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JPMorgan pays $153.6 million to settle fraud accusations about mortgage-backed securities

June 21, 2011 | 11:19 am

JPMorgan Chase & Co. is paying $153.6 million to settle accusations that it misled investors about mortgage-backed securities it sold just as the financial crisis was beginning.

The Securities and Exchange Commission said in a complaint filed in Manhattan federal court that in 2007 JPMorgan's Wall Street division sold some of its clients securities that were designed with the help of a hedge fund that had a financial interest in seeing the securities fail without telling the clients about the role played by the hedge fund. 

The accusations bear a striking similarity to those made by the SEC in a case against Goldman Sachs last year involving the now infamous Abacus security. Goldman ended up settling that case for $550 million.

In both cases hedge funds that wanted to bet against the subprime mortgage housing market worked with Wall Street banks to design securities that derived their value from bundles of American residential mortgages that had a high chance of failure.

In both cases, the SEC said, the banks sold the securities to investors without disclosing the role played by the hedge fund in creating the security. In the new JPMorgan case, a Chicago firm, Magnetar, helped design the security, known as Squared CDO 2007-1.

"By failing to disclose this, we allege that JPMorgan acted negligently, in violation of securities laws," the SEC's director of enforcement, Robert Khuzami, said in a conference call Tuesday. 

Most of the money paid by JPMorgan will go to investors who lost money on Squared, including Thrivent Financial for Lutherans, a nonprofit organization in Minnesota.

JPMorgan did not admit or deny wrongdoing in settling the charges. A spokesman for the firm did not immediately respond to a request for comment.

The SEC also sued an executive at a company that JPMorgan worked with to sell Squared.

-- Nathaniel Popper