Another in a series of settlements related to the financial fraud surrounding the housing market bubble and subsequent collapsed, JPMorgan Chase announced it will pay $153.6 million to settle civil fraud charges brought by the Securities and Exchange Commission that the firm misled investors into purchasing complex mortgage securities it knew were bad just as the housing market was starting its free-fall.
The SEC alleges that JPMorgan created and marketed a synthetic collateralized debt obligation (CDO) without disclosing to investors that a hedge fund helped select the assets in the CDO. That omission was critical because the hedge fund was simultaneously betting against the performance of more than half the assets that had been bundled in the CDO, effectively betting that a product it was selling to investors as safe would fail and fail quickly.
The scam created a win-win for JPMorgan and the hedge-fund. Should the mortgages not go into default the investment firm reaped the benefit of the sale of the portfolio. Should the mortgages default then the investment firm would benefit from it’s own shorting of the asset.
Edward Steffelin headed the team at the investment advisory firm at the center of the investigation. He has been charged with fraud as well.
The SEC’s investigation into how banks bundled and sold investments involving risky mortgages along with Wall Street’s role in perpetuating that fraud continues with a focus on major banks, loan originators and underwriters. More charges are expected.
photo courtesy of TracyO via Flickr
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