U.S. securities regulators are investigating hedge-fund firm Magnetar Capital LLC, which bet on several mortgage-bond deals that wound up imploding during the financial crisis, the Wall Street Journal reported today. If the SEC were to file civil charges, it would be its first enforcement action against hedge funds related to collateralized debt obligations (CDOs). Investigators are looking at whether Magnetar had such a strong influence in designing any of the deals that in effect it took over the role of collateral manager. The collateral manager has the ultimate responsibility for selecting the assets for the CDO and owes a duty of care to all the investors in the deal. CDOs are based on pools of risky mortgages and other loans and are sold in tranches. Magnetar invested $1.5 billion to $1.8 billion into the riskiest slices of CDOs from 2006 to 2007, while betting about twice as much that the mortgage-bond deals would decline in value.
