WASHINGTON – Bank of America Corp.’s Merrill Lynch agreed to pay about $131 million to settle U.S. regulatory claims it failed to tell investors that hedge fund Magnetar Capital LLC had a role in selecting assets for two 2006 mortgage-backed securities.
Magnetar, which held both equity and short positions in the collateralized debt obligations known as Octans I CDO Ltd. and Norma CDO I Ltd., exercised significant influence over the selection of collateral for the investments, the Securities and Exchange Commission said today in a statement.
The SEC also sanctioned two managing partners of investment adviser NIR Capital Management LLC, which handled the collateral selection for Norma. The executives agreed to pay collectively more than $472,000 and were suspended from working in the securities industry, the SEC said in a separate statement.
The settlement stems from a U.S. crackdown on Wall Street firms for misconduct during the creation of mortgage-backed securities that fueled investor losses during the housing slump and ensuing market turmoil of 2008. The SEC has brought cases against banks including Goldman Sachs Group Inc., Citigroup Inc. and JPMorgan Chase & Co. related to their roles in structuring and marketing investments tied to faulty home loans.
“Merrill Lynch marketed complex CDO investments using misleading materials that portrayed an independent process for collateral selection that was in the best interests of long-term debt investors,” George Canellos, co-director of the SEC’s enforcement division, said in a statement. “Investors did not have the benefit of knowing that a prominent hedge-fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios.”
Merrill Lynch and the NIR managers agreed to settle the SEC’s accusations without admitting or denying wrongdoing.
“We are pleased to resolve this matter, which pre-dated Bank of America’s acquisition of Merrill Lynch,” said Bill Halldin, a Bank of America spokesman. The lender agreed to buy Merrill Lynch at the height of the credit crisis in 2008.