May 17, 2012 / 5:41 PM / 7 years ago

UPDATE 1-SEC looking at hedge fund as part of CDO inquiry

* Magnetar helped package securities made up of loans

* Magnetar says it is cooperating with regulators (Adds “no comment” from Steffelin’s lawyer; in paragraph 5, adds detail that fraud charge is negligent fraud)

NEW YORK, May 17 (Reuters) - U.S. securities regulators are investigating the hedge fund Magnetar Capital for its role in putting together packages of consumer loans that big banks sold as bonds before the financial crisis, sources confirmed on Thursday.

The Wall Street Journal first reported Magnetar was “a target” of a Securities and Exchange Commission investigation. Magnetar has been a subject of at least one previous investigation involving a large Wall Street bank and securitized loans.

The latest investigation involving Magnetar focuses on collateralized debt obligations, securities that often include bonds backed by mortgage and other consumer loans.

“As we have stated publicly and acknowledged many times, the SEC has been investigating a variety of aspects of the CDO markets for some time, and we continue to cooperate with the SEC in relation to these inquiries,” a spokeswoman for Magnetar said on Thursday.

Last year, after a similar investigation involving Magnetar, the SEC charged Edward Steffelin, a former executive of now-bankrupt GSC Capital Corp, with negligent fraud in connection with a CDO known as Squared CDO 2007-1.

The SEC contended that GSC’s marketing materials for the CDO failed to reveal that the Magnetar, where Steffelin was pursuing a job, helped choose securities for the CDO and was betting they would lose value.

Magnetar was not charged with any wrongdoing by regulators in that deal.

A lawyer for Steffelin, whose case is still pending, declined to comment.

JPMorgan Chase & Co then sold the CDO to investors, who did not know Magnetar had a $600 million bet against some of the loans and securities in the CDO. The bank settled SEC charges related to the case for $153.6 million.

The person familiar with the latest investigation involving Magnetar said the SEC was also looking at other big banks that sold CDOs.

“This morning’s Wall Street Journal article is an unfortunate re-packaging of previously reported information,” the Magnetar spokeswoman said, adding that its CDO strategy was “hedged” and had been found by the Financial Crisis Inquiry Commission to be “a common strategy among medium-sized hedge funds.” (Reporting By Sarah N. Lynch and Katya Wachtel; Writing by Emily Flitter; Editing by Matthew Goldstein and Steve Orlofsky)

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