Hedge Fund Won’t Face Civil Charges

Hedge Fund Won’t Face Civil ChargesThe Securities and Exchange Commission (SEC) will not make the recommendation to file civil charges against hedge fund firm Magnetar Capital LCC, according to reports. The hedge fund firm teamed up with Wall Street firms to form mortgage securities that ended up suffering billions of dollars’ worth of losses during the financial crisis, The Wall Street Journal reported.

Some believe this decision is a sign that the SEC’s investigations into whether companies and/or individuals did break the law with their conduct before the crisis are losing steam at this point. Just last week the SEC had a courtroom victory over Goldman Sachs Group Inc. former trader Fabrice Tourre for his role in a deal that was called Abacus 2007-ACI. At this point, SEC regulators appear to be tying up loose ends on some of their highest profile investigations, all of which were supposedly related to the financial crisis.

Magnetar Capital LLC is an Illinois-based hedge fund firm founded in 2005. Named after a neutron star, the firm worked with some of the largest banks and securities firms. With those ties, it formed dozens of mortgage-bond deals that are called collateralized debt obligations. According to reports, the securities were linked to groups of mortgages and additional debts that in turn, were sold in segments with varying risks and returns. Magnetar purchased the riskiest segments of specific deals while at the same time, making the bet that some CDOs would be declining in value. The end result was the company helped to fuel the CDO machine.

SEC officials have spent more than a year investigating whether Magnetar’s activities violated federal law because of the fund’s influence on the selection of assets that were bundled into one CDO that was called Norma CDO 1. That particular $1.5 billion CDO was created by Merrill Lynch & Co., which is now a part of Bank of America Corp. Initially the investigation was looking at whether the deal was so heavily influenced by Magnetar that the firm may have taken over as the collateral manager, which would have given the firm the legal duty to investors.

But the end result is that SEC officials have decided the case lacks sufficient physical evidence to pursue in court, so civil charges will not be recommended. It is noted, however, the SEC has not officially closed their investigation of Magnetar and could still take action later if new information surfaces regarding the situation.

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About the author

Audrey is a senior editor for the business and finance sections.