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JPMorgan Ex-Structured Product CDO Head Llodra May Face SEC Suit

JPMorgan Ex-Structured Product CDO Head May Face SEC Suit
The Securities and Exchange Commission has been probing whether JPMorgan Chase & Co. and the GSC Group misled investors about hedge-fund Magnetar Capital LLCs possible role in selecting underlying assets in the $1.1 billion Squared deal. Photographer: Jin Lee/Bloomberg

U.S. regulators notified a former JPMorgan Chase & Co. executive whose unit packaged mortgage-linked investments that he may be sued for his role in selling the securities as the housing crisis worsened in 2007.

Michael Llodra, who was global head of structured-product collateralized debt obligations when he left JPMorgan, received a Wells notice from the Securities and Exchange Commission on Jan. 4 saying investigators planned to pursue civil claims against him related to the sale of a 2007 product, according to Llodra’s broker registration filings. The SEC also gave a Wells notice on Jan. 14 to Edward Steffelin, a former executive at a firm that helped manage JPMorgan’s 2007 “Squared” CDO, his brokerage records show.

The SEC has been probing whether JPMorgan, the second biggest U.S. bank by assets, and Steffelin’s former firm, GSC Group, misled investors about hedge-fund Magnetar Capital LLC’s possible role in selecting underlying assets in the $1.1 billion Squared deal, according to a person briefed on the matter who spoke on condition of anonymity because the probe isn’t public.

Magnetar has said it bought the junior-most slice of the Squared CDO as part of its strategy of investing in some mortgage-linked securities while betting against other housing debt, sometimes including bonds from the same deals. CDOs package assets such as mortgage bonds and buyout loans into new securities with varying risks.

Llodra, who joined JPMorgan in 2006, began working at Harvard Management Co. in 2008 and then went to Sunrise Securities Corp. through last November, his records at the Financial Industry Regulatory Authority show. He has since left Sunrise, a woman who answered the phone there today said.

Steffelin, 41, is now director of institutional sales and research at Walton International Group, which acquires and manages land in North America, according to his profile at the Linkedin business-network website.

SEC Investigation

JPMorgan spokesman Joe Evangelisti declined to comment. Llodra and Steffelin declined to comment, as did Steven Lipin, a spokesman for Magnetar, and SEC spokesman John Nester.

The SEC’s investigation has focused on the role of each of the three firms involved in the transaction, a person familiar with the matter said, speaking on condition of anonymity because the matter isn’t public.

Squared was sold in April 2007, with GSC Group serving as the CDO’s manager and JPMorgan underwriting the deal, according to data compiled by Bloomberg. Its collateral consisted partly of other CDOs tied to bonds backed by assets such as mortgages, with the initial holdings including credit-default swaps referencing $968 million of those CDOs, according to an offering document. CDOs backed by other CDOs were commonly referred to as “CDOs squared.” Squared went into default the following January.


The probe is part of the SEC’s broader investigation of how Wall Street firms bundled and sold mortgage-linked investments as the housing market unraveled in 2007. The agency has targeted firms at various stages of that process, ranging from loan originators such as Countrywide Financial Corp., to underwriters including Goldman Sachs Group Inc., which agreed to pay $550 million last year to resolve claims it misled investors in a subprime-linked CDO.

Evanston, Illinois-based Magnetar told investors in an April 2010 letter that it didn’t help banks create CDOs that were “built to fail” on a bet that homeowners with bad credit would default on their loans. The firm offered limited input on the creation of CDOs, and made bets that would pay off if they soured as part of a “market neutral” portfolio designed to profit no matter what happened, Magnetar said in the letter.

Magnetar said in its letter that it didn’t select specific securities to be included in its CDOs.

Magnetar was started in late 2005 by Alec Litowitz, who previously worked at Ken Griffin’s Citadel Investment Group LLC. He specialized in trading the stocks of merging companies.

GSC Bankruptcy

GSC, based in Florham Park, New Jersey, filed for bankruptcy last year, blaming losses in its funds caused by the credit crisis and an “extremely unfavorable global business environment.” The investment firm, founded by former Goldman Sachs partner Alfred Eckert III, managed $28 billion at its peak, according to court papers.

Black Diamond Capital Management LLC won a bankruptcy auction for its assets.

GSC, which entered into the business of managing CDOs tied to asset-backed securities in 2006, ran $8.1 billion of them by the time the market collapsed the next year, according to a Standard & Poor’s report at the time. The company ranked as the No. 17 manager of such CDOs, S&P said.

The firm’s name surfaced last year in e-mails released by a U.S. Senate panel investigating the financial crisis. Goldman Sachs employee Fabrice Tourre, who helped arrange the CDO that would later force Goldman Sachs to pay the record fine, wrote in a January 2007 e-mail that GSC Group had turned down a request that it serve as collateral manager for that deal, which hedge fund Paulson & Co. helped select assets for and bet against.

“GSC had declined given their negative views on most of the credits that Paulson had selected,” Tourre wrote, after discussing the Abacus CDO again with Steffelin that day, according to the e-mail.

Tourre, who has denied wrongdoing, is litigating the SEC’s case against him.

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