The Securities and Exchange Commission charged that Merrill didn’t tell investors that hedge funds helped structure some of the securities and used them to bet against the housing market, according to a Reuters report.
Specifically, hedge fund Magnetar Capital LLC had “substantial leverage” in choosing the collateral behind two $1.5bn collateralized debt obligations, the SEC charged. Magnetar hedged the CDOs with short positions, meaning its interests didn’t align with those of investors.
Merrill Lynch “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 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.”
Magnetar was not charged in the case, Reuters reported.
Bank of America has had its share of legal troubles. The lender recently agreed to pay a $500 million settlement to investors over mortgage-backed securities sold by its Countrywide unit. It’s also awaiting a penalty judgment after being found liable for fraud also relating to Countrywide’s sale of mortgage-backed securities.
Bank of America is forking over $131.8 million to settle charges that its Merrill Lynch unit misled investors about the sale of mortgage-backed securities.