The Securities and Exchange Commission has charged an asset manager with fraud for its role in one of the most notorious groups of mortgage securities deals behind the financial crisis.
Harding Advisory and Wing Chau, the head of the firm, failed to disclose that a hedge fund, Magnetar Capital, had a significant role in selecting the securities that went into one of its collateralized debt obligations, or CDOs, the agency alleges. CDOs were bundles of mortgage securities that helped fuel the financial meltdown.
As ProPublica detailed in 2010, Magnetar worked with investment banks to build CDOs that the hedge fund also bet against. Magnetar would buy the riskiest part of the CDO, which gave it influence in picking which bonds would be included in the CDO. In turn, the hedge fund pushed riskier bonds that would make the investment more likely to fail.
Harding was a collateral manager, which was supposed to act independently and in the interests of the deal. In selling their CDOs, Wall Street investment banks relied on investor expectations that collateral managers would act independently. As ProPublica wrote in 2010, that independence was often compromised.
In its complaint, the SEC alleges that Harding and Merrill Lynch gave Magnetar an undisclosed veto over the assets that went into a $1.5 billion deal called Octans I, which closed in September 2006. Octans 1, which was arranged and sold by Merrill Lynch, failed in April 2008, costing investors $1.1 billion. Harding received $4.5 million in fees for the deal.
The SEC alleges that Harding’s disclosures were “materially misleading” and its behavior violated securities laws. The agency alleges that Harding and Chau “knew or at least recklessly disregarded” their standards to accommodate trades requested by Magnetar. Chau “understood that, because Magnetar stood to profit if the CDOs failed to perform, Magnetar’s interests were not aligned with those of potential investors in the debt tranches of Octans I,” the complaint says.
Harding put assets into Octans that it would not have if Magnetar hadn’t pushed them, the SEC complaint says. A Harding analyst wrote in an email, “we had to pick the lesser of evils” at Magnetar’s insistence.
Chau did additional favors for Merrill Lynch and Magnetar, to the ultimate detriment of investors in the CDOs his firm managed. At one point, Chau agreed to purchase bonds from another Merrill Lynch/Magnetar deal that it was managing, called Norma. Chau indicated he was reluctant to buy them.
A Magnetar representative chided him in an email saying “Remember who was there for u when u were a little guy.” Chau later emailed the Merrill executive, “I never forget my true friends.” He placed the bonds in other Harding-managed CDOs.
Over the next year, Harding managed four more CDOs arranged by Merrill Lynch, as well as three other Magnetar deals.
Wing Chau was prominently featured in Michael Lewis’s bestseller, “The Big Short.” Chau later sued Lewis, alleging the book defamed him. Lewis prevailed in the suit earlier this year.
Harding’s lawyer Steven Molo did not return a call seeking comment. Through a spokesman, Magnetar declined to comment.
There have been a series of settlements related to Magnetar CDOs. Previously, the SEC brought charges against another CDO manager for its role in another Magnetar deal, but eventually dropped them. The SEC has not filed charges against Magnetar over its activities.
The latest case will go before an administrative law judge who is required to rule within 300 days. If the SEC wins, the agency may demand the disgorgement of profits, civil penalties and seek to ban Chau from the securities business.
Harding continues to serve as collateral managerfor nine CDOs with total assets of approximately $1 billion.
Help us Prepare for Trump’s Day One
Trump is busy getting ready for Day One of his presidency – but so is Truthout.
Trump has made it no secret that he is planning a demolition-style attack on both specific communities and democracy as a whole, beginning on his first day in office. With over 25 executive orders and directives queued up for January 20, he’s promised to “launch the largest deportation program in American history,” roll back anti-discrimination protections for transgender students, and implement a “drill, drill, drill” approach to ramp up oil and gas extraction.
Organizations like Truthout are also being threatened by legislation like HR 9495, the “nonprofit killer bill” that would allow the Treasury Secretary to declare any nonprofit a “terrorist-supporting organization” and strip its tax-exempt status without due process. Progressive media like Truthout that has courageously focused on reporting on Israel’s genocide in Gaza are in the bill’s crosshairs.
As journalists, we have a responsibility to look at hard realities and communicate them to you. We hope that you, like us, can use this information to prepare for what’s to come.
And if you feel uncertain about what to do in the face of a second Trump administration, we invite you to be an indispensable part of Truthout’s preparations.
In addition to covering the widespread onslaught of draconian policy, we’re shoring up our resources for what might come next for progressive media: bad-faith lawsuits from far-right ghouls, legislation that seeks to strip us of our ability to receive tax-deductible donations, and further throttling of our reach on social media platforms owned by Trump’s sycophants.
We’re preparing right now for Trump’s Day One: building a brave coalition of movement media; reaching out to the activists, academics, and thinkers we trust to shine a light on the inner workings of authoritarianism; and planning to use journalism as a tool to equip movements to protect the people, lands, and principles most vulnerable to Trump’s destruction.
We urgently need your help to prepare. As you know, our December fundraiser is our most important of the year and will determine the scale of work we’ll be able to do in 2025. We’ve set two goals: to raise $120,000 in one-time donations and to add 1383 new monthly donors by midnight on December 31.
Today, we’re asking all of our readers to start a monthly donation or make a one-time donation – as a commitment to stand with us on day one of Trump’s presidency, and every day after that, as we produce journalism that combats authoritarianism, censorship, injustice, and misinformation. You’re an essential part of our future – please join the movement by making a tax-deductible donation today.
If you have the means to make a substantial gift, please dig deep during this critical time!
With gratitude and resolve,
Maya, Negin, Saima, and Ziggy