateral manager that was willing to ignore its fiduciary duties to Norma's investors by selecting Norma's collateral pool at Merrill Lynch's behest rather than on the basis of the rigorous independent analysis."
Magnetar does not stand accused of any wrongdoing and denies all allegations that it picked and shorted Norma securities. In a related investigation, the SEC is looking into JPMorgan Chase over another CDO allegedly developed for Magnetar. The Feds have warned both a JPMorgan executive and an executive at hedge fund GSC Group, the CDO's collateral manager, now bankrupt.
NIR is no stranger to controversy. It has had to deal with lawsuits that accuse it of lying about its fund performance. In addition, Federal prosecutors are keenly interested in whether NIR participated in paying kickbacks to get its assets evaluated at an inflated level.
© 2011 Hedge Fund Writer LLC
