Merrill Settles With SEC Over Crisis-Era Bond Deals

Bank of America Unit to Pay $131.8 Million Over Hedge Fund's Role in CDOs

By JEAN EAGLESHAM And
TESS STYNES
Dec. 12, 2013 2:21 p.m. ET

Bank of America Corp.
BAC 0.00% agreed to pay $131.8 million to settle civil charges by U.S. securities regulators that its Merrill Lynch & Co. unit misled investors in two crisis-era mortgage-bond deals.


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The Securities and Exchange Commission alleged that Merrill failed to warn investors that hedge-fund firm Magnetar Capital LLC had a "significant influence" in selecting the assets in the deals and stood to profit if the deals failed.

The pact is the latest in a series of enforcement actions related to deals Magnetar helped various Wall Street firms create in the run-up to the financial crisis. The deals, called collateralized debt obligations or CDOs, saddled investors with multibillion-dollar losses when the housing market collapsed. CDOs are based on pools of mortgages and other loans, sold to investors in slices of differing risk and return.


Magnetar said in a statement Thursday that the SEC has told the firm that the agency has completed its investigation into the firm and won't recommend any enforcement action "against the firm, its funds or any of its personnel." The Wall Street Journal reported in August that SEC enforcement officials had decided not to recommend filing civil charges against Magnetar.


A Bank of America spokesman said the bank was "pleased to resolve this matter, which predated Bank of America's acquisition of Merrill Lynch." Merrill, which announced its sale to Bank of America in September 2008, didn't admit or deny wrongdoing in settling the allegations.


The SEC case related to two CDOs created by Merrill in 2006 and 2007, called Octans I CDO Ltd and Norma CDO I Ltd. The SEC also took enforcement action against the firms that managed the assets underlying the two deals.


Two principals of NIR Capital Management LLC agreed to pay in total more than $472,000 and be barred temporarily from the securities industry to settle civil charges related to the Norma deal.


The Magnetar Cases




Scott H. Shannon allegedly accepted assets chosen by Magnetar for the Norma CDO's portfolio, and Joseph G. Parish III allegedly allowed Magnetar to influence the selection of some other assets, according to the SEC. According to the SEC, Mr. Shannon called at least one of the residential mortgage-backed securities ultimately included in the portfolio a "real stinker."

An attorney for the two men declined to comment.


The SEC last month took enforcement action against another advisory firm and its owner, related to their role managing the assets in Octans I.


Write to Tess Stynes at tess.stynes@wsj.com


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