{"id":38739,"date":"2013-10-21T11:20:28","date_gmt":"2013-10-21T15:20:28","guid":{"rendered":"http:\/\/www.hedgeco.net\/news\/?p=38739"},"modified":"2013-10-21T12:32:07","modified_gmt":"2013-10-21T16:32:07","slug":"sec-charges-manager-of-cdo-with-favoring-hedge-funds-over-other-investors","status":"publish","type":"post","link":"https:\/\/hedgeco.net\/news\/10\/2013\/sec-charges-manager-of-cdo-with-favoring-hedge-funds-over-other-investors.html","title":{"rendered":"SEC Charges Manager Of CDO With Favoring Hedge Fund Magnetar Over Debt Investors"},"content":{"rendered":"

\"SEC\"<\/a>New York (HedgeCo.Net) – A NJ-based investment advisory\u00a0firm and its owner have been charged by the SEC\u00a0for “misleading investors in a collateralized debt obligation (CDO) and breaching their fiduciary duties\u00a0in order to accommodate trades requested by a third-party hedge fund firm whose interests were not necessarily aligned with the debt investors,” the SEC reports.<\/p>\n

The SEC alleges that Harding Advisory LLC and Wing F. Chau compromised their independent judgment as collateral manager to a CDO named Octans I CDO Ltd. Harding agreed to give the hedge fund firm rights in the process of selecting and acquiring a portfolio of subprime mortgage-backed assets to serve as collateral for debt instruments issued to investors in the CDO.\u00a0 These rights, which were not disclosed to investors, included the right to veto Harding\u2019s proposed selections during the \u201cwarehouse\u201d phase that preceded issuance of the CDO\u2019s debt instruments.\u00a0 The influence of the hedge fund firm led Harding to select assets that its own credit analysts disfavored.<\/p>\n

\u201cA collateral manager\u2019s independent selection of assets is an important selling point to potential CDO investors,\u201d said George S. Canellos, co-director of the SEC\u2019s Division of Enforcement. \u201cInvestors had a right to know that Harding and Chau had chosen to accommodate the interests of others and abandon their own obligations to act in the best interests of the CDO they advised.\u201d<\/p>\n

According to the SEC\u2019s order instituting proceedings, the hedge fund firm was Magnetar Capital LLC, which had invested in the equity of the CDO.\u00a0 Merrill Lynch, Pierce, Fenner & Smith Inc. structured and marketed the CDO, which closed on Sept. 26, 2006.\u00a0 Merrill Lynch, Magnetar, and Harding agreed in the spring of 2006 that Harding would serve as collateral manager for the CDO.\u00a0 Chau understood that Magnetar was interested in investing as the equity buyer in CDO transactions, and that Magnetar\u2019s strategy included \u201chedging\u201d its equity positions in CDOs by betting against the debt issued by the CDOs.\u00a0 Because Magnetar stood to profit if the CDOs failed to perform, Chau knew that Magnetar\u2019s interests were not necessarily aligned with investors in the debt tranches of Octans I, whose investment depended solely on the CDO performing well.<\/p>\n

The SEC\u2019s Enforcement Division alleges that while assembling the collateral for Octans I, Chau and Harding allowed Magnetar an undisclosed influence over the selection process.\u00a0 Harding\u2019s own credit analysis of many of the selected assets was disregarded, and Magnetar\u2019s influence over the portfolio was omitted from materials used to solicit investors for the CDO.\u00a0 Chau and Harding misrepresented the standard of care that Harding would use in acquiring collateral for Octans I.<\/p>\n

The SEC\u2019s Enforcement Division further alleges that Harding and Chau breached their advisory obligations to several other CDOs for which they served as investment managers.\u00a0 As a favor to Merrill Lynch and Magnetar, Harding and Chau purchased bonds for those CDOs that Chau and Harding disfavored.\u00a0 In accepting the bonds, Chau wrote in an e-mail to the head of CDO syndication at Merrill Lynch, \u201cI never forget my true friends.\u201d<\/p>\n

Alex Akesson
\nEditor for\u00a0<\/a>HedgeCo.net<\/a>
\nalex@hedgeco.net<\/a>
\nHedgeCo.Net<\/a>\u00a0is a premier\u00a0hedge fund database<\/a>\u00a0and community for qualified and accredited investors only. Membership in\u00a0HedgeCo.net<\/a>\u00a0is FREE and EASY. We also offer FREE LISTINGS for\u00a0Hedge Funds<\/a>!<\/p>\n","protected":false},"excerpt":{"rendered":"

New York (HedgeCo.Net) – A NJ-based investment advisory\u00a0firm and its owner have been charged by the SEC\u00a0for “misleading investors in a collateralized debt obligation (CDO) and breaching their fiduciary duties\u00a0in order to accommodate trades requested by a third-party hedge fund […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-38739","post","type-post","status-publish","format-standard","hentry","category-hedgeco-news"],"_links":{"self":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/38739","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/comments?post=38739"}],"version-history":[{"count":3,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/38739\/revisions"}],"predecessor-version":[{"id":38748,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/38739\/revisions\/38748"}],"wp:attachment":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/media?parent=38739"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/categories?post=38739"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/tags?post=38739"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}