According to The Wall Street Journal, the Securities and Exchange Commission has warned a top banker that it may bring civil charges against him for his role in creating a risky collateralized debt obligation, or CDO, that exploded spectacularly as the housing market crashed. It’s the first public evidence that the SEC is considering charges against a top banking executive involved in CDOs, which fueled the financial crisis.

The CDO, from the end days of the boom in 2007, was one of dozens that had been created with the help of the hedge fund Magnetar. As Propublica reported with This American Life and NPR, Magnetar often pushed for riskier assets to be included in CDOs, and placed bets against many of the same investments so that it would profit if those risky assets went sour. (Magnetar has never been charged with any wrongdoing, and has always maintained that it did not have a strategy to bet against the housing market.)

Alexander Rekeda, the banker warned by the SEC, helped create a $1.6 billion CDO called Delphinus CDO 2007-1 for the Japanese bank Mizuho. Investigators allege that investors were not told Magnetar stood to profit if the investments failed. (Here’s the pitchbook for Delphinus.)

In a related matter, the Financial Industry Regulatory Authority, an independent Wall Street watchdog, has made a preliminary recommendation that Rekeda be disciplined for “alleged misrepresentations in the sale of” another type of security — we have the details here.

Delphinus is not the first deal involving Mizuho and Rekeda that the SEC has looked into. As The Journal reported last year, the agency has been investigating a CDO called Tigris that Magnetar created with Mizuho. That CDO was a collection of the riskiest bits of other CDOs — as we described it, they were “bundling up the dregs of a CDO,” a “rare, if not unprecedented” strategy. The Tigris deal has not yet resulted in charges.

We’ve reached out to Rekeda, who no longer works at Mizuho, but have yet to hear back. A Mizuho spokesman told The Wall Street Journal that it “has been asked by the SEC to provide related documents and information, and it’s currently dealing with it.” (We also have reached out to Mizuho.)

The warning sent to Rekeda, called a Wells notice, says that the SEC has made a “preliminary determination … to recommend charges based on alleged misrepresentations in connection with the structuring of a CDO.”

As we noted last fall, the SEC has also warned the ratings agency Standard & Poor’s that it also may face civil charges in connection with the Delphinus CDO. Standard & Poor’s abruptly downgraded Delphinus just a few months after the security was issued and received a top rating.

Other banks have been charged by the SEC and settled allegations involving CDOs. In 2010, Goldman Sachs settled with the SEC for more than $500 million. In June, J.P. Morgan agreed to pay $153 million, and in October, Citigroup reached a $285 million settlement.

by Cora Currier, ProPublica, Feb. 21, 2012, 1:49 p.m.

Image Courtesy of   http://www.flickr.com/photos/medilldc/

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More than three years after the financial crisis, Wall Street watchdogs are still uncovering questionable actions rooted in that time. The latest revelation involves one of the more creative packagers of securities who contributed to a trail of billions in soured deals, as well as a much-maligned rating agency.

The Financial Industry Regulatory Authority — an independent, non-governmental regulatory body — has recommended disciplinary action against two men for “alleged misrepresentations in connection with the sale” of a complex security.

The recommendation is preliminary. No civil or criminal charges have been filed. The men, Alexander Rekeda and Timothy Day, are both affiliated with Guggenheim Capital, a privately held, financial services company that does everything from trading securities to providing investment advice. According to its web site, the firm, headquartered in New York, has 1,700 employees in 25 offices located in 10 countries, and it manages about $125 billion.

A lawyer for Rekeda could not be reached for comment. ProPublica has learned that he is no longer with Guggenheim. Day, who is still at Guggenheim, did not respond to a request for comment. We will update this post when they are reached.

FINRA has been investigating the men over the sale of a type of security known as a collateralized loan obligation, or CLO. The investigation touches on a CLO called Nine Grade Funding II, although it remains unclear if this CLO is the main focus of the probe. FINRA’s filing did not elaborate on the type or character of the “alleged misrepresentations” it said were involved in the sale of the CLO it is investigating.

In a story published Monday evening, the Wall Street Journal reported that Rekeda was under investigation by FINRA for an unnamed CLO. The Journal also reported that Rekeda is being investigated by the Securities and Exchange Commission for a collateralized debt obligation, or CDO, he helped construct while employed by the Japanese bank Mizuho.

As Propublica detailed in the series the Wall Street Money Machine, Rekeda was involved in the creation of several CDOs with Magnetar, a hedge fund that helped put together more than $40 billion of the securities. Magnetar often lobbied for riskier assets to be put into the CDOs and then placed bets against many of the investments, reaping tremendous profits when the deals soured. (Magnetar has never been charged with any wrongdoing, and has always maintained that it did not have a strategy to bet against the housing market.)

The investigation into Rekeda is one of the few public signs that regulators are considering charges against a top banking executive involved in a Magnetar deal. Nine Grade Funding was a CLO comprised of other CLOs backed by corporate loans. It was issued at a time when few such securities were being sold.

The CLO was featured prominently in allegations by a whistleblower, Eric Kolchinsky, against the rating agency Moody’s. Kolchinsky alleged that Moody’s allowed bonds to be added to the CLO in January 2009 and that it allowed the CLO to keep its previous rating.

Moody’s took these actions, according to Kolchinsky, despite plans already in the works by the rating agency to downgrade all such securities. Moody’s denied the allegations. After Kolchinsky was forced out of the firm, he testified about the deal before the House Committee on Oversight and Government Reform.

by Jake Bernstein, ProPublica, Feb. 21, 2012, 6:59 p.m.

Image Courtesy of  Songquan Deng / Shutterstock.com

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