According to the SEC’s complaint, J.P. Morgan sold approximately $150 million of so-called “mezzanine” notes of the Squared CDO’s liabilities to more than a dozen institutional investors who lost nearly their entire investment. These investors included:
- Thrivent Financial for Lutherans, a faith-based non-profit membership organization in Minneapolis.
- Security Benefit Corporation, a Topeka, Kan.-based company that provides insurance and retirement products.
- General Motors Asset Management, a New York-based asset manager for General Motors pension plans.
- Financial institutions in East Asia including Tokyo Star Bank, Far Glory Life Insurance Company Ltd., Taiwan Life Insurance Company Ltd., and East Asia Asset Management Ltd.
Without admitting or denying the allegations, J.P. Morgan consented to a final judgment that provides for a permanent injunction from violating Section 17(a)(2) and (3) of 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. In addition, J.P. Morgan’s consent notes that it voluntarily paid $56,761,214 to certain investors in a transaction known as Tahoma CDO I. The settlement is subject to court approval.
In a separate complaint filed against Steffelin, who headed the team at GSC responsible for the Squared CDO, the SEC alleges that Steffelin allowed Magnetar to select and short portfolio assets. The complaint alleges that Steffelin drafted and approved marketing materials promoting GSC’s selection of the portfolio without disclosing Magnetar’s role in the selection process. In addition, unknown to investors, Steffelin was seeking employment with Magnetar while working on the transaction.
The SEC’s complaint charges Steffelin with violations of Sections 17(a)(2) and (3) of the Securities Act and Section 206(2) of the Investment Advisers Act of 1940. The SEC seeks injunctive relief, disgorgement of profits, prejudgment interest, and penalties against Steffelin.
Separately, GSC’s bankruptcy trustee has consented to the entry of an administrative order requiring the firm to cease and desist from committing or causing violations or future violations of Sections 17(a)(2) and (3) of the Securities Act and Section 204 and 206(2) of the Advisers Act and Rule 204-2 thereunder. GSC is in bankruptcy, and its settlement is subject to approval by the bankruptcy court.
The SEC’s investigation was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The SEC investigative attorneys were Carolyn Kurr, Jason Anthony, Jeffrey Leasure, and Brent Mitchell. The SEC trial attorneys that will handle the litigation against Steffelin are Matt Martens, Jan Folena, and Robert Dodge.
For more information about dozens of other SEC enforcement actions against misconduct related to the financial crisis, visit the SEC website at: