J.P. Morgan Securities LLC will pay $153.6 million to settle charges that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet, the Securities and Exchange Commission said.
Under the settlement, harmed investors will receive all of their money back, the federal regulator said.
Without admitting or denying the allegations, J.P. Morgan consented to a final judgment that provides for a permanent injunction from violating the Securities Act of 1933, and payment of $18.6 million in disgorgement, $2 million in prejudgment interest and a $133 million penalty.
Of the $153.6 million total, $125.87 million will be returned to the mezzanine investors through a Fair Fund distribution, and $27.73 million will be paid to the U.S. Treasury.
The settlement also requires J.P. Morgan to change how it reviews and approves offerings of certain mortgage securities.
J.P. Morgan Securities said it "is pleased to have reached agreement with the SEC to put this matter concerning certain 2007 disclosures behind us.
"The SEC has not charged the firm with intentional or reckless misconduct,'' the company noted.
JP Morgan said it took risk of loss on 85 percent of all the notes issued and the firm ultimately sustained losses of nearly $900 million in connection with those notes.
The Commission's complaint alleges that J.P. Morgan Securities negligently failed to disclose in the offering documents for the Squared collateralized debt obligations that Magnetar Capital LLC, which purchased the subordinated notes (or "equity') in Squared and purchased the credit protection on a substantial portion of the collateral, played a significant role in the collateral selection process.
Separately, J.P. Morgan Securities conducted a review of the CDO transactions that were the subject of the Commission's investigation and, based upon that review, voluntarily made payments of approximately $56 million to certain investors in connection with a CDO unrelated to Squared known as Tahoma I.
The SEC alleged that J.P. Morgan structured and marketed a synthetic collateralized debt obligation (CDO) without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets. As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted.
The SEC separately charged Edward S. Steffelin, who headed the team at an investment advisory firm that the deal’s marketing materials misleadingly represented had selected the CDO’s portfolio.