Bank of America Corp (NYSE:BAC) is set to pay $131.8 million to the U.S. Securities and Exchange commission (SEC) to settle charges that accused its Merrill Lynch unit of misleading the investors on the mortgage securities sold, says a report from Reuters.
Investors interests sidelined
According to the regulators, hedge fund firms assisted the bank in developing some of the CDOs, and then used them to bet against the housing market.
SEC claimed that Merrill Lynch did not inform the investors that the fund manager Magnetar Capital LLC had a major influence in selecting collateral worth two $1.5 billion CDOs Octans I CDO in 2006 and Norma CDO I in 2007.
The SEC stated that Magnetar held equity position in the CDOs that gave it “substantial leverage” to impact the holdings and hedge them with short positions. The regulators reached the conclusion that Magnetar interests were not aligned with that of investors who wanted the CDOs and their collateral to execute well.
“Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes,” George Canellos, co-director of the SEC enforcement division, said in a statement.
Both the deals, Norma C.D.O and Octans 1 C.D.O were sold, in 2006 and 2007, and have collective face value of $3 billion. An investigation against Magnetar deal was run by Pulitzer Prize winning nonprofit website ProPublica, in 2010.
SEC grants clean chit to Magnetar
Numerous communications between Merrill and Magnetar along with a July 13, 2006 message from a Merrill sales representative to a Magnetar principal were presented during the case.
“Extremely important to us that you know this partnership is the top priority of the CDO group (top to bottom),” the Merrill representative wrote. “Their ultimate goal is to maximize your return with the best structure possible.”
In its probe, SEC did not accuse Magnetar of any fault or liability. Magnetar said in a statement that SEC has sent the firm a closing letter regarding the investigation of Bank of America and Magnetar.
William Halldin, a spokesman for Bank of America Corp (NYSE:BAC) said that the bank was satisfied with the settlement that predated Bank of America’s acquisition of Merrill Lynch. Halldin informed that the bank has kept a provision to pay for the settlement cost.